Sunday, October 30, 2011

The Fed Audit

Senator Bernie Sanders

July 21, 2011
The first top-to-bottom audit of the Federal Reserve uncovered eye-popping new details about how the U.S. provided a whopping $16 trillion in secret loans to bail out American and foreign banks and businesses during the worst economic crisis since the Great Depression. An amendment by Sen. Bernie Sanders to the Wall Street reform law passed one year ago this week directed the Government Accountability Office to conduct the study. "As a result of this audit, we now know that the Federal Reserve provided more than $16 trillion in total financial assistance to some of the largest financial institutions and corporations in the United States and throughout the world," said Sanders. "This is a clear case of socialism for the rich and rugged, you're-on-your-own individualism for everyone else."
Among the investigation's key findings is that the Fed unilaterally provided trillions of dollars in financial assistance to foreign banks and corporations from South Korea to Scotland, according to the GAO report. "No agency of the United States government should be allowed to bailout a foreign bank or corporation without the direct approval of Congress and the president," Sanders said.
The non-partisan, investigative arm of Congress also determined that the Fed lacks a comprehensive system to deal with conflicts of interest, despite the serious potential for abuse. In fact, according to the report, the Fed provided conflict of interest waivers to employees and private contractors so they could keep investments in the same financial institutions and corporations that were given emergency loans.
For example, the CEO of JP Morgan Chase served on the New York Fed's board of directors at the same time that his bank received more than $390 billion in financial assistance from the Fed. Moreover, JP Morgan Chase served as one of the clearing banks for the Fed's emergency lending programs.
In another disturbing finding, the GAO said that on Sept. 19, 2008, William Dudley, who is now the New York Fed president, was granted a waiver to let him keep investments in AIG and General Electric at the same time AIG and GE were given bailout funds. One reason the Fed did not make Dudley sell his holdings, according to the audit, was that it might have created the appearance of a conflict of interest.
To Sanders, the conclusion is simple. "No one who works for a firm receiving direct financial assistance from the Fed should be allowed to sit on the Fed's board of directors or be employed by the Fed," he said.
The investigation also revealed that the Fed outsourced most of its emergency lending programs to private contractors, many of which also were recipients of extremely low-interest and then-secret loans.
The Fed outsourced virtually all of the operations of their emergency lending programs to private contractors like JP Morgan Chase, Morgan Stanley, and Wells Fargo. The same firms also received trillions of dollars in Fed loans at near-zero interest rates. Altogether some two-thirds of the contracts that the Fed awarded to manage its emergency lending programs were no-bid contracts. Morgan Stanley was given the largest no-bid contract worth $108.4 million to help manage the Fed bailout of AIG.
A more detailed GAO investigation into potential conflicts of interest at the Fed is due on Oct. 18, but Sanders said one thing already is abundantly clear. "The Federal Reserve must be reformed to serve the needs of working families, not just CEOs on Wall Street."
To read the GAO report, click here.
Fed Audit

Friday, October 28, 2011

Dudley Proves This Isn’t Your Father’s New York Federal Reserve / By Caroline Salas Gage / Bloomberg

Dudley Proves This Isn’t Your Father’s New York Federal Reserve

Bloomberg Markets Magazine
Enlarge imageWilliam Dudley, president of the NY Fed

William Dudley, president of the NY Fed

William Dudley, president of the NY Fed
Peter Yang/Bloomberg Markets via Bloomberg.
William Dudley, president and chief executive officer of the Federal Reserve Bank of New York, sits for a photograph at the company's headquarters in New York, on Sept. 1, 2011.

William Dudley, president and chief executive officer of the Federal Reserve Bank of New York, sits for a photograph at the company's headquarters in New York, on Sept. 1, 2011. Photographer: Peter Yang/Bloomberg Markets via Bloomberg.

It’s a quiet September morning outside the headquarters of the Federal Reserve Bank of New York on Liberty Street in downtown Manhattan.

