By MICHAEL SMALLBERG
Tracey Greenstein wrote a timely article for Forbes last week lamenting the media's "inscrutable brush-off" of a Dodd-Frank-mandated Government Accountability Office (GAO) report on the Federal Reserve's emergency bailout programs.
Over the past few months, we've learned a great deal about the Fed’s extraordinary initiatives to stabilize the financial system during the financial crisis, thanks to the GAO audit, records obtained through a Freedom of Information Act (FOIA) lawsuit, and data released by the Fed under a Dodd-Frank requirement. Meanwhile, advocates of Fed transparency are pressing on in their efforts to obtain information about other Fed activities that have historically been shrouded in secrecy.
Here are some of the most important developments in recent months.
Section 1109(c) of the Dodd-Frank Act, introduced by Senator Bernie Sanders (I-VT), required the Fed to publicly disclose the basic details of the emergency assistance it provided between December 2007 and July 2010 in response to the financial crisis. This disclosure requirement covered the alphabet soup of broad-based programs authorized by the Fed—including the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), Term Asset-Backed Securities Loan Facility (TALF), Primary Dealer Credit Facility (PDCF) and others—as well as the Fed’s liquidity swap lines with foreign central banks, purchases of agency mortgage-backed securities, and assistance provided to individual firms such as Bear Stearns and American International Group (AIG).
The Fed posted this information on its website in December 2010, giving the public the ability to download data on more than 21,000 transactions made during the covered time period.
The data release identified the recipients of some $3.3 trillion in Fed assistance. We learned, among other things, that six European banks, including UBS, Dexia, and Barclays, were among the companies that sold the most debt to the Commercial Paper Funding Facility (CPFF); non-financial companies such as Harley-Davidson and McDonald’s also received significant assistance in short-term loans provided through the CPFF; and the Fed’s liquidity swap lines provided assistance to central banks in Mexico and South Korea. Even the wives of Wall Street titans were able to secure assistance through the TALF.
Long before Dodd-Frank was passed into law, Bloomberg and Fox News were trying to obtain much of the same information through the Freedom of Information Act (FOIA). Their FOIA requests also sought information on assistance provided through the Fed’s Discount Window (DW)—a long-standing program through which the 12 regional Federal Reserve Banks (FRBs) lend short-term money directly to eligible financial institutions. The DW can also serve as an emergency source of liquidity for depository institutions that lack other options.
A Supreme Court order issued in March forced the Fed to hand over the DW data, providing the public with its first-ever glimpse at DW borrowers. DW lending peaked at $111 billion in October 2008 as credit markets nearly froze in the aftermath of Lehman’s bankruptcy.
Bloomberg also filed a FOIA request for details regarding the Fed’s single-tranche open-market operations, which consisted of 28-day loans issued between March and December 2008 and peaked at $80 billion in loans outstanding. This information was not covered by the Fed’s December 2010 data release required by Dodd-Frank. The records released to Bloomberg revealed that Goldman Sachs received the biggest loan under this program.
Last month, Bloomberg combined the data from the Fed’s December 2010 release with the records obtained through the FOIA litigation. The number-crunching revealed that the Fed’s outstanding loans peaked at $1.2 trillion in December 2008. Morgan Stanley received as much as $107.3 billion, while Citigroup got $99.5 billion and Bank of America $91.4 billion. The overall assistance provided by the Fed dwarfed the amount of assistance provided through the better-known Troubled Asset Relief Program (TARP) run by the Treasury Department.
Section 1109(a) of Dodd-Frank required the GAO to conduct a one-time audit of the same programs and time period covered by the Fed’s December 2010 data release. The audit confirmed that the Fed’s outstanding loans peaked at more than $1 trillion in late 2008.
The GAO also provided critical information on a topic of great interest to POGO: the Fed’s use of private contractors and financial agents to assist with the emergency liquidity and credit programs. The GAO reported the following:
- The Federal Reserve Banks—primarily the Federal Reserve Bank of New York (FRBNY)—awarded 103 contracts worth $659.4 million from 2008 through 2010 to help implement the emergency programs;
- Most of the contracts, including 8 of the 10 largest contracts, were awarded non-competitively;
- The FRBNY is not subject to the Federal Acquisition Regulation (FAR), and its internal acquisition policies lack adequate guidance on the use of competition exceptions; and
- The FRBNY took steps to mitigate conflicts of interest for its employees, directors, and program vendors, but its policies did not adequately address all the potential conflicts that arose due to the Fed’s emergency programs, such as those that provided assistance to non-bank institutions.
We also learned from the GAO that an FRBNY official—later identified to Senator Sanders as William C. Dudley, the current FRBNY president—received a waiver in 2008 allowing him to keep his investments in AIG even after the insurer received emergency assistance from the Fed. An FRBNY spokesman explained that Dudley received the waiver because “had he sold these shares immediately after the interventions it would have the appearance of a conflict.”
Other Upcoming Reports
Congress—and to a lesser extent, the public—may soon be learning even more about the Fed’s activities thanks to additional upcoming reports required by Dodd-Frank.
Section 1101 now requires the Fed to report to the Senate Banking Committee and the House Financial Services Committee on its use of emergency lending authority, although the Fed Chairman can request that certain information be kept confidential and made available only to the Chair and Ranking Member of the Committees.
Section 1102 authorizes the GAO to audit the Fed’s future use of emergency lending programs, but the audit cannot be released to the public until one year after the emergency facility is terminated.
Section 1103 requires the Fed to publicly disclose certain information regarding its emergency lending programs and other operations, but not until a delayed release date. Prior to this date, the information is protected from release under FOIA Exemption 3. A provision introduced by Senator Patrick Leahy (D-VT) requires the Fed’s Inspector General to study this FOIA Exemption to determine its impact on public access to information regarding the Fed’s emergency lending programs and other activities.
Finally, Section 1109 requires the GAO to conduct an audit of Federal Reserve Bank governance, focusing on issues such as the potential conflicts of interest that can arise when FRB directors are elected by member banks. The GAO is expected to release this report sometime next month.
Expanded Transparency Measures
Representative Ron Paul (R-TX) has repeatedly introduced legislation calling for a full audit of the Fed, but this legislation was rejected in favor of the scaled-back Dodd-Frank provisions. Earlier this year, Rep. Paul and his son, Senator Rand Paul (R-KY), introduced similar legislation to require a more comprehensive audit of the Fed, including an examination of its monetary policy decisions and its lending to foreign banks.
Legislation requiring a full audit of the Fed has garnered remarkable bipartisan (or transpartisan) support from a wide coalition of groups including POGO. As the Fed continues to play a central role in the government’s economic recovery efforts, we urge Congress to require even greater disclosure of the Fed's policy decisions by passing the "Federal Reserve Transparency Act" (S. 202 / H.R. 1496) introduced by the Congressmen Paul.
Michael Smallberg is a POGO Investigator.
Image via Flickr user NCinDC