Hedge Funds Got Fed Help, Too

Date: Thursday, December 2, 2010
Author: Ben Protess, DealBook

Wall Street banks weren’t the only ones approaching the Federal Reserve for help.

When the credit markets nearly froze up in the fall of 2008, the Federal Reserve Bank of New York helped hedge funds, mutual funds and other big investors buy highly rated securities backed by car loans and student debt, among other assets.

The institutional investors, which collectively borrowed $71 billion through the program, included such market giants as Pimco, T.Rowe Price and BlackRock.

In a statement, BlackRock said that it borrowed the funds “on behalf of both institutional and mutual fund clients.”

The California Public Employees Retirement System, the nation’s largest pension fund, also borrowed through the program, known as the Term Asset-Backed Securities Loan Facility, or TALF. The Major League Baseball Players Pension Plan was another pension fund participant in the program.

Hedge funds made the list as well. Magnetar Capital, an Illinois-based hedge fund, received seven loans from the Fed.

Magnetar was the subject of a ProPublica investigative report over the fund’s bets against risky mortgage-related securities that Magnetar itself sponsored.

The program was a “resounding success in providing liquidity to the consumer credit markets,” a Magnetar spokesman said in a statement.

Frontpoint Partners, the hedge fund that recently made news when a portfolio manager brushed up against an insider trading investigation (he was not charged), received a few dozen TALF loans.

“On behalf of clients, FrontPoint was an early participant in the Government TALF program,” said a spokesman for the firm. “With our clients, we were able to support the government in this important initiative.”

The Fed used the loans to entice investors into the largely frozen asset-backed securities market. Most of the loans came cheap and lasted for a year. The program ended earlier this year.

Morgan Stanley, which is in the process of spinning off FrontPoint, was the only investment bank on the list of TALF recipients under its own name.

The disclosures of loan recipients come from Federal Reserve’s release of volumes of previously undisclosed information about the trillions of dollars in loans it made during the financial crisis.

One crucial Fed lending program was the Primary Dealer Credit Facility, a cheap overnight loan system for banks that was similar to the Fed’s discount window.

You name the big broker-dealer, and they’re on that list. Goldman Sachs, Morgan Stanley, Bank of America and Citigroup all borrowed through this program.

One surprise, however, is that JPMorgan Chase borrowed only three times, all in the fall of 2008. The program started in March 2008 and ended February 2010.

Citigroup, Bank of America and Morgan Stanley kept borrowing through the spring of 2009.

There was a clear advantage to keep borrowing: As time went on, the Fed’s interest rate kept falling. When Bank of America drew its last loan in May 2009, the $375 million loan carried a nominal 0.5 percent rate.

In the same week in October 2008 that banks received TARP funds, Goldman took out overnight loans worth as much as $60 billion. Morgan Stanley borrowed as much as $34 billion in one day that week.

Foreign banks also received assistance. Societe Generale, headquartered in Paris, and the Italian bank Intesa Sanpaolo, received loans through the Fed’s Term Auction Facility, or TAF. So did a few Canadian banks as well as the Arab Banking Corporation. The firms all have offices in New York.

The Fed created the TAF program in late 2007 when some banks balked at borrowing from the Fed’s discount window. The program offered 28-day loans to generally healthy depository institutions.