The 22-story building, made of limestone and sandstone blocks and decorated with wrought iron, embodies the secrecy with which the central banking system has operated since its founding in 1913. The ground floor, with its vaulted ceilings and iron chandeliers, houses an exhibit on the history of money. In a 10th-floor conference room, William C. Dudley, president of the New York Fed, sits in a leather chair and explains how he’s trying to change the image of the central bank as a closed club that caters to Wall Street at the expense of everyone else, Bloomberg Markets magazine reports in its November issue.

“It’s important for us to get out into the community to get our message across to explain why we do what we do,” says Dudley in a rare interview, breaking with the Fed bank’s traditional aversion to publicity. “That’s important, because to a lot of people, it’s pretty mysterious what the Federal Reserve does.”

Dudley, who was chief U.S. economist at Goldman Sachs Group Inc. (GS) from 1996 to 2005, has spent more time talking to people in his district than any of his nine predecessors, according to the New York Fed. At these gatherings of local businesspeople in places like the borough of Queens, New York, Dudley speaks about the Fed’s unprecedented moves to revive the economy and often faces pointed questions from the crowd.

‘Something Very Unfair’

Why did the Fed spend billions in tax dollars to bail out Wall Street during the credit crisis and not help small businesses get loans? Why hasn’t the Fed forced banks to modify mortgages? Isn’t the Fed causing food prices to spike?

Back at headquarters, Dudley says he understands why people are so angry.
“There is something very unfair about what happened,” he says. “The fact that bankers and financiers invented all sorts of crazy products, introduced them in a way that wasn’t well thought through and that caused a financial calamity, and then the financial system got rescued while the financial crisis caused them to lose their jobs -- it’s completely unfair.”

Dudley, 58, is grappling with some of the biggest challenges that a New York Fed president has ever faced. The New York Fed board appointed him in January 2009 in the middle of the worst financial crisis in decades, after Timothy F. Geithnerleft to become President Barack Obama’s Treasury secretary.

Second to Bernanke

Dudley is developing regulations for some of the world’s biggest financial firms, such as Goldman Sachs and JPMorgan Chase & Co. (JPM), aimed at preventing a repeat of the events that brought down Lehman Brothers Holdings Inc. and the global economy.

His position makes Dudley vice chairman of the policy-setting Federal Open Market Committee, second only to Federal Reserve Chairman Ben S. Bernanke in wielding power over monetary policy. In that role, Dudley is trying to keep the economy out of a double-dip recession that could throw an additional hundreds of thousands of Americans out of work at a time of 9.1 percent unemployment.
“There’s no question this job is a major, major responsibility and really requires a diverse set of talents,”says Mark Gertler, a New York University economist who serves on a New York Fed economic advisory committee. “The president of the New York Fed carries the added responsibility of having to monitor financial markets, and that requires an extraordinary depth of knowledge. It’s perhaps second only to the chairman in terms of difficulty of the job and maybe on par.”

Pretty Ugly Treatment

Dudley also has had to navigate the steady stream of attacks on him and his institution from all sides of the political spectrum. Senator Bernie Sanders, an Independent from Vermont, accused the New York Fed of being too entangled withWall Street to do its job properly. Sanders wrote a provision in the Dodd-Frank financial overhaul act to have the Government Accountability Office investigate the matter last year.

The Academy Award-winning 2010 documentary “Inside Job”depicted Dudley as a stooge of Wall Street, partly because of his Goldman roots. And Republicans are castigating Fed officials for stoking inflation following their second so-called quantitative easing program, which bought $600 billion in

U.S. Treasuries to spur economic growth.

Texas Governor and Republican presidential candidate Rick Perry said in August that additional stimulus measures from Bernanke would be “almost treacherous -- or treasonous.” He said: “We would treat him pretty ugly down in Texas.”

