Last week, when the Federal Reserve finally released the names of the banks that tapped the central bank’s most secret lending program in the wake of the financial crisis many of the expect names were there. Citigroup got over $50 billion in loans. Bank of America was a big borrower, too. Goldman borrowed five times, though the amounts were relatively small. But among the names of banks that got tens of billions in loans from the Fed in order to stay afloat was at least one few expected: The Central Bank of Libya.
In the 18 months following the collapse of Lehman Brothers, a foreign subsidiary of the bank of the government of Muammar Gaddafi received a cumulative $35 billion in short-term loans from the Fed. Libya’s Central bank received the loans through a foreign subsidiary called the Arab Banking Corp., which has a branch in New York. At the time of the financial crisis, the bank was 29% owned by the Libyan government. But since then the Libyan government has upped its stake in ABC, as it is known, to 59%. So the main beneficiary of the Fed’s help is the Libyan government.
And like the rest of Wall Street, ABC’s profits have snapped back sharply since getting assistance from the US federal government. In 2008, ABC lost $880 million, mostly due to the fact that it held over a billion in structured bonds known as collaterlized debt obligations, which were in general plummeted with the value of US homes. But ABC’s profits have soared since. The bank has posted a combined $265 million in earnings in 2009 and 2010.
ABC is only one of a number of foreign banks that received money in a secretive Fed lending program – the details of which the Federal Reserve was forced to reveal last week after being sued by Bloomberg, Fox News and others. Unlike TARP or other bank bailout programs, which general provided funds for longer periods of time, the Federal Reserve has refused to name the banks that came to the US central bank for short-term loans in the wake of the financial crisis. The Federal Reserve has said that all of the loans, included the ones made to the subsidiary of the Central Bank of Libya were repaid with interest.
One of the things the Fed may have been looking to hide was how often many of those loans went to help out foreign banks. In fact, during one week in October 2008, when the Fed lending program was at its height, 70% of all the loans the US central bank made were to foreign banks. Some of the biggest recipients were the Societe General, France’s second biggest bank, and Dublin-based Depfa Bank.
But among the banks that are likely to draw the most outrage are ABC. The loans were made during a time when the relationship between the US and Libya had warmed somewhat. A Fed official told Bloomberg it was unlikely the Fed would make same loans today, given the fact that the US is currently bombing the country and assisting rebels that are fighting Gaddafi. In March, the US government froze all of Lybia’s assets. But oddly enough hasn’t stopped ABC from continuing to do business in the US. ABC, which is primarily in the business of financing trade between US companies and Middle East firms, has received a waiver from the US government as long as it promises not to do business with the Gaddafi regime. Still, rating service Fitch says the Libyan government has sizable assets deposited at ABC bank. So it’s not like the bank is totally Gaddafi free.
Will the Fed get punished for the loans. It’s not clear. But Senator Bernard Sanders, who was one of the first to spot the Lybian bank on the Fed’s client list, is trying to draw attention to them.
“It is incomprehensible to me that while creditworthy small businesses in Vermont and throughout the country could not receive affordable loans, the Federal Reserve was providing tens of billions of dollars in credit to a bank that is substantially owned by the Central Bank of Libya,” says Sanders of Vermont.
Just another wonder of the financial crisis.