The Fed's Commercial Paper Buying Knew No National Boundaries
During the nearly 15-month program that began in late October 2008, the Fed purchased $395.9 billion in commercial paper from U.S. companies and from foreign companies that had U.S. issuers. Those foreign companies scored $267.9 billion, or nearly 68% of the program, while U.S. companies received $128.1 billion, or 32%.
Of the total 544 transactions under the CPFF, the gap narrowed between foreign and U.S. companies. Foreign companies accounted for 52.6% of the transactions and the U.S. the remainder.
Where Did the Money Go?
From the Fed's point of view, throwing aid to foreign companies would trickle down to the benefit of U.S. businesses and consumers. "Foreign-based institutions are important providers of credit to U.S. businesses and households. The Federal Reserve's broader policy was aimed at providing liquidity, to encourage a general willingness to lend, increase access to credit and support confidence in global financial markets," according to a statement from Jeff Smith, a spokesman for the Federal Reserve Bank of New York, which financed the commercial paper purchases.
But the Fed didn't track whether the liquidity it provided to these foreign parents of U.S. issuers was applied, or redirected, to the U.S. issuers of these foreign parents, says one source familiar with the situation. Nor was there any requirement that a percentage of the borrowed funds be applied or rerouted to these U.S. issuers of foreign parents.
So, for instance, the Fed isn't sure how much of the staggering $74.5 billion it lent to Swiss-based bank UBS (UBS) was redirected toward helping UBS's liquidity woes in the U.S. The Swiss banking giant captured the most funding among foreign companies under the program. But whether the company was big or small, like Mitsubishi UFJ Financial Group, which borrowed a modest $114 million, there was no accountability to determine whether these foreign-based institutions were truly putting their liquidity to use for the good of U.S. businesses and households.
The Fed's CPFF was just one of nearly a dozen programs the government launched during the economic crisis beginning in December 2007, according to a Fed announcement last week. These programs amounted to more than 21,000 individual credit and other transactions, which were designed to stabilize markets during the crisis and restore the flow of credit to American families and businesses. The Fed also acquired $1.25 trillion in mortgage-backed securities, doled out another $3.8 trillion in loans under its Term Auction Facility and funded a whopping $8.95 trillion with its Primary Dealer Credit Facility, as part of this broader effort.
Sen. Bernie Sanders (I-Vt.), for one, is appalled. "After years of stonewalling by the Fed, the American people are finally learning the incredible and jaw-dropping details of the Fed's multitrillion-dollar bailout of Wall Street and Corporate America. Perhaps most surprising is the huge sum that went to bail out foreign private banks and corporations. As a result of this [Federal Reserve] disclosure, other members of Congress and I will be taking a very extensive look at all aspects of how the Federal Reserve functions," Sanders said in a statement.
Nonetheless, on the CPFF alone, the Fed is well aware of the potential controversy its program faced. In an internal report released in June, the CPFF noted: "The public sector's role in providing backstop liquidity to the shadow banking system will continue to be debated. Although the duration of the CPFF was necessarily limited, the facility provides a model for a market-based lender-of-last-resort liquidity backstop, which could serve as a guide for future policy discussion."
According to the critics, that's exactly the problem.