How AAA-Rated Foreign Banks Made Out on Ben's Term Auction Facility

Financial Times reports [emphasis is mine]:

The Taf was set up in December 2007 to provide one-month loans to creditworthy banks as markets dried up for lending longer than overnight. In August 2008, it began offering three-month loans as well.

Rabobank of the Netherlands and Toronto-Dominion of Canada, two of the only banks in the world with triple A credit ratings, used more than $20bn in cumulative Taf loans.

Ed Clark, TD chief executive, said that using Taf was logical even though his bank never had a liquidity problem. “That wasn’t how we made a lot of money. But you make a dollar here, you make a dollar there. What’s the spread you make on a billion dollars?” he said.

In the summer of 2008, TD was borrowing $1bn from TAF at rates of between 2 and 2.5 per cent. For that borrowing it used the lowest quality – and hence highest yielding – collateral acceptable to the Fed.

More than 80 per cent of its collateral had a triple B credit rating at a time when such bonds yielded about 7 per cent. TD could therefore have made a notional gross spread of about $4m a month during 2008.

A BBB rating is the lowest a bond can be rated and still considered to be an investment-grade. In other words, one notch above junk bonds, which are rated BB and lower.

And we are supposed to think everything is OK and justified because the money was fully repaid with interest. Hurray for the banks who took advantage of risk-free free money from the Fed and made out like the true bandits that they were and continue to be.

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