Fess Up, Fed
by Ron Paul: Enabling
a Future American Dictator
the U.S House of Representatives, Committee
on Financial Services, Subcommittee on Domestic Monetary Policy
& Technology Hearing on Federal Reserve Lending Disclosure:
FOIA, Dodd-Frank, and the Data Dump, June 1, 2011
deals with one of the most pressing issues this subcommittee will
face during this Congress, the issue of Federal Reserve transparency.
While the Federal Reserve is still far less transparent than it
should be, recent disclosures of the Federal Reserveís lending programs
have greatly increased our knowledge of the Fed's monetary policy
during the height of the financial crisis.
2010 and March 2011, a remarkable thing happened: the Fed disclosed
information on its lending facilities and discount window operations,
including who borrowed money, what amounts were loaned, maturity
dates, interest rates, and collateral. It took an act of Congress,
the Dodd-Frank Act, to bring about the December releases that discovered
the details of the emergency lending facilities set up by the Fed
during the crisis. The March 2011 disclosures covered discount window
lending, the oldest Fed lending tool, whose operations had never
before been disclosed. It took a three year legal battle regarding
the Freedom of Information Actís (FOIA) applicability to the Fed
in order to gain access to this information. The suits brought by
Bloomberg and Fox News resulted in 29,000 pages of unorganized,
heavily redacted documents being provided. Combining these two data
releases has given us a fuller, if still woefully incomplete, picture
of the Fedís operations during the financial crisis and the nearly
$3 trillion balance sheet it has built up.
25, 2008, the Fed created the Term Asset-Backed Securities Loan
Facility (TALF) which was intended to "lend up to $200 billion...
to holders of certain AAA-rated ABS [asset-backed securities]."
When the Fed released TALF data in December of 2010, 18% of TALF
loans were backed by subprime credit card and auto loan securities,
17% of TALF loans were backed by "legacy", a.k.a. troubled,
commercial real estate securities, and 13% of TALF loans were backed
by student loan securities. On March 11, 2008, the Fed created the
Term Securities Lending Facility (TSLF) to "lend up to $200
billion...to primary dealers... secured... by... securities, including
federal agency debt, federal agency residential mortgage-backed
securities (MBS), and non-agency AAA/Aaa-rated private-label residential
MBS." When the Fed released TSLF data in December of 2010,
26% of loans were backed by AAA/Aaa-rated securities, 17% were backed
by non-AAA-rated securities, and 57% of loans were backed by collateral
whose rating was not published by the Fed.
reports have brought to light the existence of a previously undisclosed
Fed lending program known as "single-tranche open market operations"
(ST OMO). This program loaned money at rates as low as 0.01% to
major firms such as Goldman Sachs, and was essentially a free loan
to these politically well-connected firms. Data about this program
was not published, but instead was gleaned through examination of
charts published in March as a result of the Fed's Freedom of Information
Act (FOIA) disclosure. The charts were found within a 327-page document
which had 81% of its content redacted.
Out of the
funds loaned through the Fed's credit facilities, nearly one-third
was loaned to foreign banks. Some facilities and programs, such
as the Mortgage-Backed Securities Purchase Program, the Commercial
Paper Funding Facility, and the TSLF, provided more than half of
their funding to foreign banks. During the peak of the financial
crisis, up to 88% of overall discount window lending went to foreign
banks, and nearly 100% of the New York Fed's discount window lending
went to foreign banks.
these data disclosures have raised significant new questions about
the Fed's behavior. Among many questions raised are: Why did foreign
firms receive such a large percentage of Fed lending? What advantages
were given to large financial institutions that had access to multiple
lending facilities for prolonged periods of time? Did extending
loans to non-financial firms go beyond the Fedís emergency lending
authority? Why did investors who participated in TALF have to have
a relationship with the Fedís primary dealers, and did this give
an unfair advantage to wealthy investors, such as the wives of two
Morgan Stanley executives? Why did the Fed set up single-tranche
open-market operations (ST OMO) which gave primary dealers access
to $80 billion at rates as low as 0.01%, essentially providing a
direct government subsidy to these firms, and why did the Fed only
disclose this information in chart form? Are there other programs
that have yet to be disclosed? Why were so many pages redacted in
the 327-page document that alluded to ST OMO? Can you really claim
to be in compliance with FOIA when such significant portions of
documents are redacted? How can we trust that this data was "not
responsive" to the FOIA request? Are we to trust the non-transparent
Fed that we really don't need to see that information? If the Fed
claims to lend against AAA collateral and then does not, can we
trust anything the Fed publishes in a press release? Can we trust
that collateral classified by the Fed as AAA really is AAA?
emerge from the Fedís handling of the FOIA requests brought by Bloomberg
and Fox News. The Fed used several arguments in refusing to comply.
Among them was the Fedís claim that it was a private institution
and not subject to FOIA, since the documents requested were held
by the New York Fed, a private bank, and thus exempt. Fortunately
for the American people, the court rejected that assertion. But
what exactly is the legal relationship between the private regional
banks and the Board of Governors? The Fed also claimed that lending
records of discount window borrowers were privileged or confidential
information that could cause imminent competitive harm if disclosed,
or even cause a run on banks, and therefore should be exempt from
FOIA. This has been the Fedís long-standing defense of the secrecy
of the discount window. One of the judges in the case summed up
the Fedís secrecy succinctly: "[T]he risk of looking weak to
competitors and shareholders is an inherent risk of market participation;
information tending to increase that risk does not make the information
privileged or confidential."
Given the massive
amount of data released last December and this March, and the fact
that much information in the March data release was redacted, it
is all but certain that there remains much to be discovered about
the Fed's bailouts through the discount window and its credit facilities.
The Federal Reserve's actions in bailing out Wall Street through
credit facilities and quantitative easing provoked a backlash among
the American people and among many members of Congress. Trillions
of dollars worth of loans and guarantees were provided to rich bankers
and their worthless holdings of mortgage debt were snapped up by
the Fed, while Main Street Americans continued to suffocate under
harsh taxation and the prospect of increasing inflation. These events
have awakened many Americans to the problems with the Fed's loose
monetary policy, the bubbles it has created in the past, and the
potential hyperinflation it might cause in the future. We should
not neglect the fundamental need for more transparency of the Fed
and a thorough audit that can help shed light on operations of the
Federal Reserve System. We need stronger audit authority over the
Fed, both looking back at previous market interventions and also
ensuring that any future credit facilities, bailout vehicles, or
large-scale asset purchase programs are subject to oversight.
At this hearing
we hope to receive substantive answers from the Fed about its lending
behavior during the worst part of the financial crisis, and we hope
to receive assurances about the Fed's future compliance with the
Dodd-Frank bill's requirements for public access to lending information.
Aside from our ability to ask questions at the hearing, the hearing
record will remain open for 30 days to allow the Fed time to respond
to our written questions. At a time when the Fed's balance sheet
is rapidly approaching the $3 trillion dollar mark, it is absolutely
imperative that the Fed come clean with the details of its open
market operations, lending operations, and asset purchases. Pumping
trillions of dollars into the banking system with no oversight by
Congress and no accountability to the American people cannot be
allowed to continue.
the Ron Paul File
Paul is a Republican member of Congress from Texas.
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