Fed’s Help for Foreign Banks Angers Critics

Fed’s Help for Foreign Banks Angers Critics
April 12, 2011

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)

During the height of the financial crisis in 2008, the U.S. Federal Reserve apparently became the bailout broker to the world.

“We now know that the Fed's bailout had nothing to do with helping the American people,” said Rep. Ron Paul (R-TX), who runs a House subcommittee that oversees the Federal Reserve.

Even Arab Banking Corp., partly owned by the Libyan government, with which this nation is currently at war, received billions of U.S. dollars from the Federal Reserve in 2008.

In fact, the largest individual loans from the Federal Reserve “discount window” in 2008 went to foreign banks. The discount window provides emergency loans to eligible financial institutions that run short of money. It is meant to be a lender of last resort.

This is among the information that continues to come to light as people pore over some 29,000 pages of records the Fed recently gave up under court order, the result of lawsuits filed nearly three years ago by Bloomberg News and Fox News. The news organizations had sued the Fed to learn who borrowed money and how much had been borrowed during the financial panic. The Fed objected but had to turn over the information after the Supreme Court in late March rejected the attempt to block disclosure.

73 Loans to Libyan Bank
The documents show Arab Banking Corp. initially received $5 billion and 73 loans over 18 months. Furthermore, even though Moammar Ghaddafi’s government currently owns nearly 60 percent of the company and the United States has frozen Libyan assets, Arab Banking Corp. apparently is exempt from the freeze.

In a February 27 statement, Arab Banking Corp. reported “neither ABC nor any of its subsidiaries are subject to the asset freezes specified in the US Executive Order or UN Resolution 1970 and that all members of the ABC Group are able to transact freely in the United States and elsewhere. “

Seventy Percent to Foreign Banks
Among other revelations in the Fed’s document dump:

•    Seventy percent of the money flowing from the Federal Reserve’s discount window at the height of the borrowing in October 2008 went to foreign banks.

•    The discount window poured out $111 billion in loans on October 29, 2008, the peak day of the financial crisis, and nearly half that amount went to two European banks—Dexia (a Belgian-French bank) and Depfa (a German bank).

•    The Fed continued to make multibillion-dollar loans to other foreign banks through its discount window, including Austria's Erste Group, Royal Bank of Scotland, Germany's Commerzbank, and France's Societe Generale.

•    Many prominent financial institutions in the United States did not borrow from the Fed’s discount window, raising questions over how distressed American banks really were.

“The Fed lent huge sums of our money to foreign banks. This in itself was not surprising, but the actual amount is staggering!” said Rep. Paul in a statement. Paul for many years has been the Fed’s harshest critic in Congress and currently serves as chairman of the House Domestic Monetary Policy Subcommittee of the House Financial Services Committee.

‘Nothing to Do With Helping Americans’
“In one week at the height of the crisis, about 70 percent of the money doled out went to foreign banks,” Paul said in a statement. “We were told that bailing out banks was going to stave off a massive depression. Depression for whom? We now know that the Fed's bailout had nothing to do with helping the American people, who have gotten their depression anyway with continued job losses and foreclosures. But now we learn that a good deal of the money did not even help American banks!”

Robert Wenzel, editor and publisher of EconomicPolicyJournal.com, said of the revelations coming from the Fed’s document dump, “It’s very bad. These are just surface things where we recognize the names of the institutions, the time frames. When we dig through this, there are probably going to be all kinds of surprises.”

“I find it more than curious that the Fed is lending massive amounts of dollars to foreign banks while, at the same time, the U. S. government is at pains to find foreign buyers of our paper to finance debt,” said economist Robert Ekelund Jr., Edward Lowder Eminent Scholar Emeritus at Auburn University. “Is there a ‘political’ reason or something that would perhaps justify such actions on the part of the U.S. central bank?”

‘Should Concern Americans’
Anthony Randazzo, director of economic research at Reason Foundation, said, “Given the billions the Fed was shelling out in currency swaps to help support foreign banks, it would only make sense that they would be lending in significant amounts from the discount window. That doesn't make the process sane though.

“Given the international role the dollar plays in making global markets, there might be an argument for the Fed being somewhat cozy with foreign banks, but the information should, at the very least, alert and concern Americans about the dangers of the current Federal Reserve model. It makes the conversation about changing their mandate all the more urgent today.”

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing editor of Finance, Insurance & Real Estate Policy News.

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)