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The Federal Reserve pumped billions of dollars into cash-short Utah financial institutions through an emergency loan program known as the discount window during the financial crisis that began in 2007, helping to prevent a credit collapse that might have deepened the recession.
Thirteen banks, a credit union and a Utah-based credit card company went to the discount window almost 200 times from April 2008 to March 2009 for short-term loans, many overnight, totaling close to $9.5 billion, Fed records show.
Most of the borrowing took place after Lehman Brothers filed for bankruptcy in September 2008. The bankruptcy, one of the signal events of the financial panic, helped touch off a massive disruption that threatened to bring down the U.S. financial industry. With normal credit channels frozen, hundreds of anxious banks turned to the Fed's discount window to boost their cash supplies in case the crisis worsened.
The discount window is the Fed's oldest lending program, designed to help solvent financial institutions experiencing temporary cash problems to stay open and lend money. For banks, the discount window is a last-resort source to tap when they aren't willing to lend to each other, which is what happened during the financial meltdown.
Borrowing from the window has traditionally been seen as a sign of weakness, something to avoid at all cost.
Yet with banks refusing to lend to each other during the depths of the financial panic and no certainty about which financial companies would survive or die, U.S. and foreign lenders — some healthy, some not — put aside their scruples and went to the window.
"Why was that important? The answer is, that if the average depositor lost confidence and went to withdraw money overnight, then the entire [banking] system could have collapsed," said James Abbott, who runs Zions Bancorp's investor relations office.
Zions Bank borrowed $234 million, all of which was repaid.
For some banks, tapping the emergency window meant the difference between survival and failure. In 2008, Spokane, Wash.-based AmericanWest Bank was struggling to deal with construction and land-development loans its Utah-based Far West Bank had made in the years before the housing market came apart in 2007.
AmericanWest Bank had sufficient cash and borrowed money from the Fed only to provide a cushion to protect itself from the bad loans. The extra cash also assured regulators, who gave AmericanWest enough time to find an investment firm willing to buy the bank through a bankruptcy sale. SKBHC Holdings, backed in part by a Goldman Sachs fund, bought AmericanWest for $6.5 million in December. SKBHC also put $185 million in new capital into the bank.
Like other banks, "at the time, we didn't know what the next month would bring. That was the rockiest of times for the national economy," AmericanWest spokeswoman Kelly McPhee said.
The government has shed light on its efforts to rescue the financial system from disaster even before it provided the central bank's data. In December, the Fed and the Treasury Department provided details showing $8.1 billion was injected into Utah financial firms through loans and loan commitments via the Troubled Asset Relief Fund and other loan programs between December 2007 and last July.
What wasn't revealed at the time was information about discount-window borrowing. The particulars were withheld because they were deemed to be too sensitive. The Fed was forced to release the information last month after a lengthy court battle between the central bank and Fox Business and Bloomberg News.
It's now known that the biggest borrower with Utah operations to approach the Fed window was Morgan Stanley, which was fighting to stay alive in 2008.
In September of that year, the Fed approved the powerhouse securities firm's application to switch its status to a bank holding company. As part of the change, Morgan Stanley was allowed to convert its Utah industrial bank to a national bank supervised by the Fed.
The change also gave Morgan Stanley access to the Fed's discount window. A month later, Morgan Stanley's new Utah bank twice went to the window, for $4.5 billion.
It isn't clear how the money was used. Morgan Stanley representatives didn't respond to a request for comment.
But in a statement at the time, the company said it had requested the new bank holding status "to provide the firm maximum flexibility and stability … as the financial marketplace undergoes rapid and profound changes."
Because banks turn to the discount window only when they can't borrow anywhere else, the Fed requires them to show good reason for seeking loans and that they have exhausted other avenues.
In normal times, that isn't a problem. Banks routinely lend large sums to each other at low cost for periods ranging from overnight to a few months. But during the financial crisis, interbank lending virtually stopped.
"There was concern about every bank's future. Banks stopped lending to each other because the banks didn't trust each other. When that happened, the interbank rates went through the roof," said Scott Schaefer, a University of Utah finance professor.
