On Sept. 10, 2008, U.S. Bancorp accessed the Federal Reserve's discount window for $3.4 billion of overnight funding. On Jan. 6, 2009, JPMorgan Chase & Co. borrowed $3.5 billion from the same facility.
If these revelations ever would have been destabilizing to either company, they aren't now. But the two banks' reactions to the information's release shows a disagreement over how future dealings with the Fed will be interpreted.
U.S. Bancorp, which went to the discount window on several occasions to settle its end-of-the-day positions, has portrayed its use of the facility as a thrifty tactical move during a disruption in the credit markets.
"If the discount window borrowing rate is 75 basis points, and in the last 15 minutes of trading market rates are at 2%, we're going to go to the discount window," U.S. Bancorp Treasurer Ken Nelson told American Banker on Thursday.
JPMorgan Chase, on the other hand, has reacted to the Fed's disclosures as if making use of the window is a shameful secret. Now that the records will be made regularly available to the public, "we never intend to use the discount window," JPMorgan Chase Chairman and Chief Executive Jamie Dimon said on Wednesday, a day before the Fed gave up a two-year fight to keep the data private.
Of course, this line of thinking presumes he always will have a choice. It also suggests that accessing the window is somehow more shameful than accessing other forms of government support, such as the Federal Deposit Insurance Corp.'s Temporary Loan Guarantee Program, which JPMorgan Chase used to sell billions of dollars of debt in 2008 and 2009.
"When everyone is borrowing, I don't know what the stink is," said Paul Miller, managing director of FBR Capital Markets. "Everybody knows that two or three years ago, we almost collapsed, the liquidity helped, and we're lucky to be alive."
Initial reviews of the Fed's disclosures about discount window borrowings have turned up little beyond confirmation that the government played a crucial role in stabilizing the markets. Combing through the documents more carefully will take time, as the manner in which the data was released — more than 800 separate PDF files put on a computer disk that news outlets could pick up in person from the Fed building in Washington or have mailed to them — had all the graciousness of a gambler paying off a $100 bet with a 60-lb. sack of pennies.
There will be more disclosures to come. The Dodd-Frank Act requires the Fed to identify, with a lag time of about two years, firms that have borrowed at the discount window, used emergency credit facilities or participated in the Fed's open market operations. Congress also instructed the Fed to disclose the amounts and terms involved.
But future disclosures will not speak to why banks engaged in those actions. Thursday's disclosure didn't either, making it impossible for consumers of the data to tell whether banks took out the loans because of convenience or necessity. In U.S. Bancorp's case, however, it is hard to see evidence that the company was especially vulnerable. Credit-default swap rates show that the market considered it to be more stable than many big bank peers.
On Sept. 10 and other occasions, Nelson said, the company used the discount window to settle positions late in the day, when rates were most volatile. The company typically taps other sources of overnight funding, including Eurodollar deposits, commercial paper, repos or the excess cash that customers place with the bank through their accounts. But when the costs associated with those markets exceeded the discount rate, as they did on occasion during the market turmoil of 2008, "it no longer made any economic sense to pay that rate when [liquidity] was available and encouraged to be taken from the discount window," Nelson said.
The money at stake was not huge. Supposing that end-of-day market funding cost a full 1% more than the discount rate, for example, tapping the window on Sept. 10, 2008, would have saved U.S. Bancorp less than $100,000 for the night.
But regulators, seeking to stabilize the financial system and hoping to bring short-term rates back in alignment with the Fed's target by draining demand from private markets, were openly encouraging banks to access the window. And given the economics, there was no reason not to, Nelson said. He dismissed the possibility that regulators would have considered U.S. Bancorp's decision to access the window a sign of weakness.
"They know our bank inside and out, so when we borrow from the Fed they know exactly that we're using it at the end of the day, typically in the last 15 minutes of the trading day, to settle our positions. They know us, and I'm going to assume that they know all the other banks that borrow from them as well," Nelson said.If that's the case, there would hardly seem to be reason to fear extensive fallout from the disclosure.
"My guess," Miller said, "is that we get in the same situation, the banks will do the same thing."
Even, perhaps, JPMorgan Chase.