The Fed’s secret giveaway to European banks

By Felix Salmon
May 27, 2011

File under “things you never knew the Fed did during the financial crisis”: an $80 billion loan scheme known as ST OMO, which was so obscure that even Barney Frank had no idea it existed when he required the Fed to turn over its lending data in his Dodd-Frank bill.

In any case, Bloomberg’s Bob Ivry has the details, thanks to a FOIA which went all the way to the Supreme Court. As with most of these things, it’s impossible to work out what the Fed was so worried about — but it’s easy to see how the Fed made it as hard as possible for Ivry to get information on ST OMO. Not only did they refuse to give him the information he was asking for, but then, when they were ordered to, they dumped 29,000 pages of documents on him. Hidden in which we find charts like these:


What we’re looking at here is the pink bars, which are labeled ST OMO; the height of each bar corresponds to the billions of dollars that each bank had borrowed from the Fed that day.

These loans were insanely cheap — the interest rate on them was as low as 0.01%, even as the Fed’s main bank window was charging 0.5%. Ivry has looked at these charts very carefully, and by measuring how tall the bars are he’s worked out how much money each bank borrowed at any given time; Credit Suisse topped out at $45 billion, for instance.

Why was the Fed so reluctant to discuss this program? After all, Fed spokesman Jeffrey Smith had nothing but great stuff to say about it to Ivry, gushing about how it “helped alleviate strains in financial markets and support the flow of credit to U.S. households and businesses”. You’d think if it was so great, the Fed wouldn’t be so quiet about it.

One possible reason is hinted at in the charts above. They cover four banks: Credit Suisse, Deutsche Bank, BofA, and RBS. (RBS is still referred to, quaintly, under its old name of Greenwich Capital, the shop bought by NatWest before NatWest was bought by RBS.) The three European banks all borrowed 11-figure sums from the facility, while the one American bank barely used it.

And that fits the overall usage pattern of ST OMO very well. If you look at the charts, only one U.S. bank was a big user of the facility: Goldman Sachs. And even Goldman was very late to the ST OMO game, with its big borrowings taking place at the very end of the program, in December. All the other big borrowers were European: Credit Suisse, Deutsche, RBS, Barclays, BNP Paribas, UBS.

Why did the Fed set up a short-term lending program which seems to have been aimed overwhelmingly at European banks? And how does lending $45 billion to Credit Suisse support the flow of credit to U.S. households, in any but the most circuitous manner? It’s probably not worth asking the Fed these questions. But it does seem that the governments of Switzerland, Germany, France, and the UK should all be sending thank-you letters to 33 Liberty Street if they haven’t already done so: it’s entirely possible that the New York Fed bailed out their banks without those governments even knowing about it. That’s just how generous we are, in this country.


We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see

Here’s a guess. I’m relying on a couple of papers that analyzed BIS data after the fact and a key fact, that the Fed made an emergency loan to the ECB of something like $630B when the crisis hit. The mechanism described – which I first heard about through Brad Setser’s old blog – is that Lehman was a huge US money market issuer but that no one – literally – knew that European banks were very heavily invested in the US money markets for short-term funding. The reasons are somewhat obscure but they invested through London because there were basically no reporting rules on the capital flows. The process then goes: Lehman collapses, the European banks need dollars because they otherwise have no short-term money, so they grab what they can, causing a complete absence of dollars in the system, then the system completely locks up with credit indicators going skyward – which makes sense because now you can see why banks didn’t want to lend to each other, because if you needed to borrow you were in danger of short-term collapse – the Fed pumps dollars to the ECB and now it looks like they also kept some of the major European banks afloat. Maybe there was a side deal with the ECB. Maybe they were asked to step in because these defaults would have had crushing consequences to the system. Sounds like it.

Bottom line: lack of reporting, particularly of capital flows, can have really, really bad consequences.

Posted by jomiku | Report as abusive

And what were the low interest 11-figure sum loans backed by… not that the taxpayers need to know such trivial details…

It was secret because no one needs to know they were reinforcing the house of cards.

Posted by hsvkitty | Report as abusive

I think that those European countries did know about the loans. As America’s financial system staggered, so did the European financial system and hedge funds who did business with those banks.

The entire debacle, including the sudden danger to Europe’s banks, originated upon the the popping of a fetid American bubble. So, in a way, it was good manners, an apologetic gesture offered in the interest of maintaining/restoring the trust which is so vital in a system where no bank has enough cash to instantly cash out all of its customers, but it much more than that.

The European financial system was in jeopardy quite because our systems are so interconnected. It would do no good to pull out all the stops in trying to stabilize America’s financial system if the European financial system failed because, even on a good day, our system would have a difficult time surviving their system’s failure.

And our system was not having a good day; it was teetering on the brink of total collapse.

Posted by breezinthru | Report as abusive

Where did the Fed get the authority to do this? I don’t think they had it legally because I don’t think they have the authority to back-door foreign banks. They were just the most direct and invisible conduit available. Everyone is always screaming about criminal accountability but in this case (and in Blankfein’s cramming down the AIG bailout) the criminal charges would have to fall at the top – Bernanke, Geithner, Paulson – and that isn’t going to happen. It’s time we all act our age, myself included, and accept the fact that political corruption is the price of all financial systems, some are just a lot more corrupt than others ..

Posted by Woltmann | Report as abusive


I can appreciate what you are saying but I will never accept criminal behavior as a necessary evil no matter how much money the criminal has.

Posted by breezinthru | Report as abusive

A fed economist comes to the defense of the fed. It wasn’t secret because if you were looking they had it on the website… not detailed… but who needs details?

Dr. David E. Altig is senior vice president and director of research at the Federal Reserve Bank of Atlanta. 011/05/secret-loans-that-were-not-so-sec ret.html

Now that the Dodd-Frank financial reform bill has passed, big banks have been lobbying aggressively against restrictions they believe are too harsh. Among the top items on the industry’s lobbying agenda are stronger capital regulations, as well as a Consumer Financial Protection Bureau, new rules on derivatives trading and restrictions on proprietary trading. 6/us-lobbying-imfreport-idUSTRE74P7AF201 10526

Posted by hsvkitty | Report as abusive

May be a case whereby the CDS on RBMS were run thru Citi(and others) and essentially, the Fed made good those exposures.
Why oh why do we let gravey trains go out of control and pop bubbles.
All any markets need is more transparency, once all participants can see, overheating doesn’t happen.
If Dodd-Frank bill does anything.. please make all for forms of dirivitives only tradeable and seen at the counter, instead of a closely held secrect, by those that make those same vehicles.

Posted by Chivelry | Report as abusive

The program was not a secret because it was reported in the NY Times: 8/guide-to-feds-alphabet-soup/

on SourceWatch, a Fed Watchdog: le=Total_Wall_Street_Bailout_Cost

in the Fed 2008 OMO report, page 11: o2008.pdf

and in the daily summary of OMO transactions: m/historical/tomo/search.cfm

The primary dealers were allowed to bid for loans if they provided Agency MBS as collateral. On any given day, the highest bids got the loans.

Posted by mikehira | Report as abusive