Dexia, the French and Belgian lender, ranks number one among foreign firms that borrowed from the Federal Reserve’s discount window during the financial crisis.
And beyond being in difficult shape, and eventually needing a bailout from its home authorities, there was another reason the Federal Reserve was willing to lend so freely to this foreign bank: Municipal bonds.
Dexia was heavily involved in the U.S. municipal bond market through bond guarantees and, if it collapsed, could have caused problems for the sector broadly, according to Bloomberg.
“If Dexia went bankrupt, it could have been a catastrophe for municipal finance and money funds,” said Matt Fabian, a Concord, Massachusetts-based senior analyst and managing director at Municipal Markets Advisors, an independent research company. “The market has extensive exposure to foreign banks.”
Dexia isn’t alone in this, with Bloomberg also mentioning Depfa as another European bank similarly involved in the muni bond market.
While from a historical perspective this is interesting, it also explains something about the muni market going forward. The threats don’t just lie with defaulting cities, counties, or states. But also with banks around the world, that may have guarantees on muni bonds, which investors may or may not be aware of.