THE FINANCIAL IMPACT OF LENDER-OF-LAST-RESORT BORROWING FROM THE FEDERAL RESERVE DURING THE FINANCIAL CRISIS

The U.S. Federal Reserve (Fed) was reluctant to release the names of firms that borrowed, and the amounts borrowed, from the emergency loan facilities during the financial crisis. We show that when the details of this information were finally made public by the Fed, there was no stock market reaction, contrary to the thought that this was valuable information. However, further investigation shows that stock returns for publicly traded borrowing institutions declined significantly and almost immediately after the Fed borrowing was initiated, although the information had not been made public by the Fed at the time. The underperformance of borrowing institutions was greatest for those that received the largest loans or had the largest amount of loans outstanding. This evidence is consistent with the idea that investors were able to trade on the information about the Fed's emergency loan program, although the Fed purposely tried to keep the information private.