"Secret Fed loans" that were not so secret

rcwhalen's picture

Below is a post from Dave Altig at FRB Atlanta -- Chris

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http://tinyurl.com/3eftyrt

May 27, 2011

"Secret loans" that were not so secret

I confess to be more than a little surprised when yesterday's morning reading turned up the following headline, from Bloomberg's Bob Ivry:

"Fed Gave Banks Crisis Gains on Secretive Loans Low as 0.01%"

The crux of the story found its way to the Wall Street Journal's Real Times Economics blog:

"Credit Suisse Group AG, Goldman Sachs Group Inc. and Royal Bank of
Scotland Group Plc each borrowed at least $30 billion in 2008 from a
Federal Reserve emergency lending program whose details weren't revealed
to shareholders, members of Congress or the public. The $80 billion
initiative, called single-tranche open-market operations, or ST OMO,
made 28-day loans from March through December 2008, a period in which
confidence in global credit markets collapsed after the Sept. 15
bankruptcy of Lehman Brothers Holdings Inc. Units of 20 banks were
required to bid at auctions for the cash. They paid interest rates as
low as 0.01 percent that December, when the Fed's main lending facility
charged 0.5 percent."

I think a couple of clarifying points are in order. First, these
transactions were hardly, in my view, "secretive." On March 7, 2008, the
following was posted on the New York Fed's website (with similar information provided by the Board of Governors):

"The Federal Reserve has announced that the Open Market
Trading Desk will conduct a series of term repurchase (RP) transactions
that are expected to cumulate to $100 billion outstanding. This
initiative is intended to address heightened pressures in term funding
markets. These transactions will be conducted as 28-day term RP
agreements in which primary dealers may elect to deliver as collateral
any of the types of securities—Treasury, agency debt, or agency
mortgage-backed securities—that are eligible as collateral in its
conventional RP operations."

The magic words in the Bloomberg piece are apparently "details weren't
revealed." While it is true that specific transactions with specific
institutions were not published in real time, the overall results of the
auctions (both total purchases and the lowest interest rate paid) were
posted each day (as noted in the Bloomberg article), and the list of
potential counterparties (the primary dealers) was (and is) available for all to see.
I suppose we could have a reasonable debate about how much information
is required to support the claim that "details" were made available. But
I have a hard time with the notion that publicly announcing the
program, offering details on size and prices in each day's transactions,
and providing general information about the entities in the game
constitutes "secretive."

Another aspect of the Bloomberg piece that I question is the claim
that the transactions were "loans" provided under an "emergency lending
program." That language is quite imprecise and evokes the thought of the lending programs that relied on the authority granted under "unusual and exigent circumstances" by section 13(3) of the Federal Reserve Act.

The Bloomberg article does not help in avoiding possible confusion on this point by including this passage:

"Congress overlooked ST OMO when lawmakers required the central
bank to publish its emergency lending data last year under the
Dodd-Frank law."

But as the New York Fed's public notice made clear at the time, this
was not outside of the Fed's standard authorities—and not unprecedented
(emphasis added):

"When the Desk arranges its conventional RPs, it accepts
propositions from dealers in three collateral 'tranches.' In the first
tranche, dealers may pledge only Treasury securities. In the second
tranche, dealers have the option to pledge federal agency debt in
addition to Treasury securities. In the third tranche, dealers have the
option to pledge mortgage-backed securities issued or fully guaranteed
by federal agencies in addition to federal agency debt or Treasury
securities. With the special 'single-tranche' RPs announced today,
dealers have the option to pledge either mortgage-backed securities
issued or fully guaranteed by federal agencies, federal agency debt, or
Treasury securities. The Desk has arranged single-tranche transactions from time to time in the past."

Finally, identifying the one auction where the Fed "paid interest
rates as low as 0.01 percent" is misleading. To begin with, the 0.01
percent refers to the so called "stop-out" rate, which is the lowest
rate paid by bidders in any particular auction. The operations in
question were multi-price auctions, so the lowest rate cannot be assumed
to be the average rate paid on the repo transactions. In any event, the
program was terminated after two auctions when the stop-out rate hit
the very low levels the Bloomberg article referred to.

More generally, the auction rates in these ST OMOs tracked short-term funding rates over the course of the program's existence:

 

The interest rates associated with all operations obviously fell as
the provision of market liquidity became more aggressive after the
failure of Lehman Brothers. You are free to object to that response, but
singling out ST OMO as secretive or special in anyway isn't, in my
opinion, justified.

 

Photo of Dave AltigBy Dave Altig
senior vice president and research director at the Atlanta Fed