The Federal Reserve has been forced to disclose its aid to American financial firms during the credit crisis. Ben Bernanke probably wanted to avoid these disclosures, but under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, he had no choice.
The details released today show that many of the transactions, conducted through a variety of broad-based lending facilities, provided liquidity to financial institutions and markets through fully secured, mostly short-term loans. Purchases of agency mortgage-backed securities (MBS) supported mortgage and housing markets, lowered longer-term interest rates, and fostered economic growth. Dollar liquidity swap lines with foreign central banks helped stabilize dollar funding markets abroad. Other transactions provided liquidity to particular institutions whose disorderly failure could have severely stressed an already fragile financial system.
The aid was broken into several categories, and one needs to look at their sums to see the level of support given to institutions from Morgan Stanley (NYSE MS) and Goldman Sachs Group (NYSE: GS) to Bear Stearns, Lehman Brothers, and AIG (NYSE: AIG). It is actually astonishing the amount of support the Fed gave these faltering companies.
The categories under which the Fed supplied capital include:
- Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF)
- Term Asset-Backed Securities Loan Facility (TALF)
- Primary Dealer Credit Facility (PDCF)
- Commercial Paper Funding Facility (CPFF)
- Term Securities Lending Facility (TSLF)
- TSLF Options Program (TOP)
- Term Auction Facility (TAF)
- Agency MBS purchases
- Dollar liquidity swap lines with foreign central banks
- Assistance to Bear Stearns, including Maiden Lane
- Assistance to American International Group, including Maiden Lane II and III
The period of the analysis and disclosure covers December 1, 2007, to July 21, 2010.
The most detailed information is in the Credit and Liquidity Programs and the Balance Sheet. The sums provided under the Primary Dealer Credit Facility (PDCF) are staggering. They include several loans to Bear Stearns and Lehman which were well into the tens of billions of dollars, particularly in early and mid 2008. As the crisis progress, nearly equal sums went to firms that survived. In the period before Countrywide Financial was “rescued” by Bank of America (NYSE: BAC) it used the Fed facility aggressively. In September 2008, Morgan Stanley took loans of $28 billion and $35 billion. Its borrowing continued at that level well into the fall.
By October, when it became clear that Merrill Lynch might not survive the crisis, it also began to take loans well into the tens of billions.
What is clear is that the Fed saved the financial world in the US at a time that the credit crisis would have overwhelmed the system
Douglas A. McIntyre
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