NEW YORK (MainStreet) — Six years after the 2008 financial crash, the Federal Reserve, the U.S. central bank, has left unanswered questions about how it managed the crisis and its lingering aftermath. In an April 23 speech to the Economic Club of Canada, out-going Fed chair Ben Bernanke threw a bone to those still scratching their heads.

"I still think there are a lot of people out there who really don't understand why we did what we did," he told his Toronto audience, despite nearly 300 speeches and numerous Congressional appearances. He added, "They think somehow or another we favored Wall Street over Main Street."

Among the Fed's concerns in 2008 were banks that were afraid to lend money to each other. A place where the Fed dispenses cash to liquidity-starved banks that can't borrow from their peers is the Fed discount window, or the Fed DW, a critical Federal Reserve lending facility. A January 15 post on the Fed's Liberty Street blog "Why Do Banks Feel Discount Window Stigma?" — including a 71-page staff report — examines the DW's performance during the financial crisis, but raises many questions, including ones that go beyond the discount window.

Read More: Main Street Suffers the Bruce Springsteen Effect

The Federal Reserve's 100-year-old DW makes secured, short-term loans when other sources of liquidity dry up, particularly in the Fed funds market, where loans are typically made overnight by banks with excess cash to banks with a temporary shortfall. In the early days, a bank would send an employee with a money bag to a Fed teller window, although physical Fed teller windows continued to operate into the 1960s. Assisting banks with cash flow is a key role at a central bank, when it acts as the lender of last resort.

The Fed calls these loans "advances," charging about 1% above the Fed funds rate in recent years. Commercial banks, thrifts and U.S. branches of foreign banks are eligible. Banks with liquidity problems can get money; those that are insolvent are supposedly shut out.

Read More: Main Street Suffers the Bruce Springsteen Effect

But banks face "discount window stigma," which assumes that if you're borrowing at the DW, you're in dodgy shape and could be a risk to counterparties. The loans are supposed to be anonymous, but word can end up on the street.

Borrowers in the 11 Fed districts outside New York could be exposed, the blog noted, through a weekly Fed report "in which DW borrowings are aggregated by Federal Reserve District" and published every week in the Fed's H.4.1 release. Banks may speculate that a peer that suddenly disappears from the Fed funds market probably went to the discount window.

The blog's contradictory message seemed to be: yes, these advances come with a stigma. But don't worry about stigma. We think it's a solved problem.

That's because, the blog says, the Fed "fundamentally changed its DW policy in 2003" by separating DW loans into primary, secondary and seasonal credits. As of July 14, primary rates were 0.75%, secondary rates 1.25% and seasonal credits 0.15%. The Fed funds target rate that banks charge each other is 0.25%. Before 2003, anyone at the discount window had to prove he tried the Fed funds market first.

For the least-risky banks qualifying for primary credit, the new DW is a "no questions asked facility," the blog said. "The Fed no longer establishes a bank's possible sources and needs for funding to lend under the primary credit program. Instead, primary credit for overnight maturity is allocated with minimal administrative burden on the borrower. Hence, access to primary credit need not be motivated by pressing funding needs nor signal financial weakness. In other words, there's no structural reason why stigma should be attached to the new DW."

The Fed blog does acknowledge, however, that "stigma concerns resurfaced in 2007 at the onset of the recent financial crisis."

That begs the question: why herald a solution from 2003 that didn't work during a real crisis in 2008?

A former Fed official who spoke on background acknowledged that 2008 was the kind of systemic crisis they feared.

"The goal of the 2003 changes was to neutralize stigma," this person said. "It didn't work completely but it was a step in the right direction. But then 2008 TARP bailout arrived, followed by bailout fatigue. Then the Dodd-Frank disclosure requirements arrived," which required that banks getting advances be identified. Stigma was back, unless it never really left.

Olivier Armantier, a Fed expert in applied econometrics and the blog's lead author, could not be reached for comment. New York Fed spokesperson Matthew Ward said, "Unfortunately, we don't have anything to add outside the blog post."

"I haven't disaggregated their econometric model, so I'm assuming it all hangs together," said Dennis Kelleher, president of Washington, D.C.-based Better Markets, a non-profit that promotes financial reform. "The thing that doesn't make sense in the Fed's analysis is that banks going to the discount window should expect no stigma. They're probably as worried about stigma as ever. What's more, they're saying there's no reduction in stigma if a group of banks went to the window together. That doesn't make sense."

