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Aug 29

Written by: Donald van Deventer
8/29/2011 2:18 AM 

On August 25, we examined the Federal Reserve’s extensions of credit under the Commercial Paper Funding Facility (“CPFF”).  We reached an 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 rank the borrowings under the CPFF for all 82 parent/sponsors of the legal entities whose commercial paper was funded under the program. We wish to thank Brendan Cavanaugh for very helpful comments that have resulted in the revision of the number of days on which borrowing occurred for 22 of the 82 firms.

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:

http://www.federalreserve.gov/monetarypolicy/cpff.htm

We classified 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

We categorize the 82 parent/sponsors whose affiliates borrowed under the CPFF here.  The fact that two governments, the Republic of Korea and the Free State of Bavaria, are included will surprise many who are seeing the list of borrowers for the first time:
   
AIG

1
American International Group


Asian Banks
1
KB Financial Group Inc.
2
Mitsubishi UFJ Financial Group
3
Mizuho Corporate Bank, Ltd.
4
Shinhan Financial Group Co Ltd
5
Sumitomo Mitsui Banking Corporation


Asian Corporations
1
COFCO Ltd
2
Mitsubishi Corp
3
Mitsui & Co Ltd
4
Sumitomo Corp
5
Toyota Motor Corp


European Banks
1
Aegon NV
2
Allied Irish Bank
3
Banco Espirito Santo SA
4
Barclays PLC
5
BNP Paribas
6
Caixa Geral de Depósitos
7
Commerzbank AG
8
Danske Bank A/S
9
Dexia SA
10
Dresdner Bank
11
DZ Bank AG
12
Erste Group Bank AG
13
Fortis Bank SA/NV
14
Handelsbanken
15
HSBC Holdings PLC
16
HSH Nordbank AG
17
ING Groep NV
18
KBC
19
KBC BANK NV
20
Natixis
21
NordLB
22
Rabobank
23
Royal Bank of Scotland Group
24
UBS
25
Unicredit
26
WestLB


European Corporations
1
Bayerische Motoren Werke AG
2
Deutsche Post AG
3
Syngenta AG


European Private Firms
1
BSN Holdings
2
Northcross


Foreign Governments
1
Free State of Bavaria
2
Republic of Korea


Other Foreign Banks
1
Bank of Montreal
2
Bank of Nova Scotia
3
Royal Bank of Canada


Too Big to Fail Firms
1
Bank of America
2
Citigroup
3
Goldman Sachs
4
Merrill Lynch & Co
5
Morgan Stanley
6
State Street Bank & Trust


USA Corporations
1
Baxter International Inc.
2
Caterpillar Financial Services
3
Chrysler Financial Services
4
Ford Credit
5
General Electric Co
6
Georgia Transmission Corp
7
GMAC LLC
8
Harley-Davidson Inc.
9
McDonalds Corporation
10
PACCAR Inc.
11
Verizon


USA Financial Institutions
1
American Express Co
2
Fifth Third Bank
3
Genworth
4
Hartford Financial Services Group
5
Lincoln National Corp
6
Members United Corporate Credit Union
7
Metlife
8
National Rural Utilities Cooperative
9
Old Republic Capital Corp
10
PNC Bank
11
Principal Financial Group Inc.
12
Prudential Financial Inc.
13
Torchmark Corp
14
Wisconsin Corporate Credit Union
15
Zions First National Bank


USA Private Firms
1
Chartwell Investment Partners, LP
2
Hudson Castle
3
The Liberty Hampshire Company

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.  We note that all borrowers began October 27, 2008 with zero borrowings from the CPFF.  On that day and all subsequent days, we calculate 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 by category are shown in this graph:



The maximum outstanding under the CPFF was $348.5 billion on December 31, 2008, with borrowings dominated by the “European banks” category. 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. Average borrowings of all European sponsors were 57.28% of the average outstandings under the CPFF. 

We now turn to the borrowings by individual parent/sponsors.  Our first chart lists the top 40 parent sponsors by their maximum daily outstanding borrowing during the October 27, 2008 to January 25, 2010 period. Consistent with our findings above, UBS led the list and four of the top 5 borrowers by this ranking were European banks:



The next chart continues the ranking by maximum outstanding for the remaining 42 borrowers under the CPFF program.  Note that the much-criticized Goldman Sachs is only 81st on this ranking, well below its Too Big to Fail peers like Citigroup, AIG and Bank of America:



We now rank the firms by average borrowings during the October 27, 2008 to January 25, 2010 period.  Five of the top 10 borrowers were European banks, joined by Too Big to Fail Citigroup and AIG.  The biggest surprise on this chart, however, is the presence of three privately held fund managers in the top ten.  Thanks to the largess of the Federal Reserve, these firms were able to take funding that, directly or indirectly, came from Joe and Mary Six Pack in the United States, allowing these funds managers to benefit from subsidized funding during a period of extreme market turbulence.



The firms which ranked 41st to 82nd by average outstanding during the period October 27, 2008 to January 25, 2010 are shown here. Note that Goldman Sachs ranks last on this list with an average borrowing over this period of only $2 million per day.  UBS, by contrast, earned first place on this list with an average borrowing more than 7,000 times that of Goldman Sachs.



Another measure of the degree of distress of firms borrowing under the CPFF is simple: of the 456 days that we examine here, for how many days did these firms borrow? Two privately held fund managers borrowed for all 456 days under this program:



The remaining 42 firms, ranked by days of outstanding borrowings, are shown in the next chart.  Goldman Sachs again ranks 82nd with a single borrowing for 3 months under the program:



We then employed another method of comparison, the ranking of firms by the average borrowing on the days in which a borrowing was outstanding.  The top 15 firms, ranked by “average borrowing when drawn,” are led by UBS, Bank of America, Dexia SA, General Electric, Fortis, and AIG:



A graph of daily outstanding borrowings by UBS shows a pattern that indicates a few trades of very large size in commercial paper issued under the CPFF:



The pattern of outstandings for Bank of America under the CPFF shows a pattern much like UBS, one big block of commercial paper:



The graph of daily outstandings for Dexia SA shows many more transactions in various sizes were needed to accommodate the funding needs of legal entities for which Dexia SA was the parent/sponsor.



The pattern of outstandings for General Electric resembles those of UBS and Bank of America, where outstandings were driven by a small number of transactions in large size:



The graph for Fortis Bank SA/NV outstandings under the CPFF shows a pattern of a large number of transactions in smaller size:



The pattern for American International Group is an intermediate one, filled with a medium number of transactions in fairly large size, extending over almost the full October 27, 2008 to January 27, 2011 period:



In this blog and on August 25, we have described what, but not why, the Federal Reserve did in extending credit under the Commercial Paper Funding Facility to 82 privileged borrowers.  As we noted on August 25, this analysis 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, Dexia, Fortis and UBS instead of lending to the governments of the U.K., the Netherlands, Belgium and Switzerland so that those governments could take the counterparty credit risk of RBS, Dexia, Fortis 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?

Why was it in the best interest of the United States for American taxpayers to bail out the Republic of Korea and the Free State of Bavaria?

Like our conclusions about the Federal Reserve’s “primary, secondary, and other extensions of credit,” we find again that the extensions of credit under the CPFF had much more to do with taking Joe and Mary Six Pack’s money to bail out Wall Street, Frankfurt, and London, not Main Street.

Donald R. van Deventer
Kamakura Corporation
Honolulu, Hawaii
August 29, 2011

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

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