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.


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