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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 24

Written by: Donald van Deventer
8/24/2011 10:41 PM 

On August 23, we explained how an enormous amount of the Federal Reserve’s loans in the form of “primary, secondary and other extensions of credit” went to AIG, other Too Big to Fail firms, and European institutions. Only 3% of average Fed loans went to “Other USA Banks,” those outside the 14 Too Big to Fail Firms.  In today’s blog, we examine Fed extensions of credit under the Commercial Paper Funding Facility (“CPFF”).  We reach another astonishing conclusion: on average, 57% of the extensions of credit under the CPFF, which peaked at $348.5 billion of funds from Joe and Mary Six Pack, went to European firms.

In this blog, we explain how (but not why) the Federal Reserve redirected hundreds of billions of dollars from people like Joe and Mary Six Pack to bail out troubled European financial institutions and corporates and to provide arbitrage opportunities to European fund managers.

The Commercial Paper Funding Policy data analyzed in this blog was provided by the Federal Reserve on its web site.  For background and access to the raw data, see this link:

In our next blog, we analyze borrowings under the CPFF by individual institutions.  In this blog, we classify the beneficiaries of the CPCC in these twelve categories:

  1. European Banks
  2. European Corporations
  3. European Private Firms
  4. AIG
  5. Too Big to Fail Firms
  6. USA Corporations
  7. USA Financial Institutions
  8. USA Private Firms
  9. Asian Banks
  10. Asian Corporations
  11. Foreign Governments
  12. Other Foreign Banks

The Federal Reserve reported 1,157 transactions under the CPFF between its first day of operation on October 27, 2008 and the close of the program on February 1, 2010.  The last borrowing under the program was on January 25, 2010.  The issuers of the commercial paper to the CPFF were typically special purpose legal entities set up as special investment vehicles or funding subsidiaries. In each case, the “parent/sponsor” of these special legal entities is the firm of interest.  Unlike the Fed’s “primary, secondary and other extensions of credit” in which 1,305 financial institutions participated, there were only 82 sponsors who borrowed through affiliates under the CPFF.  While the CPFF borrowers have been highlighted in the press, most accounts have erred in reporting the amounts borrowed.  A sponsor which issued $50 million in commercial paper for three months and then rolled it over for another three months was reported as borrowing $100 million instead of the correct borrowing total: $50 million for 6 months.

In this blog, we correctly note that all borrowers began October 27, 2008 with zero borrowings from the CPFF.  On that day and all subsequent days, we correctly report the daily ending balance outstanding as the sum of the beginning balance plus the amount of any new borrowings less any borrowings maturing that day.  We do this daily for all borrowers through the date of the last borrowing reported by the Fed, January 25, 2010.  Total borrowings under the program are shown in this graph:

The maximum outstanding under the program was $348.5 billion on December 31, 2008, a massive amount of funding that directly or indirectly ultimately comes from American tax payers like Joe and Mary Six Pack. The average outstanding under the CPFF program was $145.5 billion on the 456 days from October 27, 2008 to January 25, 2010.

When we look at the composition of the types of sponsors who borrowed under the program, the results are truly astonishing:

The largest single class of borrowers under the CPFF program was European banks! European corporates were also significant borrowers, and, just as surprising, so were private European fund managers using the program for arbitrage. AIG and Too Big to Fail firms from the United States were significant borrowers as one would expect, but on a smaller scale than the European borrowings.  USA financial institutions outside the Too Big to Fail group were relatively minor participants in the CPFF program.  Private firms in the USA, again fund managers and other arbitrageurs, were significant recipients of Joe and Mary Six Pack’s money courtesy of the Federal Reserve.

The table below summarizes the level of involvement in the CPFF program by each of the 12 classes of sponsors:

European banks had a maximum CPFF borrowing amount of $166.95 billion, 47.91% of the CPFF maximum outstanding of $348.5 billion. European corporations and private firms had maximum borrowings that were 1.35% and 5.14% of the CPFF maximum.  Jointly, European borrowers under the CPFF had maximum borrowings that were 54.39% of the maximum outstanding for the CPFF.

On an average basis, the European banks had borrowings of $71.6 billion from October 27, 2008 to January 25, 2010. This was 49.23% of the CPFF average outstanding of $145.5 billion. European corporations and private firms had average borrowings equal to 1.03% and 7.02% of the CPFF overall average. Average borrowings of all European sponsors were 57.28% of the average outstandings under the CPFF.  These findings deserve a high degree of scrutiny from Congress and the American public.

In this blog, we have described what, but not why, the Fed did in extending credit via the CPFF to 12 classes of sponsors.  This raises a number of questions to which Joe and Mary Six Pack deserve answers:

Why was it in the best interests of the United States to take, directly and indirectly, money from taxpayers like Joe and Mary Six Pack and loan 57% of the money to Europeans?

Why was it in the best interest of the United States to loan money via the CPFF to troubled institutions like Royal Bank of Scotland and UBS instead of lending to the governments of the U.K. and Switzerland so that those governments could take the counterparty credit risk of RBS and UBS?

Why was it in the best interest of the United States to take money from Joe and Mary Six Pack to lend to foreign automakers like Toyota and BMW, which have played a large role in the financial troubles of GM, Chrysler, and Ford Motor Company?

In our next blog, we name all 82 borrowing sponsors and analyze the daily outstanding borrowings of those who used the CPFF most intensively.

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

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