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`Shadow’ Lenders’ Emergency Fed Loans Benefited Biggest Banks

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James Sterngold, Donal Griffin and Jody Shenn
Dec 13, 2010

The Federal Reserve gave more support to the world’s biggest financial companies, including Barclays Plc, Citigroup Inc. and Royal Bank of Scotland Plc, than the direct loans it disclosed this month in response to congressional mandates.

That’s because about $140 billion, or 20 percent of the Fed’s Commercial Paper Funding Facility, went to affiliates of four firms that provided financing to banks and other companies: Hudson Castle, BSN Holdings, Liberty Hampshire Co. and Northcross, central bank data show.

Banks around the world benefited. The affiliates were vehicles known as conduits — part of what a Fed report in July called the “shadow banking” system that removed assets from companies’ balance sheets and turned toxic debt into top-rated securities. At least a dozen banks had promised to provide conduits financing or other support in an emergency, reports by Standard & Poor’s show. Some also tapped the conduits for loans, according to people with direct knowledge of the firms’ dealings.

The shadow banking system “contributed significantly to asset bubbles in residential and commercial real-estate markets prior to the financial crisis” by obscuring risks, the Fed itself said in the study. The Fed’s disclosures on Dec. 1 didn’t identify borrowers from the four conduits. The funds were repaid.

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This article was posted: Monday, December 13, 2010 at 10:12 am

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