Visiting Queens

Since October 2010, Dudley’s mission to mend relations with the public and get an on-the-ground view of local conditions has taken him to 16 cities in his district. It includes New Yorkstate, parts of New Jersey and Connecticut and all of Puerto Rico and the U.S. Virgin Islands.

On a dreary morning in March, he walked to the podium in a lower-level, windowless conference room at the Sheraton LaGuardia East Hotel in Queens, dressed in a navy suit, a blue shirt and a blue-green tie. The meeting with the Queens Chamber of Commerce made Dudley the first New York Fed chief to make an official visit to the borough in at least a decade.

After Dudley’s speech, the complaints about the Fed poured in.
One man accused it of printing money and spurring inflation, even though the core rate, which excludes food and commodities, was only 1 percent at the time. “There really is nothing to be worried about,” Dudley responded. “If we see the economy starting to overheat, we can raise the interest rate we pay on excess reserves, and those reserves will stay with us rather than be lent out into the economy.”

Dr. Pepper, Ice Cream
The man in the audience fired back: “When was the last time, sir, that you went food shopping? I was just in my supermarket the other day, and I bought paper towels and a couple food items. I couldn’t believe the price,” he says. “Us common folk, when we go food shopping, you can see the inflation that has hit our economy.”

The New York Fed president says he does shop, often to satisfy his cravings for Diet Dr Pepper and ice cream. Dudley and other Fed officials haven’t been so forthcoming about the details of the bailouts. The 2010 Dodd-Frank reforms forced the Fed to disclose the recipients of many of its emergency loans. And a lawsuit brought in 2008 by Bloomberg LP, the parent company of Bloomberg News, and won in March compelled the release of 29,000 documents and information that went beyond the Dodd-Frank requirements.

‘Trust Us’

The Fed had argued in court that records held at the regional reserve banks are not subject to Freedom of Information Act requests because they’re privately financed institutions, not government agencies.
Dudley says he’s not a lawyer and can’t judge the merits of the Fed’s defense in the case. He adds that the institution should disclose information when it doesn’t damage its policies.
“In the old regime, it was sort of like: ‘Well, we did what we did. It speaks for itself, and trust us,’” Dudley says, referring to the institution he inherited. “We’ve learned a lot -- that it’s not sufficient for us to just do what we think is the right thing. We have to be much more forward leaning in terms of our communicating.”

Dudley, who goes by Bill, is suited to the task of public outreach. His grand-father was the minister of a church on Flatbush Avenue in Brooklyn, where Dudley also later lived for six years.
“He’s a down-home, easygoing, laid-back guy,” says Leon Cooperman, the former head of research at Goldman Sachs who was Dudley’s first boss when he joined the firm in 1986 as an economist. “He has no ego and is collaborative by nature.”

Dovish Dudley

Dudley is one of the most dovish members of the FOMC, meaning he’s more concerned with encouraging growth than thwarting inflation, says Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. Stanley says that Dudley was an enthusiastic supporter of the Fed’s two bond-purchase programs, which helped swell its balance sheet to almost $3 trillion, and that he doesn’t put a lot of stress on inflation when commenting on the economy.

Dudley, who years ago made political contributions to several Democrats, including Senator John Kerry of Massachusetts, says he rejects the dove label and considers himself a pragmatist.
Dudley has voted in support of all of Bernanke’s stimulus measures, including the FOMC’s Aug. 9 decision to maintain its benchmark interest rate at its record low near zero, at least through mid-2013. And the FOMC decided on Sept. 21 to replace some bonds in its portfolio with longer-term securities to further reduce borrowing costs.

Fed Can Help

Both moves prompted the same three policy makers to dissent, the most since 1992. Even after its barrage of unconventional actions, the Fed has failed to bring down an unemployment rate that’s been stuck near or above 9 percent since April 2009.
Dudley says the Fed can’t fix the economy alone. Congress and the Obama administration, which have been almost paralyzed by ideological battles over taxes and spending, are now debating the president’s $447 billion jobs bill.