Desperate for money, hundreds of financial institutions turned to the Fed window, despite the stigma attached to the widespread perception that if a bank borrows from the discount window, it is having trouble getting funds from anywhere else, Schaefer said.
Even though plenty of financial institutions made the leap, many still believed that regulators and rivals might see such loans as a sign of financial weakness.
One such borrower, apparently, is Proficio Bank, a Salt Lake City-based provider of commercial and mortgage banking services to home builders and real estate brokerages. It borrowed $2.8 billion during dozens of visits to the discount window from September 2008 to March 2009, according to the Fed.
Brad Hardy, Proficio's CEO, and Richard Holley, the chief financial officer, insist the bank never borrowed money through the discount window. Instead, Proficio availed itself of a Fed program known as "borrower-in-custody," which carries no stigma, the executives said.
"The discount window, historically, was … a last resort if a banking organization was in trouble," Holley said. "The program we are talking about was a Federal Reserve-sponsored program. The Fed encouraged banks to use it because it [provides] liquidity that allows them to keep lending. There's no stigma."
In truth, borrower-in-custody is an element of the discount window program. The term refers to a procedure for pledging collateral for discount window loans, Fed spokesman Joe Pavel said.
Similarly, Village Bank didn't borrow from the discount window, CEO Douglas Bringhurst said, adding that Fed records showing the St. George-based bank took out seven overnight loans totaling $45.5 million must be mistaken.
"We have never borrowed $45 million from the Federal Reserve discount window," Bringhurst said in a voice message. He later acknowledged that the bank had gone to the discount window "once or twice" in the past year, borrowing $1 million each time.
"It's just a matter of liquidity. It's a line of credit that we use," Bringhurst said, without elaborating.
Although many bankers and the Fed insist there was no shame associated with borrowing from the discount window during the crisis, it's clear that many banks that sought cash were in trouble. The Fed helped more than 100 banks that later failed, including Draper-based Advanta.
That bank was closed in March 2010 by the Utah Department of Financial Institutions. It had borrowed $15 million from the Fed in March and November 2008.
Banks weren't the only borrowers seeking cash from the Fed. America First, the largest Utah-based credit union, received $967 million through 39 short-term loans from October 2008 to January 2009.
It isn't clear how the loan proceeds were used. America First executives did not respond to a request seeking comment.
American Express and American Express Centurion Bank in Salt Lake City each borrowed $100 million, again for reasons that are unclear. The loans were approved in November 2008, one week after the Fed blessed applications by American Express and a sister company to become bank holding companies after the conversion of American Express Centurion's status from an industrial loan business to that of a bank.
Like Morgan Stanley, the conversion gave American Express' Salt Lake City operations access to the Fed's discount window.
"We have diversified funding sources. I'm not going to comment on any one," American Express spokeswoman Susan Korchak said.
Zions Bancorp received $1.4 billion in TARP funds from the Treasury Department in November 2008. The holding company acknowledged in December it also had borrowed $5.2 billion through a Fed program called the Term Auction Facility.
Set up in December 2007, TAF was another Fed effort to put more cash into the banking system. It established TAF because of the stigma that banks feared would attach if they borrowed from the discount window.
What Zions didn't divulge were seven discount-window loans totaling $234 million. The loans went to Zions' subsidiary, Zions Bank.
James Abbott, who runs Zions' investor relations department, said it's vital to understand what was happening in the economy when the loans were being sought.
"Every single person on Wall Street woke up in the mornings of September and October of 2008 not sure which banks were going to fail that day," Abbott said, ticking off names such as Wachovia, Washington Mutual, Bear Stearns and Lehman Brothers.
"Every day was the most significant crisis of confidence that multiple generations of people went through, in terms of their financial institutions," he said.
Abbott said the usual source of funds for banks short of cash — short-term borrowing from other banks — had virtually shut down.
"Almost no bank in the world wanted to lend to another bank, no matter who they were. They were all very fearful."
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