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Federal Reserve Loans Billions to Prop Up Foreign Banks

April 4, 2011

by Eric Hammer | FTMDaily Contributing Writer

TEL AVIV, Apr 4 – A new report recently released by the Federal Reserve and reviewed by Bloomberg News shows that the Federal Reserve spent some 70% of their emergency stimulus loan money bailing out foreign banks rather than banks in the United States.

The Federal Reserve has a long standing program known as their discount lending window which offers emergency cash loans at low rates to banks facing a liquidity crisis. The program has existed for nearly a century and has been responsible for helping to keep a number of banks solvent throughout its history.

However, the program has a loophole: It provides money to any American bank, including an American bank which is a tiny subsidiary of a major foreign bank. This has meant effectively that even though Federal Reserve rules required that they provide loans only to American banks, for all intents and purposes, some 70% of loans were given to foreign banks facing liquidity crises during the recent recession.

The Federal Reserve had been reluctant to reveal the names of the banks that had been receiving the loans, with Federal Reserve chairman Ben Bernanke commenting that he feared public disclosure could “lead market participants to infer weakness.” The report was eventually revealed by Bloomberg News after they filed a Federal Freedom of Information Act request demanding that the information be revealed.

A number of lawmakers, most notably outspoken Republican lawmaker, Ron Paul have expressed outrage at the recent revelations. Mr. Paul was quoted by Bloomberg News as saying “The American people are going to be outraged when they understand what has been going on.” He went on to complain about the fact that there are a large number of Americans who are not “able to pay their mortgages and they’re losing their homes, [while we] pass out tens of billions of dollars to banks that are overseas.”

In their defense, the Federal Reserve would say only that all loans made through their discount window program had been repaid in full and with interest. It is worth noting however that with interest rates at historic lows, the actual cost of the money loaned out to these foreign banks was probably less than the cost of inflation.

Among the foreign banks which borrowed massive sums of money from the Federal Reserve, a number of names stand out. These include Arab Banking Corp. which is 29% Lebanese owned and which took a total of 73 loans from the Federal Reserve through their New York based branch, the largest of which was a $1.2 billion loan in July, 2009 and the Bank of China, which borrowed $198 million in August, 2007.

Other countries represented in the recently revealed documents include banks in Great Britain, France, Belgium and Luxemburg, all of whom have small operations in the United States but all of whom took outsize loans from the Federal Reserve’s discount window to help stabilize their foreign operations.

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