Fed Opens Books, Revealing European Megabanks Were Biggest Beneficiaries
NEW YORK -- The Federal Reserve on Wednesday reluctantly opened the
books on its monumental campaign to save the financial system in the
midst of the recent crisis, revealing how it distributed some $3.3
trillion in relief.
The data revealed that the Fed's aid was scattered much more widely
than previously understood. Two European megabanks -- Deutsche Bank and
Credit Suisse -- were the largest beneficiaries of the Fed's purchase of
mortgage-backed securities. The Fed's dollars also flowed to major
American companies that are not financial players, including McDonald's
and Harley-Davidson, through unsecured short-term loans.
The measure, initiated in Jan. 2009 to stimulate the flow of credit
and keep household borrowing costs low, led the nation's central bank to
purchase more than $1.1 trillion in mortgages packaged into the form of
securities. The mortgage bonds are backed by Fannie Mae and Freddie
Mac, the twin mortgage giants now owned by taxpayers.
Deutsche Bank, a German lender, has sold the Fed more than $290
billion worth of mortgage securities, Fed data through July shows.
Credit Suisse, a Swiss bank, sold the Fed more than $287 billion in
The data had previously been secret. It was released Wednesday per
the recently-enacted law overhauling the federal financial regulation.
The Fed, ferociously backed by the Obama administration, fought
lawmakers' desire for full disclosure throughout the financial reform
The mortgage purchase program has come under withering criticism by
economists and financial experts who believe the Fed's initiative has
unnecessarily inflated the housing market, and prevented the cleansing
that pretty much all experts believe is necessary for a full economic
rebound. However, the program has also been heavily praised for
preventing an Armegedon-type situation in which mortgage costs could
have skyrocketed, collapsing the housing market and leading to even more
Data released Wednesday shows which Wall Street firms have been the
biggest beneficiaries of the Fed's bond buying program. The fact that
foreign lenders benefited the most is sure to irk lawmakers.
The Fed effectively telegraphed its intentions to the Street before
buying the bonds. Legendary money manager Bill Gross, who oversees more
than $1.2 trillion at Pacific Investment Management Co. said last month
during a television interview that part of his success over the last 18
months was due to buying securities in front of the Fed, and selling
them to the Fed at a premium, allowing him to profit handsomely. Gross
runs PIMCO's $252.2 billion Total Return Fund.
Morgan Stanley sold the Fed more than $205 billion in mortgage
securities from January 2009 to July 2010, while it's much bigger rival,
Goldman Sachs, sold $159 billion. Citigroup, the nation's third-largest
bank by assets, sold the Fed nearly $185 billion in mortgage bonds.
Merrill Lynch/Bank of America sold about $174 billion.
It's not clear how much these firms profited by engaging in the kind
of activity that allowed Gross to profit so well, known as "front
running." However, it's abundantly clear that they did turn a profit.
JPMorgan Chase, the nation's second-largest bank by assets, sold the Fed about $153 billion worth of mortgage securities.
Other foreign banks with extensive Wall Street operations also profited from the program.
Barclays, the British firm that took over failed investment bank
Lehman Brothers, sold about $123 billion in mortgage bonds. UBS, a Swiss
lender, sold about $94 billion. BNP Paribas, a French bank, sold about
Marcus Baram contributed reporting.