Fed Airs the Laundry

Many life insurers turned to the Federal Reserve Board for affordable financing while the recent credit crisis was raging.

The Fed has included the life insurers in spreadsheets listing thousands of emergency financing transactions completed through crisis-related programs.

The Fed disclosed the information to comply with a provision added to the Dodd-Frank Wall Street Reform and Consumer Protection Act by Sen. Bernie Sanders, Independent-Vt.

It is not always clear from the spreadsheets provided whether the companies listed needed help, were taking advantage of cheap financing, or were simply trying to do their part to help the government get the economy moving again.

Fed officials were discreet about emergency financing program participation in 2008 and 2009, to avoid panicking consumers and investors. They encouraged healthy companies to use the Term Auction Facility (TAF) discount lending window, to reduce the stigma of using the TAF, and they also encouraged investors of all kinds to participate in public-private investment efforts.

Commercial Paper Funding Facility (CPFF)

CPFF Data

The Fed announced the CPFF in October 2008 and began buying commercial paper just a few weeks later in an effort to restore the flow of capital to banks, insurers, industrial companies and other enterprises.

Commercial paper is a short-term, unsecured promissory note. Large U.S. companies have been using commercial paper to finance their operations since the 1800s, and, up until 2008, many thought of commercial paper as a simple, low-cost tool for managing cash flow.

“In the fall of 2008, the commercial paper market was under considerable strain as money market mutual funds and other investors–themselves often facing liquidity pressures–became increasingly reluctant to purchase commercial paper,” Fed officials say. “As a result, the volume of outstanding commercial paper fell, interest rates on longer-term commercial paper increased significantly, and an increasingly high percentage of outstanding commercial paper needed to be refinanced each day. This restriction in the availability of credit made it more difficult for businesses to obtain credit during a critical period of economic stress.”

The Federal Reserve Bank of New York tried to ease the strain by starting an entity, CPFF L.L.C., that used cash borrowed from the New York Fed to buy high-grade commercial paper directly from eligible issuers.

A commercial paper issuer had to pay a fee each time it used the CPFF, and the CPFF ended up collecting $849 million in fees, officials say.

The facility closed earlier this year, and the last CPFF commercial paper holdings matured in April.

“All loans that were made to the CPFF LLC were repaid in full, in accordance with the terms of the facility, and all of the commercial paper that the CPFF LLC purchased was repaid in accordance with the stated terms,” officials say.

At least 10 issuers with ties to the life insurance industry participated in the program, and the Fed CPFF spreadsheet shows that they borrowed about $33 billion through the CPFF. But the Fed CPFF spreadsheet exaggerates total borrowings in many cases because, each time a CPFF loan was rolled over, the Fed counted the loan as a separate loan.

Term Asset-Backed Securities Loan Facility (TALF)

TALF Loan Data
TALF Borrower Data

The Fed started TALF in November 2008, to support the companies that were active in the asset-backed securities market.

The Fed encouraged holders of asset-backed securities, including many very health companies and investment funds, to take out loans using the asset-backed securities as collateral. Officials were hoping the borrowers would use the loans to buy more asset-backed securities and pump money into the small business loan, auto loan, student loan and credit card loan markets.

Lending through the program started in March 2009 and ended earlier this year.

Through Sept. 30, “more than 60% of the TALF loans have been repaid in full, with interest, ahead of their legal maturity dates,” officials say. “All loans that have not been repaid in full early are current in their payments of principal and interest and no collateral has been surrendered in lieu of repayment.”

TALF borrowers with ties to the life insurance industry include the Oppenheimer Strategic Income Fund, a mutual fund managed by a unit of Massachusetts Mutual Life Insurance Company, Springfield, Mass.; Prudential International Insurance Service Company L.L.C., a unit of Prudential; Teachers Insurance and Annuity Association of America, New York; Lincoln National; and Unity Mutual Life Insurance Company, Syracuse, N.Y.

Other life insurers, such as Northwestern Mutual Life Insurance Company, Milwaukee, and Guardian Life Insurance Company of America, New York, show up on the TALF borrower spreadsheet because they were classified as “material investors” in funds that invested in the TALF program.

Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF)

AMLF Data

The Fed created the AMLF in September 2008, to help money market mutual funds sell asset-backed commercial paper at a time when the markets for asset-backed securities and commercial paper of all kinds were imploding.

The Fed used the AMLF to lend to big investment banks, and the investment banks were supposed to use the money to buy asset-backed commercial paper from money market funds.

The list of money market mutual funds and money market variable contract accounts that used the program to sell commercial paper includes affiliates of Ameriprise, Phoenix, Principal, TIAA-CREF and Thrivent Money Market Fund / Thrivent Mutual Funds Thrivent Financial for Lutherans, Minneapolis.

The AMLF was closed in February.

“All loans made under the facility were repaid in full, with interest, in accordance with the terms of the facility,” Fed officials say.

Term Auction Facility (TAF)

TAF Data

The Fed created the TAF discount lending window in December 2007 to ease funding pressures on financial institutions. The Fed held the last TAF auction earlier this year.

“All loans made under the facility were repaid in full, with interest, in accordance with the terms of the facility,” officials.

MetLife Bank N.A., a bank affiliated with MetLife, used the TAF 19 times and borrowed a total of about $19 billion. As of Dec. 31, 2008, and Dec. 31, 2009, MetLife Bank had no outstanding borrowings under the TAF, the company says in its Form 10-K reports for 2008 and 2009.