“We have to recognize that it’s not just about the Federal Reserve,” Dudley says. “It needs to be a collective action of all elements of government working together. We can help, but I don’t think it can be all on us.”

Dudley operates within a byzantine institution with conflicts in its structure that erupted into controversies during the financial meltdown. In passing the Federal ReserveAct of 1913 to establish a central banking system, Congress sought to balance influence over the institution between the government and banks.

Banker Boards

To exert their sway, bankers were given a role in appointing top executives at the 12 regional reserve banks -- a conflict that wasn’t addressed until the Dodd-Frank legislation.
The Federal Reserve Act created nine-member boards for each of the reserve banks and assigned three of those seats to bankers. Banks in each district select six directors, including the three bankers. JPMorgan Chief Executive Officer Jamie Dimon,San Juan, Puerto Rico-based Popular Inc. CEO Richard Carrion and Saratoga Springs, New York-based Adirondack Trust Co. CEO Charles Wait represent banks for the New York Fed. The Board of Governors in Washington, which is appointed by the U.S. president, picks the other three members.

The six directors who aren’t bankers, including Macy’s Inc. head Terry Lundgren and Columbia University President Lee Bollinger, represent the borrowing public in areas such as commerce, industry and services.

‘Very Bizarre Structure’

Regional directors, who serve three-year terms, choose the president of their bank, with the approval of the Board of Governors, as well as senior officials. They also give advice on local economic conditions.

Kevin Hassett, director of economic policy studies at the American Enterprise Institute in Washington and a former Fed economist, says the banker directors have spurred controversy over their conflicts and that the positions should be eliminated.
“It’s a very bizarre structure that arose as a political compromise a long time ago,” Hassett says. “There’s this sort of shadowy world where our financial regulators are connected with Wall Street. It’s really important that the New York Fed not be viewed as a captive of Wall Street.”
In March 2008, Dimon was caught in a conflict when JPMorgan acquired Bear Stearns Cos., says

Robert Eisenbeis, former head of research at the Federal Reserve Bank of Atlanta. The day before Bear Stearns would have had to file for bankruptcy, Dimon told Geithner, then the New York Fed president, that JPMorgan would buy the failing brokerage only if mortgage-related assets were removed, according to a July GAO report.

Dudley’s AIG Stock

Geithner agreed, and the Fed purchased $30 billion of Bear Stearns’s mortgage assets. A JPMorgan spokesman declined to comment.

“They had Jamie Dimon on the board of directors, who were not only picking the president but also were involved with inside knowledge about what was going on at the Fed,” says Eisenbeis, who’s now chief monetary economist at Sarasota, Florida-based Cumberland Advisors Inc. “You’ve got potentially really sensitive issues where you’re talking about trying to bail out banks.”

Dudley found himself in a possible conflict in September 2008 over American International Group Inc. (AIG) shares he owned. He joined the New York Fed in 2007 after leaving Goldman to head the markets group of the Fed. That body executes the central bank’s monetary policy by trading U.S. bonds. According to the GAO report, Dudley owned less than $15,000 of AIG stock, which he wasn’t required to sell under the central bank’s code of conduct because the insurer wasn’t supervised by the Fed.

Conflict Waivers

After the Fed invoked its emergency-lending powers to rescue AIG in 2008, Dudley says he brought the fact that he owned the shares to the central bank’s attention.
“I basically identified that I had the holdings and said,‘I will do whatever you want me to do,’” says Dudley, who worked on the $85 billion loan to the insurer.

Geithner directed him to keep the AIG shares until a later, predetermined date because selling them at that time would also pose a conflict since he had access to inside information about the company’s dire state, the GAO said. Dudley has since sold the shares as directed by the bank.

