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8/14/14

Term Auction Facility (TAF)

Background

Bank funding markets, especially term funding markets, came under severe pressure at the start of the financial crisis in 2007. Amid widespread concerns about the condition of many financial institutions, investors became very reluctant to lend, especially at maturities beyond the very shortest terms. To address these funding pressures, the Federal Reserve first took steps to increase the amount of liquidity available to financial institutions through the discount window. However, many banks were reluctant to borrow at the discount window out of fear that their borrowing would become known and would be erroneously taken as a sign of financial weakness. To meet the demands for term funding more directly, the Federal Reserve established the Term Auction Facility (TAF) in December 2007.

Under the program, the Federal Reserve auctioned 28-day loans, and, beginning in August 2008, 84-day loans, to depository institutions in generally sound financial condition. The TAF enabled the Federal Reserve to provide term funds to a broader range of counterparties and against a broader range of collateral than it could through open market operations. As a result, the TAF helped promote the distribution of liquidity when unsecured bank funding markets were under stress. It also provided access to term credit without the stigma that had been associated with use of the discount window.

All depository institutions that were eligible to borrow under the Federal Reserve’s primary credit program were eligible to participate in the TAF. All U.S. depository institutions and U.S. branches and agencies of foreign institutions that maintain deposits subject to reserve requirements are eligible to borrow from the Federal Reserve’s discount window. Of those institutions, primary credit, and thus also the TAF, is available only to institutions that are financially sound.

All loans extended under the TAF were fully collateralized, and the funds were allocated through an auction, in which participating depository institutions placed bids specifying an amount of funds, up to a pre-specified limit, and an interest rate that they would be willing to pay for such funds. The funds were allocated beginning with the highest interest rate offered until either all funds were allocated or all bids were satisfied. All borrowing institutions paid the same interest rate, either the rate associated with the bid that would fully subscribe the auction, or in the case that total bids were less than the amount of funds offered, the lowest rate that was bid. The TAF was created under the Federal Reserve’s standard discount window lending authority granted under Section 10B of the Federal Reserve Act. The auctions were administered by the Federal Reserve Bank of New York, with loans granted through the 12 Federal Reserve Banks.

The facility was announced on December 12, 2007. The final TAF auction was held on March 8, 2010, with credit extended under that auction maturing on April 8, 2010. All loans made under the facility were repaid in full, with interest, in accordance with the terms of the facility.

http://www.federalreserve.gov/newsevents/reform_taf.htm

Data

Wachovia;

Loan date............Maturity.......Term...Amount.....Rate........Unencumbered collateral

Dec 20 2007....Jan 17 2008.....28....... 25.0......4.650.......65.4556 Billion Unencumbered Collateral
Mar 27 2008...Apr 24 2008.....28.....3,500.0....2.615.......65.8325 Unreported Collateral
Jul 31 2008......Aug 28 2008....28.....5,000.0.....2.350......61,879.7
Aug 14 2008....Sep 11 2008....28.....5,000.0.....2.450......62,518.3
Aug 14 2008....Nov 6 2008.....84.....2,500.0......2.754......62,518.3
Aug 28 2008....Sep 25 2008....28.....5,000.0......2.380......60,062.8
Sep 11 2008....Oct 9 2008......28......2,500.0......2.530......56,838.9
Sep 11 2008....Dec 4 2008......84......2,500.0......2.670......56,838.9
Sep 25 2008....Oct 23 2008.....28......5,000.0......3.750......56,848.4
Oct 9 2008.......Jan 2 2009.......85.....15,000.0.....1.390......29,396.4
Oct 23 2008.....Nov 20 2008...28.....15,000.0......1.110......33,997.8
Nov 6 2008......Jan 29 2009.....84.....15,000.0......0.600......36,562.7
Nov 20 2008....Dec 18 2008....28.....15,000.0......0.510......47,212.7
Dec 22 2008.....Jan 8 2009.......17.....10,000.0......0.528......76,280.0
Feb 26 2009.....May 21 2009...84.......5,000.0.......0.250......67,820.2

On December 21, 2011, Stephanie L. Hunsaker, Senior Assistant Chief Accountant Division of Corporation Finance at the Securities and Exchange Commission asked Wells Fargo & Company; "We have become aware through various news reports that you may have accessed various Federal Reserve ...sponsored funding programs during 2008 and 2009, including the Term Auction Facility (TAF)... We note from your disclosures during these periods that ...you do not appear to have provided any discussion about certain other programs that were in existence at this time, such as the TAF... 

Wells Fargo responded by stating "We did participate in the Term Auction Facility (TAF) during 2008 through August 2009. TAF was established by the Federal Reserve in December 2007, and represented one of several sources of competitive, low-cost short term funding available to us. ...At December 31, 2008, our short-term borrowings under TAF totaled $72.5 billion, which included $40 billion of TAF borrowings by Wachovia Corporation at the time of acquisition [approved by the Federal Reserve Board which issued the loans].

However, the TAF borrowings were classified differently in the legacy Wells Fargo and Wachovia accounting systems (which had not been integrated as of the time the 2008 Form 10-K was prepared), which resulted in our reporting of $32.5 billion of the TAF borrowings in the “Commercial paper and other short-term borrowings” line item, and the $40 billion of Wachovia TAF borrowings reported in the “Federal funds purchased and securities sold under agreements to repurchase” line item...

...our management did not distinguish TAF from other sources of short-term borrowings, such as federal funds purchased, commercial paper or securities sold under repurchase agreements...

...We were a viable entity regardless of whether we participated in the programs. Further, our participation in the programs did not ...provide ...arrangements designed to insulate us from the economic effects of problem assets. ...our participation in the referenced programs did not materially affect, and was not reasonably likely to have a material future effect upon our financial condition or results of operations...

http://www.sec.gov/Archives/edgar/data/72971/000119312511349117/filename1.htm


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