Emergency Fed Lending Kept U.S. Central Afloat

Register now

WASHINGTON – Previously secret documents released by the Federal Reserve yesterday show that U.S. Central was a major beneficiary of the Central Bank’s emergency Term Auction Facility beginning in August 2008, just as the corporate credit union giant was teetering.

The records show the one-time $52 billion corporate tapped into the emergency liquidity facility, created by the Fed as the nation’s financial system began to seize up, for a 28-day loan of $2.5 billion on August 28, 2008. The annual rate on the emergency loan, collateralized by asset-backed securities held by U.S. Central was 2.38%.

The TAF was one of a half-dozen special lending facilities created by the Fed in the dark days of the 2008 meltdown in the financial markets, which collateralized everything from commercial paper to mortgage securities to Treasuries in order to lend out some $9 trillion to institutions all over the world, the records show.

The troubled corporate continued to tap into the specially created Fed loan facility several more times, borrowing as much as $5 billion on Sept. 11, 2008 at 2.45%. The final short-term loan from the Fed’s TAF was made on Sept. 25, 2008, just days before Congress authorized NCUA to make emergency loans to corporates through the Central Liquidity Facility. The Fed borrowings were subsequently replaced by a $5 billion loan from the CLF at a far more advantageous rate, below 1%.

At the time, growing losses at U.S. Central was making it increasingly expensive for the corporate giant to borrow in the public markets by selling short-term commercial paper, or at the Federal Home Loan Bank of Topeka, where it had a $7 billion line of credit.

The $5 billion CLF loan was used by U.S. Central to ease its liquidity crunch until it was subsequently taken over by NCUA a few months later, in March 2009. The congressional action also enabled NCUA to lend $5 billion to WesCorp FCU, as dwindling liquidity eventually contributed to the failure of the one-time $34 billion California-based corporate.

The $5 million CLF line was later supplemented by a $1 billion capital note from NCUA, that U.S. Central soon ran through, and later by as much as $7 billion of specially created CU SIP notes then helped liquify both U.S. Central and WesCorp.

The Fed documents show the extraordinary lending conducted by the U.S. Central Bank during the unprecedented time of financial stress to not only American institutions, but to banks all over the world with nominal U.S. presences, from Germany, Japan, Canada, France and Israel, as well as to the central banks of other countries. Among the many recipients were Lloyd's Bank England, Royal Bank of Canada, UBS, Misuho Bank Japan, Israel Bank, Arab Banking Corp., and Deutsche Bank of Germany.

The participation of U.S. Central in the Fed’s short-term program was very unusual in that only two other credit unions, Service CU of New Hampshire and Marine CU of Wisconsin, are listed among the more than 10,000 loans provided under the program during the two-year period. Service CU tapped into the fed's facility for a 28-day loan of $12 million at 0.25% at least four times, and for $14 million once. Marine CU borrowed an initial $10 million at 0.25%, then as much as $28.3 million at the same rate.

As many as 200 other natural person credit unions required emergency short-term liquidity at this time, but the vast majority of them tapped in to the CLF.

For reprint and licensing requests for this article, click here.
Corporate credit unions