The former Fed official also believes that as the crisis grew, so did DW stigma.

"The Fed tried to find alternative ways to make direct sources of funding available during the crisis," citing the Term Auction Facility, launched in December 2007, as an example of a stigma avoidance solution. "The TAF was really just a term discount window loan," said the former Fed official. "It was an attempt by the Fed to direct credit to where the system had really frozen up."

But even the Fed's DW analysis acknowledged that in 2008 credit alternatives that shadowed the DW were affected. The Fed's report states that the Primary Dealer Credit Facility (PDCF), launched after the collapse of Bear Stearns in March 2008, and the Term Securities Lending Facility (TSLF) "may have been stigmatized."

Then came the Troubled Assets Relief Program (TARP), passed by Congress in the fall of 2008. It was the biggest taxpayer-funded bailout of the banking system in history—and arguably one huge exercise in stigma reduction.

"The way to de-stigmatize TARP would be to make it available to everybody," Kelleher said. "That's the solution that TARP hit on--everyone would get a loan, so no one would be stigmatized. That's contrary to one of the key findings of this Fed discount window study on what causes borrower stigma."

The Fed blog considers — and rejects — this, which it dubs the "herding affect" theory, where a single bank and a group of banks seeking the same advance could both be stigmatized. But "herding," or what passed for it, was the solution that TARP went with.

"We know that when TARP got done, when (Treasury Secretary) Hank Paulson, Ben Bernanke and Tim Geithner, then president of the New York Fed, called those nine banks in for a meeting in 2008, they were all instructed to take the money," Kelleher said. "They got told: you're all going to take the money whether you like it or not. Because every bank in the room got TARP money, you were less sure which ones needed it and which ones didn't. Taking out the stigma forced the hand of every bank. You also didn't know for sure whether the federal government — and U.S. taxpayers — was going to get its money back."

The TARP banks included Chase; Citigroup, one of the primary dealers in U.S. Treasuries; State Street Bank, the nation's biggest custodian bank; Bank of New York Mellon, which was hired by Treasury to be the master custodian of TARP funds; Wells Fargo; and the insolvent Merrill Lynch, which fell into the arms of TARP recipient Bank of America--plus Goldman Sachs and Morgan Stanley. In his Oct 5, 2009 report to then-Treasury Secretary Tim Geithner, Neil Barofsky, TARP's special inspector general, reported that the nine TARP banks had $11 trillion in assets—75% of the assets held by all U.S. banks.

What about the thousands of banks that held the other 25%? "It was the banks that were not in the room," Kelleher said, "that they were really worried about."

In addition to money, the Fed coughed up thousands of documents on DW activity following March 2011 lawsuits filed by Bloomberg News, Fox News and Dow Jones — information Bloomberg described as "secret data." The Fed argued that it should remain secret to discourage stigma. In response to the Bloomberg's Freedom of Information Act lawsuit, the Fed argued that outing DW borrowers would "impede its ability to respond to future crisis." In ruling for Bloomberg, a Federal judged stated that the Fed failed to prove that stigma was a real phenomenon—even if it clearly was. The stigma experts couldn't get out of their own way.

The former Fed official argued for a don't ask, don't tell approach to discount window confidentiality. "These court-mandated disclosures were incredibly corrosive," the former official said. "I don't think there was anything we needed to know that we didn't already in terms of aggregate numbers." Opponents of disclosure fear that healthy banks that went to the DW would be tarnished once they were identified.

The biggest discount window borrowers were U.S. branches of foreign banks along with others that claimed to be financially sound. On September 15, 2008, the day Lehman Brothers went bankrupt, Austrian bank Erste Group borrowed $4 billion. Banks from France, Japan and Spain took billions more by the end of the week. Dexia of Belgium took $31.5 billion on October 24, 2008 and continued to go to the window through November 2009, getting over 100 loans. Bank of Scotland and Dublin-based Depfa were also heavy borrowers.

On September 28, 2008, two weeks after the collapse of Lehman Brothers, Securities and Exchange Commission chair Christopher Cox announced the shutdown of the Consolidated Supervised Entities Program, the SEC entity that regulated, on a voluntary basis, the Big Five investment bank holding companies—Bear Stearns, which collapsed in March 2008, Lehman Brothers, Merrill Lynch, Goldman Sachs and Morgan Stanley. Goldman and Morgan Stanley obtained commercial bank charters in a single September weekend. Once the New York Fed became their regulator, their next stop was the Fed discount window as the stock market--and their share prices--were plunging.

