About 2 dozen Illinois institutions took advantage of government programs during financial crisis

December 04, 2010
By Becky Yerak, Tribune reporter

On Wednesday, a veil was lifted on more than 21,000 business transactions the Federal Reserve made aimed at stabilizing markets during the financial crisis. Wall Street institutions and megabanks weren't the only ones who sought help or participated in the programs.

Some wealthy individuals, philanthropies and institutions, including Major League Baseball's pension fund, invested in a Fed emergency program called the Term Asset-Backed Securities Loan Facility, or TALF. Its mission was to keep markets open for consumer and business credit.

In the Chicago area, the Arie and Ida Crown Memorial, the Crown Investment Fund and the Edgar D. Jannotta Jr. Revocable Trust were among the "material investors" in various trusts and funds that borrowed under TALF, records show.

Jannotta, a private equity executive, said he made the investment because he thought the fund managers were "savvy."

Others could not be reached for comment

The Fed has said it doesn't expect to lose money on the program.

About two dozen Illinois banks, including failed Amcore, tapped another Fed program, the Term Auction Facility program, or TAF, that increased the amount of liquidity available to lenders during the credit crunch. About half of the Illinois banks that participated are part of Chicago-based Metropolitan Bank Group Inc., which is owned by the Fasseas family.

"It was simply an additional funding source available at a reasonable cost," said Chief Executive Peter Fasseas.

TAF was established in December 2007, shortly after the first signs of the financial crisis began appearing. Initially, the Fed took steps to boost liquidity through its discount window, where banks go to borrow money. But the Fed said many banks were reluctant to borrow at the discount window out of fear that their borrowing would become known and would be interpreted as a sign of weakness. The TAF program auctioned 28-day or 84-day loans to banks.

The Fed said all TAF loans, which were collateralized, were repaid in full, with interest.

"TAF was important to the entire banking system because it injected liquidity, and confidence, into the market at a time of deep systemic concerns," said Mark Hoppe, chief executive of Cole Taylor Bank, which participated 12 times from July 2009 to February 2010, in amounts ranging from $35 million to $325 million.

"It also provided access to liquidity at interest rates that were closer to historical norms" rather than the less favorable ones brought on by broad market instability, said Hoppe, echoing comments by many other bankers.

Among the foreign banks that received assistance from TAF was Bank of Montreal, parent of Harris Bank. A BMO spokesman said, however, that the Canadian bank "had no issues raising short-term funding in the markets during the financial crisis."

Here's what some other local banks said about their participation:

PNA Bank: The Chicago-based bank, which has $193 million in assets, did one 84-day TAF transaction for $5 million, in September 2009. The bank, which is owned by the Polish National Alliance, a fraternal life insurance society, said it viewed TAF as a way to boost its interest income.

"We borrowed $5 million from the Fed and we turned around and bought a Treasury note and a Fannie Mae note for $5 million and earned a spread on that money," President Larry Chlum said. "We just did it for the investment opportunity."

Chlum said he was surprised that TAF is now looked upon as a liquidity crutch.

"We had no need to take the money," he said.

Republic Bank of Chicago: The Oak Brook-based bank, which has $1.44 billion in assets, did eight TAF transactions from November 2008 to October 2009, in amounts ranging from $5 million to $20 million.

"It wasn't a liquidity issue with us," CEO William Sperling said. "It was the least costly source of funds."

Records show that Republic's interest rates on the transactions ranged from 0.6 percent to 0.25 percent, the rate in six of the eight instances.

"It helped our interest rate margin and maximized our earnings," he said.

American Chartered Bank: The Schaumburg-based bank, which has $2.57 billion in assets, also considered TAF both a dependable and cost-effective funding source during the crisis. It did 16 transactions from March 2009 to February 2010, with amounts ranging from $5 million to $170 million, and always at a 0.25 percent interest rate.

"We were still in an environment where wholesale and retail funding sources, while the rates were coming down, hadn't gotten to the level that TAF was at," said President Dan Miller. "It was nice always to know that there was liquidity out there if an opportunity came along to continue to lend money in the market or buy an investment."

Community First Bank: The Fairview Heights-based bank, which is located near St. Louis and has $189.2 million in assets, said Illinois banking regulators encouraged lenders to participate in TAF as "a backup contingency."

Plus, "the rates were really attractive, much better than alternative short-term funds," President Charles Daily said.

Community First did 18 transactions, usually at $5 million, between March 2009 and February 2010, and was charged 0.25 percent interest, Fed records show.

"We used it as a cheaper alternative source of funds just to increase our interest margins," Daily said. "Then, when they raised the rates, we got out of it."

Dozens of Illinois banks participated in another government effort, the Troubled Asset Relief Program, in which the U.S. Treasury bought preferred stock in various banks. That program was more transparent from the start and wasn't included in Wednesday's data release.

Two banks that participated in TARP, Chicago-based Northern Trust Corp. and Lake Forest-based Wintrust, didn't participate in TAF or any of the other programs of which details were released last week.

Wintrust has said it started preparing for this credit cycle in 2006.

"Part of our preparation was to make sure we had adequate liquidity and liquidity sources available to us," Wintrust CEO Ed Wehmer said.

For one thing, Wehmer said, Wintrust banks typically operate at a loan-to-deposit ratio of 85 percent to 90 percent, "providing inherent balance-sheet liquidity" and "no need for us to take part in the Fed's funding program."

byerak@tribune.com

Copyright © 2010, Chicago Tribune

http://articles.chicagotribune.com/2010-12-04/business/ct-biz-1205-crisis-lending-20101204_1_discount-window-financial-crisis-illinois-banks

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