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Don founded Kamakura Corporation in April 1990 and currently serves as its chairman and chief executive officer where he focuses on enterprise wide risk management and modern credit risk technology. His primary financial consulting and research interests involve the practical application of leading edge financial theory to solve critical financial risk management problems. Don was elected to the 50 member RISK Magazine Hall of Fame in 2002 for his work at Kamakura. Read More

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Jul 24

Written by: Donald van Deventer
7/24/2011 10:52 PM 

Today’s blog focuses on the U.S. dollar funding shortfall that took place at the German bank HSH Nordbank AG’s New York branch during the period from February 8, 2008 to March 16, 2009. HSH Nordbank is not an institution that is as well-known as its rival banks in Germany, but a study of its funding shortfall reveals a surprising fact: U.S. taxpayers were funding the rescue of HSH Nordbank even before the German government came to its rescue. We explain why in what follows.

This is the seventeenth Kamakura case study in liquidity risk, following earlier blogs on AIG, Bank of America, Countrywide Financial, Merrill Lynch, a consolidation of the latter three firms, Lehman Brothers, Morgan Stanley, Citigroup, Dexia SA, Depfa Bank plc, Barclays, Goldman Sachs, the combined JPMorgan Chase, Washington Mutual, and Bear Stearns, Wachovia, State Street, and BNY Mellon.

Under the Dodd-Frank Act of 2010, the Board of Governors of the Federal Reserve was required to disclose the identities and relevant amounts for borrowers under various credit facilities during the 2007-2010 financial crisis.  These credit facilities provide perhaps the best source of data about liquidity risk and funding shortfalls of the last century.  This data is available for purchase from Kamakura Corporation and is taken from the Kamakura Risk Information Services Credit Crisis Liquidity Risk data base. We use this data to determine to what extent there was a funding shortfall at HSH Nordbank during the credit crisis.

The data used for HSH Nordbank in this analysis are described in more detail below. The data consist of every transaction reported by the Federal Reserve as constituting a “primary, secondary, or other extension of credit” by the Fed. Included in this definition are normal borrowings from the Fed, the primary dealer credit facility, and the asset backed commercial paper program. Capital injections under the Troubled Asset Relief Program and purchases of commercial paper under the Commercial Paper Funding Facility are not included in this definition put forth by the Federal Reserve. 

A detailed chronology of the 2007-2009 credit crisis is given in these two recent blog posts:

van Deventer, Donald R. “A Credit Crisis Chronology Part 1 Through February 2008: This Time Isn’t Different,” Kamakura blog, www.kamakuraco.com, May 13, 2011.

van Deventer, Donald R. “A Credit Crisis Chronology Part 2 March 2008 Through March 2009: This Time Isn’t Different,” Kamakura blog, www.kamakuraco.com, May 14, 2011.

HSH Nordbank is not mentioned specifically in the two blog posts above, but its credit crisis problems were serious.  We highlight a few of the related headlines here:

February 25, 2008
HSH Nordbank sues UBS over CDO exposure to sub-prime danger (Source: The Sunday Times).


November 10, 2008
HSH Nordbank chief resigns due to financial losses (Source: USA Today).


November 22, 2008
Hamburg-based HSH Nordbank said it would receive up to 30 billion Euros ($37 billion) in guarantees to rescue it from the ongoing global financial crisis from Soffin, a federal government agency which has a 480-billion-euro war chest (Source: Deutsche Welle).


February 13, 2009
HSH Nordbank closed 2008 with a consolidated net loss of around EUR 2.8 billion before restructuring costs, taxes and loss participation (Source: HSH Nordbank press release).


February 24, 2009
HSH Nordbank received a capital injection of €3 billion ($3.8 billion) from the state of Schleswig-Holstein and the city-state of Hamburg and the bank will also receive a state-backed credit guarantee worth €10 billion (Source: Spiegel Online).

This blog reports on “primary, secondary, or other extensions of credit” by the Federal Reserve to HSH Nordbank during the period February 8, 2008 to March 16, 2009. HSH Nordbank AG New York branch’s borrowings from the Federal Reserve can be summarized as follows:

Borrowing dates:
First borrowing March 27, 2008 for $2.0 billion, and borrowings were continually outstanding until November 5, 2008.
Average from

2/8/2008 to 3/16/2009
$1.7 billion
Average when Drawn
$3.0 billion
Maximum Drawn
$5.25 billion starting on May 15, 2008
Number of Days with

Outstanding Borrowings
223 days

The graph below shows the wave of HSH Nordbank borrowings that began on March 27, 2008, almost exactly 8 months prior to the announcement that German bail-out agency Soffin would extend guarantees of 30 billion Euros to HSH Nordbank. The support from the Federal Reserve came 11 months before HSH Nordbank received a capital injection of €3 billion ($3.8 billion) from its two most significant shareholders, the state of Schleswig-Holstein and the city-state of Hamburg. Peak borrowings at HSH Nordbank were $5.25 billion starting on May 15, 2008.