In a May 2009 Senate hearing, Ben Bernanke refused to identify banks that got DW loans in response to a question from Senator Bernard Sanders, a Vermont Independent. In a March 31, 2011 letter to Bernanke, Sanders criticized discount window lending as evidence that the Fed cut big banks a break at taxpayer expense. He singled out the Arab Banking Corporation, whose majority owner was the Central bank of Libya, a country being sanctioned by the U.S. government.

The Arab Banking Corporation got $3.2 billion in DW loans and $26 billion in tax credits while small banks in Vermont were turned down. Bernanke never answered Sanders's letter, but had Sanders cornered him in an elevator, he would likely have been told that his constituents weren't systemically important.

Kelleher, from Better Markets, and others believe that banks which the Fed thought had liquidity problems they could fix at the DW were actually insolvent. Determining which banks have a liquidity gap and which are insolvent has been debated for decades.

In her 1992 presentation "The Misuse of the Fed's Discount Window" hosted by the St. Louis Fed, monetary theorist Anna J. Schwartz noted that "some observers of bank performance have asserted that it is impossible to know whether an institution that applies for the discount window assistance faces a liquidity or solvency problem."

Fed data released through the Bloomberg/Fox/Dow Jones law suit revealed that of the 201 banks that failed between January 2008 and March 2010, only 11 had DW loans when they folded, meaning that the vast majority either feared DW stigma and didn't try to borrow or had the window slammed shut when they did. At the same time, the Fed data show that IndyMac Bancorp, the nation's ninth largest mortgage lender at the time, got three overnight DW loans from July 8 to July 10, 2008. By the time it failed on July 11, it got nearly $1 billion in DW loans, including $500 million the day it went under—evidence that it was insolvent when it got DW cash.

Washington Mutual, the biggest bank failure in U.S. history, tapped the window for $2 billion on Sept. 18, 2008, a week before it collapsed. WaMu was borrowing to the bitter end, taking another $2 billion on September 25, the day it was handed over to Chase—most likely so there would be something left to hand over. But the Fed gave money to a big insolvent bank.

Anna Schwartz traces the DW's tendency to lend to insolvent banks from the 1920s to the advent of the CAMEL score, which stands for Capital adequacy, Asset quality, Management, Earnings and Liquidity and rates the health of banks. Schwartz noted that of 530 banks that went to the Fed discount window between 1985 and 1992, 437 had a 5 CAMEL rating, with 5 being the worst on a scale of 1 to 5. CAMEL has been used since 1979.

The Fed's report attempts to calculate the cost to banks who eschew DW loans to avoid stigma and obtain more expensive money elsewhere, and the cost is significant. But gleaning a clear pattern behind decisions to make DW advances is problematic. The Fed's DW policy may be: avoid lending to insolvent banks if you can, but lend if you must. Or think you have to.

If the Fed is losing the battle over DW stigma, it's lost one against DW loan confidentiality.

The Dodd-Frank Act mandated the Fed to identify the destination of nearly all of the $3.3 trillion in cash it pumped into economy from December 2007 to July 2010, when Dodd-Frank became law —except discount window advances. But from August 2010 on, it will have to identify the banks and the amount they borrowed from the DW two years after advances are made. Industry observers say that the reporting requirement will further discourage banks from going to the discount window.

"If I'm a bank and I hear that one of my peers was at the discount window, I'm going to make a note about that," said the former Fed official, "which could affect my dealings with it in the future."

The debate within the Fed over the role and existence of stigma is anything but settled. Rebecca Snider, who oversees the Richmond Fed discount window, stated in 2011 that "if a bank borrows from the discount window, that means it met the Fed's criteria for primary credit — it is a fundamentally sound bank."

That doesn't explain the advances to IndyMac or Washington Mutual and hundreds of others, or that there are people at the Fed who don't think the stigma status quo has changed.

In a 2010 speech to the Economics Club of Hampton Roads in Norfolk, Va., Elizabeth Duke, a former member of the Fed board of governors, suggested that DW stigma would be used again to identify weak banks.

"When uncertainty about the health of individual institutions or the industry as a whole increases, stigma intensifies as the market tries to identify the weakest players," she said. "The dilemma facing the Fed is that when discount window borrowing is most needed to keep credit flowing, it is most stigmatized."

—Written by John Sandman for MainStreet