Because of the financial crisis, financial institutions in trouble cannot any longer fly under the radar to the Federal Reserve’s discount window. A Freedom of Information Act request for the details had kicked around the courts until last week. The Supreme Court ruled that the public has a right to know which banks obtained loans from the discount window and how much they borrowed. Just how bad the financial crisis got was made clear by the discount window data.
Financial institution bailout by Fed
The discount window was created by the Fed a century ago to help healthy banks caught in a cash crunch with short-term loans. The identities of the financial institutions borrowing have been kept a secret in the past due to the stigma that comes in financial circles when a financial institution needs help from the Fed. After Bloomberg and Fox Business filed a request under the Freedom of Information Act, the Fed was required to release the data though because of a Supreme Court ruling. Nobody was worried about the stigma anymore after the report was released Thurs by the Fed. This was because almost every bank in the world during the financial turmoil needed a bit of help. More than 25,000 pages of documents show the Fed lent as much as $110 billion through the discount window in one day as the financial crisis peaked.
Borrowing in Europe extreme
Through the financial turmoil, Wall Street banks got a lot of criticism for taking government bailout funds. The discount window banks were mostly European financial institutions though, the data showed. About $26.5 billion was borrowed by Belgian-French bank Dexia while $24.6 billion was borrowed by Dublin-based financial institution Depfa that German mortgage lender Hypo Real Estate owns on Oct. 29, 2008. There were other European financial institutions to get billions from the discount window. These included France's Societe Generale, Austria's Erste Group and Bank of Scotland. On this side of the pond, before it became the biggest financial institution failure in history, Washington Mutual borrowed $2 billion on Thursday, Sept. 18, 2008, to get through the weekend. The $2 billion loan could not be paid by Wamu Monday when it was due leaving the bank to keep taking out $2 billion overnight loans. This was until Thursday, September 25, 2008 when J.P. Morgan Chase ! took over.
U.S. not the only ones with a financial turmoil occurring
When the collapse of Lehman Brothers in September 2008 triggered the financial crisis, the global economy went into a tailspin, the financial system froze and banks worldwide begged the Fed for help. The release of the discount window data shows just how bad the damage was and how easily it spread. During testimony to a congressional panel investigating the financial turmoil in November 2009, Fed chairman Ben Bernanke said of all the financial institutions lined up at the discount window, only one was not at risk of total collapse. The Dodd-Frank financial reform bill passed in 2010 removes secrecy from discount window lending, however not until two years have passed from the time the loans are made — about the same period it took the courts to force the Fed to do it this time.
Information from
Fox Business
foxbusiness.com/industries/2011/03/31/demystifying-feds-secretive-discount-window/
Wall Street Journal
online.wsj.com/article/SB10001424052748703712504576234700412932330.html
Reuters
reuters.com/article/2011/03/31/usa-fed-lending-idUSN3126104220110331?pageNumber=2
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