A European bank that received the most Federal Reserve discount window help during the financial crisis also took $381 billion in aid from its home countries and owned subsidiaries implicated in bid-rigging that prosecutors say defrauded US taxpayers.
Details of Fed lending released last week show that Dexia SA (DEXB), based in Brussels and Paris, borrowed as much as $37 billion, with an average daily loan amount of $12.3 billion in the 18 months after Lehman Brothers Holdings collapsed in September 2008. The House sub-committee that oversees the Fed plans hearings on the central bank’s discount window lending to offshore financial institutions next month.
By lending to Dexia, the Fed kept money flowing into local government projects throughout the US as well as the money market funds that invested in them. Dexia guaranteed bonds issued by entities as varied as the Texas State Veterans Land Board in Austin and the Los Angeles County Metropolitan Transportation Authority.
“If Dexia went bankrupt, it could have been a catastrophe for municipal finance and money funds,” said Matt Fabian, a Concord, Massachusetts-based senior analyst and managing director of Municipal Markets Advisors, an independent research company. “The market has extensive exposure to foreign banks,” he added.
Overseas banks accounted for about 70 per cent of discount window loans when borrowing reached its peak of $113.7 billion in October 2008, according to the Fed’s data. The discount window, established in 1914, is known as the lender of last resort.
By law, most US branches of foreign banks have access to the discount window, said David Skidmore, a spokesman for the American central bank. “They are important providers of credit to US businesses and households, and discount window lending during the financial crisis helped support their continued lending in the US,” he said.
The Fed has kept discount window borrowers secret for 97 years. Last week’s disclosures were court-mandated after legal victories by Bloomberg LP, the parent of Bloomberg News, and News Corp’s Fox News Network LLC.
Depfa Bank, a German-owned bank based in Dublin, was another insurer of municipal bonds in the US Depfa’s discount window borrowing peaked at $28.5 billion in November 2008.
Dexia, which borrowed $37 billion from the discount window in January 2009, said its loans from the European Central Bank peaked at 122 billion euros ($173 billion) in October 2008. That month, it also received about $200 billion in debt guarantees and $8 billion in cash infusions from Belgium, France and Luxembourg.
The bank availed itself of other Fed lending programs too. Its total borrowings from the US central bank’s Commercial Paper Funding Facility ranked third among users of the emergency program created to support the market for short-term debt issued by banks and corporations. Dexia used the program 42 times for a total of $53.5 billion, according to data the Fed released in December.