In the chart below, we compare HSH Nordbank’s consolidated funding short fall to those firms whose liquidity risk we have previously analyzed in this series.  HSH Nordbank’s consolidated funding shortfall, measured by average drawn borrowing of $3.0 billion, ranks 16th among the firms analyzed in this series to date.



If one ranks the same firms by largest outstanding borrowing on a single day, HSH Nordbank ranks 17th, with a peak borrowing of $5.25 billion:



Borrowings During the Bear Stearns Crisis, March 14, 2008 to May 31, 2008

If we focus on the period from March 15 (one day prior to the JPMorgan Chase absorption of Bear Stearns) to May 31, 2008, HSH Nordbank ranks much higher among the financial institutions studied so far. When measured by average borrowings during this period, HSH Nordbank AG New York Branch ranks 4th.



When measured by peak borrowings in the wake of the Bear Stearns collapse, HSH Nordbank ranks 8th at $5.25 billion.



Borrowings from the Commercial Paper Funding Facility

The Federal Reserve’s disclosure of borrowings under the Commercial Paper Funding Facility lists four borrowings by HSH Nordbank AG.



Implications of Funding Shortfall Data

Surprisingly, HSH Nordbank ranks high among the institutions that were in most distress in the wake of the collapse of Bear Stearns.  By May 15, 2008, it was borrowing $5.25 billion from the Federal Reserve, a full 8 months before HSH Nordbank received guarantees from the Germany government agency Soffin and 11 months before its primary shareholders, the state of Schleswig-Holstein and the city-state of Hamburg, injected more capital.  These borrowings from the Federal Reserve raise an obvious series of questions: why was the Fed rescuing a German bank even before the German government supplied aid? Why would the Fed lend directly to HSH Nordbank, rather than lending to the German government, which could on-lend the funds to HSH Nordbank? The American taxpayers deserve an answer to these questions.

Background on the Federal Reserve Data

A summary of the Federal Reserve programs that were put into place and summary statistics are available from the Federal Reserve at this web page:

http://www.federalreserve.gov/newsevents/reform_transaction.htm

Today’s blog focuses on one set of disclosures by the Federal Reserve: primary, secondary and other extensions of credit by the Fed.  This includes direct, traditional borrowings from the Federal Reserve, the primary dealer credit facilities, and the asset backed commercial paper program described at the link above.  These borrowings do not include commercial paper purchased under the Commercial Paper Funding Facility nor do they include the equity stakes taken by the U.S. government under the Troubled Asset Relief Program.

Kamakura took the following steps to consolidate the primary, secondary and other extensions of credit:

  • From www.twitter.com/zerohedge Kamakura downloaded the daily reports, in PDF format, from the Federal Reserve on primary, secondary and other extensions of credit from February 8, 2008 until March 16, 2009, approximately 250 reports in total
  • Kamakura converted each report to spreadsheet form
  • These spreadsheets were aggregated into a single data base giving the origination date of the borrowing, the name of the borrower, the Federal Reserve District of the borrower, the nature of the borrowing (ABCP, PDCF, or normal), the maturity date of the borrowing, and (in the case of Primary Dealer Credit Facility) the name of the institution holding the collateral.
  • Consistency in naming conventions was imposed, i.e. while the Fed listed two firms as “Morgan Stanley” and “M S Co” Kamakura recognized to the maximum extent possible that they are the same institution and used a consistent name
  • To the maximum extent possible, the name of the ultimate parent was used in order to best understand the consolidated extension of credit by the Fed to that firm.

For information regarding the Kamakura Credit Crisis Liquidity Risk data base, please contact us at info@kamakuraco.com.  Please use the same e-mail address to contact the risk management experts at Kamakura regarding how to simulate realistic liquidity risk events in the Kamakura Risk Manager enterprise-wide risk management system.

Donald R. van Deventer
Kamakura Corporation
Honolulu, Hawaii
July 25, 2011

© Copyright 2011 by Donald R. van Deventer, All Rights Reserved.

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