Wall Street gets a di­luted ver­sion of Wik­iLeaks

We have yet to learn any de­tails of bank bor­row­ings at the Fed's dis­count win­dow, a lender-of-last-re­sort fa­cil­ity op­er­a­tional since 1914.

The Pak Banker - - Editorial5 - Caro­line Baum

The deed is done, and the world is a bet­ter place. At least the stock mar­ket is higher. The Fed­eral Re­serve, com­ply­ing with a pro­vi­sion of the Dodd-Frank Act on fi­nan­cial reg­u­la­tion, posted de­tailed in­for­ma­tion on its web­site yes­ter­day on loan trans­ac­tions that took place be­tween Dec. 1, 2007, and July 21, 2010. We now know who was on the re­ceiv­ing end of Fed credit dur­ing the fi­nan­cial panic of 2008 and its af­ter­math; how much these in­sti­tu­tions bor­rowed; when they bor­rowed it; what in­ter­est rate they paid; and how much and what kind of col­lat­eral they pledged to se­cure the Fed loans.

For ex­am­ple, we learned that Bank of Amer­ica Corp. posted the largest share of crappy col­lat­eral ( Ba-rated or lower) for loans to­tal­ing $688.9 bil­lion from the Pri­mary Dealer Credit Fa­cil­ity.

Now that most of the loans have been re­paid and fi­nan­cial mar­kets are func­tion­ing on their own, there was lit­tle threat from dis­clos­ing cri­sis-lend­ing data.

We have yet to learn any de­tails of bank bor­row­ings at the Fed's dis­count win­dow, a lenderof-last-re­sort fa­cil­ity op­er­a­tional since 1914. The Fed has al­ways guarded in­for­ma­tion on its coun­ter­par­ties closely, and for good rea­son.

In the old days-in the 1970s and 1980s, for ex­am­ple-traders and an­a­lysts would scour the Fed's Thurs­day night data re­leases for signs of a spike in dis­count win­dow bor­row­ings on the fi­nal day of the two-week set­tle­ment pe­riod. (That's when banks have to rec­on­cile their re­quired re­serves with their de­posits.) If the num­bers showed un­usu­ally large bor­row­ings on that Wed­nes­day in a par­tic­u­lar Fed district, traders would whit­tle down the po­ten­tial can­di­dates and set­tle on one. Ru­mor or fact, that bank could have trou­ble fund­ing it­self.

That sort of in­for­ma­tion had the power to cre­ate dis­lo­ca­tions in the mar­ket, says Ward McCarthy, chief fi­nan­cial econ­o­mist at Jef­feries & Co. in New York. "It did in­crease the spec­u­la­tive na­ture of the fund­ing mar­ket at that time."

I re­mem­ber one oc­ca­sion dur­ing the first Gulf War in 1991 when the funds rate spiked to 100 per­cent (that's an an­nu­al­ized rate) on set­tle­ment day.

Yet some bank paid the price rather than in­cur the stigma of go­ing to the dis­count win­dow. The Fed had to prac­ti­cally beg banks to avail them­selves of dis­count win­dow loans dur­ing the fi­nan­cial cri­sis.

Yes­ter­day's re­lease of about 21,000 trans­ac­tions to­tal­ing $3.3 tril­lion was a data-maven's de­light. For the foes of cen­tral bank­ing, it was a tri­umph of good over evil. For op­po­nents of Fed se­crecy, it was a vic­tory for trans­parency.

For most of us, I'd ven­ture to say the data were an­cient his­tory: nice to have when you want to re­gale your grand­chil­dren with sto­ries about the Week the World Al­most Ended, but noth­ing that's go­ing to make you change your be­hav­ior or cause you to take your money out of the bank.

Sure, there were hard num­bers to up­end soft sto­ries. For ex­am­ple, Gold­man Sachs Group Inc. has main­tained it didn't need emer­gency Fed loans to sur­vive fol­low­ing the col­lapse of Lehman Broth­ers Hold­ings Inc. in Septem­ber 2008.

The Fed data show that Gold­man had $35.4 bil­lion of bor­row­ings out­stand­ing through the Term Se­cu­ri­ties Lend­ing Fa­cil­ity and Pri­mary Dealer Credit Fa­cil­ity on Oct. 21, 2008. That rep­re­sented more than 70 per­cent of the firm's book value.

The Fed's data dump, which is be­ing pe­rused by jour­nal­ists and blog­gers for gotcha items, is less em­bar­rass­ing to fi­nan­cial in­sti­tu­tions than Wik­iLeaks' re­lease of State Depart­ment ca­bles-re­fer­ring to French Pres­i­dent Nicolas Sarkozy as an "em­peror with no clothes"-was to for­eign dig­ni­taries.

Most of the cri­sis-lend­ing fa­cil­i­ties have been closed-with­out the Fed in­cur­ring any credit losses, the cen­tral bank noted in its press re­lease.

Over the years the Fed has grad­u­ally lifted the veil on its in­ner work­ings.

It wasn't that long ago (pre1994) fi­nan­cial mar­kets had to guess at pol­icy changes. Now they're an­nounced at the time.

Dodd-Frank, passed in July, re­quires dis­clo­sure of dis­count win­dow bor­row­ings, start­ing with July 2010 trans­ac­tions, with a two-year lag. That's long enough to pro­tect wob­bly fi­nan­cial in­sti­tu­tions from bank runs and desta­bi­lize fi­nan­cial mar­kets yet still young enough to be of some his­tor­i­cal value.

The world didn't end with yes­ter­day's dis­clo­sure of fi­nan­cial cri­sis lend­ing yes­ter­day. De­layed data on dis­count win­dow bor­row­ings should be equally be­nign.

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