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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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Kamakura Blog

Aug 23

Written by: Donald van Deventer
8/23/2011 3:43 AM 

In our 20 part series on “Case Studies in Liquidity Risk,” we focused on the story of 20 firms who experienced a larger and serious funding crisis in the period from February 8, 2008 to March 16, 2009. While the firm by firm analysis is critical from a Basel III and enterprise risk management perspective, there is a bigger story in the analysis of the Federal Reserve’s extension of “primary, secondary and other sources of credit” during this period.  Our conclusion is very simple: Joe and Mary Six Pack saved Wall Street, London, Frankfurt, and big corporates in the USA and Europe.  More than $700 billion in Fed extensions of credit ultimately come from Joe & Mary Six Pack’s tax dollars. Joe and Mary will be surprised to learn how little of their support in the credit crisis went to the small banks on Main Street.  For the details, read on.

Kamakura’s prior blogs on case studies in liquidity risk have focused on these firms: 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, BNY Mellon, HSH Nordbank AG, Societe Generale, HBOS/Bank of Scotland, and Royal Bank of Scotland.  In this blog, we look at all of the 1,305 borrowers and 15,857 transactions described by the Federal Reserve as “primary, secondary and other extensions of credit.” 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.

We use the Federal Reserve data to analyze how much of these extensions of credit went to firms classified as follows:

  • AIG itself, on a stand-along basis
  • Too Big to Fail Firms
  • Other USA Banks
  • The Commercial Paper Funding Facility run by the Federal Reserve
  • European Banks
  • Other Foreign Banks

The 14 firms included in the “Too Big to Fail” category were selected because they were given a very large amount of government aid.  Lehman Brothers is included in the group because, as our blog series has shown, the effective definition of “too big to fail” was changed within a few days of Lehman’s bankruptcy.  If Lehman had gotten in trouble just a week later, the government would have saved Lehman as well.  The 14 firms include the following:

  1. Bank of America
  2. Bank of New York Mellon
  3. Bear Stearns
  4. Cantor
  5. Citigroup
  6. Countrywide
  7. Goldman Sachs
  8. JP Morgan Chase
  9. Lehman Brothers
  10. Merrill Lynch
  11. Morgan Stanley
  12. State Street
  13. Wachovia Bank NA
  14. Washington Mutual Bank

The total borrowings outstanding for each class of firms are shown on a daily basis in the graph below.  Note that these borrowings do not include any investments in the firms under the Capital Purchase Program of the Troubled Asset Relief Program, which began in October 2008.

The graph makes a number of points very clear.  First, at its peak, the Fed was providing more than $714 billion of Joe and Mary Six Pack’s money to all classes of borrowers.  Second, the overwhelming majority of the funds went to AIG, the Too Big to Fail Firms, European Banks, and the Commercial Paper Funding Facility which in turn bought the commercial paper of blue-chip companies in the United States and (primarily) Europe who were unable to obtain funding on their own. Extensions of Fed credit to other banks in the USA were by comparison minimal.  We show the massive discrepancies in funding provided on a quantitative basis in this chart:

The peak borrowings of Other USA Banks, $20.58 billion, were only 2.88% of the overall peak lent by the Fed of $714.8 billion on December 31, 2008.  The peak borrowings of Other USA Banks totaled only 9.86% of the peak borrowing by AIG, only 6.08% of the peak borrowing by the Too Big to Fail Banks, only 5.90% of the peak borrowing by the Commercial Paper Funding Facility, and (most incredibly) only 20.69% of the peak borrowing by European banks from the Federal Reserve.

The average borrowing by Other USA Banks on days in which there were borrowings from the Fed was $8.6 billion.  This is only 3.08% of the $279.1 billion daily average of credit extended by the Fed during this period. The average borrowings, on days in which borrowings were outstanding, of Other USA Banks totaled only 5.33% of the average borrowing by AIG, only 10.73% of the average borrowing by the Too Big to Fail Banks, only 3.08% of the average borrowing by the Commercial Paper Funding Facility, and (still incredible) only 22.59% of the average borrowing by European banks from the Federal Reserve.

These stunning statistics make it very clear that the beneficiaries of more than $714 billion in funding from Joe and Mark Six Pack were the senior debt holders and employees of the largest financial firms on Wall Street, London, and Frankfurt, along with the shareholders and senior debt holders of the U.S. and (largely) European firms who were saved by massive borrowings from the Commercial Paper Funding Facility.

This is a massive transfer of wealth from average Americans to many of the highest paid professionals in the financial services industry in New York, London and Frankfurt and in corporate America and Europe.

We shine a bright spotlight on borrowers under the Commercial Paper Funding Facility in our next blog.

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:

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 the equity stakes taken by the U.S. government under the Troubled Asset Relief Program. We separate discuss commercial paper purchased under the Commercial Paper Funding Facility in aggregate, not on a borrower by borrower basis.

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

  • From 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  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
August 23, 2011

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