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Fed, forced by court, releases lending details

The Federal Reserve today released the names of banks that borrowed from its main emergency lending facility during the financial crisis after having run out of legal appeals to block publication.

The 25,000-plus pages of documents released by the central bank provide an unprecedented view of which banks needed the most help during the crisis.

They detail not only the bank names but how much they borrowed from the Fed's so-called discount window for period of Aug. 8, 2007, to March 1, 2010.

Discount window lending peaked on Oct. 29, 2008, at $111 billion US as the crisis reached fever pitch after investment bank Lehman Brothers filed for bankruptcy in mid-September.

The Fed was forced to disclose details of its discount window lending after the U.S. Supreme Court last week let stand a lower court ruling that it do so, an action the Fed had fought.

Bloomberg LP, the parent of Bloomberg News, and News Corp.'s Fox News Network had sought the bailout details under the federal Freedom of Information law, which requires government agencies make certain documents public.

The Fed had strenuously resisted providing information about borrowers from its discount window, arguing that banks, fearing being stigmatized as weak, would be unwilling to use it if they feared their actions became public.

The lending facility is an important tool the Fed has at its disposal to ensure banks remain liquid in times of stress.

"It should be emphasized that confidentiality is not meant to protect the identities of individual banks per se, but rather to make the discount window more effective in dealing with market disturbances," New York Federal Reserve Bank economists Joao Santos and Stavros Peristiani wrote on the regional central bank's blog on March 30.

COMING INTO THE LIGHT

A law passed last year to overhaul U.S. financial regulation required the central bank to divulge borrowing from special emergency programs it set up to stabilize financial markets during the economic meltdown, but not the Fed's regular discount window.

The new law does, however, require the release of future discount window borrowing details, but with a two-year lag.

A December data release revealed that major banks had been big beneficiaries from some of those special emergency programs the Fed set up during the 2007-2009 crisis. The combined usage of those emergency lending facilities peaked at $600 billion on November 5, 2008.

The discount window is a facility central banks offer as part of their role as a lender of last resort, based on the idea that during a crisis, even healthy banks can have trouble accessing short-term funds.

Lehman Brothers filed for bankruptcy protection on Sept. 15, 2008, setting off the most virulent part of the crisis.

"If you look at the firms that came under pressure in that period ... only one ... was not at serious risk of failure," Fed Chairman Ben Bernanke told an official crisis inquiry panel in November 2009. "Even Goldman Sachs, we thought there was a real chance that they would go under."

The cost of borrowing at the discount window is usually set at a penalty rate above market borrowing costs to ensure banks only access government credit

when they really need it. During the crisis, the Fed cut that penalty rate to get banks to accept government help sooner rather than later.

The Fed slashed the spread of the discount rate over the overnight market rate from 1 percentage point to 0.5 percentage point on Aug. 17, 2007, and extended loan terms to 30 days from overnight. Days before that discount rate cut, banks were borrowing just $4 million from the window.

On March 16, 2008, after the fire sale of Bear Stearns to JPMorgan, the Fed cut the discount rate spread further - to a just a quarter-point and extended loan terms to 90 days. It has since widened the spread.

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