Former New York Fed board member Stephen Friedman had a conflict that turned into a scandal. He had spent a career at Goldman Sachs and was on its board when the firm converted to a bank holding company in September 2008, putting it under Fed supervision. That made Friedman ineligible for his post as a public director at the New York Fed until he sought and received a waiver to stay on.

Questioning Credibility

He later added to his Goldman stock as the firm benefited from Fed emergency programs -- spending $4 million to buy shares in December 2008 and January 2009. After Richard Shelby of Alabama, the ranking Republican on the Senate Banking Committee, called Friedman’s dual roles a conflict, the Goldman director resigned from the New York Fed board in May 2009, saying his service was being mischaracterized as improper.

Following the credit meltdown, Dudley and other officials have made several changes to clean up possible conflicts.

“We have to take appearance of conflict really seriously because it does affect the institution by creating questions about our credibility,” he says.

Dodd-Frank ended the practice of banker directors having a vote in electing regional presidents -- a move Dudley says he supported. After the Friedman affair, the Fed in Washington said directors who represent public borrowers can no longer have any association with banks.

No Untoward Behavior

The New York Fed’s board went further, restricting bankers from playing any role in bank supervision or appointing its leaders in order to avoid the appearance of a conflict.
Dudley says probes by the GAO and the Financial Crisis Inquiry Commission, a panel created by

Congress, didn’t show that the Fed was rife with conflicts.

“All our activities have been looked at extraordinarily carefully,” Dudley says. “If you really look at all the body of evidence, there’s really no signs of any meaningful untoward behavior. At worst, there have been a couple of instances where there’s been an appearance of conflict, as opposed to an actual conflict.”
The GAO said the New York Fed still needs to bolster its conflict rules to reflect its expanded responsibility under Dodd-Frank. The act gave the central bank even more power, granting it authority over nonbank firms such as insurers.

‘Bit of Rebellion’

Dudley says the New York Fed is working to update its code of conduct, including prohibiting its employees from having investments in the kinds of companies the Fed gained control over.
A native of Springfield, Massachusetts, and a Boston Red Sox fan, Dudley took a path to Wall Street that wasn’t completely conventional. After getting his diploma fromWilliston Northampton School in Easthampton, Massachusetts, and spending his freshman year at Columbia University in New York, he transferred to New College of Florida in Sarasota, where he sought a more avant-garde education: Students there design their own educational experience.

“I wanted just a little bit of rebellion, to break off the track I was on,” says Dudley, whose father, a lawyer, died of polio when Bill was 2 years old. “I was on the ‘I went to prep school, went to an Ivy school, got married, had 2.3 children.’”

B in Macroeconomics

At New College, he ended up majoring in economics after realizing that a literature concentration required studying British poetry, which wasn’t his passion. Dudley was more attracted to the blend of math and analytical content that economics provided. He went on to get his doctorate in economics from the University of California, Berkeley, in 1982.

Dudley says that the one B he received was, ironically, in macroeconomics. And he adds with a smile that the grade was given to him by George Akerlof, Fed Vice Chairman Janet Yellen’s husband and a Nobel laureate in economics.

Dudley worked as a regulatory economist at JPMorgan and as an economist at the Fed in Washington before joining Goldman in 1986. Cooperman says Dudley distinguished himself when he got involved with the firm’s trading desk. In October 1998, Dudley said that Brazil’s currency, the real, was 15 percent overvalued and that there was a nearly even chance Brazil would be forced to devalue it. Three months later, the country gave up a 4 1/2-year defense of its currency, allowing it to fall by about a third in the following two months.

Earning Respect

Dudley said in a 2010 commencement address at New College that he thought he won Cooperman’s respect early in his career by telling him there was a mistake in a report they had co-written on tax reform that changed all the numbers. It was right before the report was to be distributed, and they had to throw out the 10,000 copies that had just been printed.

Cooperman, CEO of hedge fund Omega Advisors Inc., says Dudley’s performance brought him to the attention of Robert Rubin, who was co-chairman of Goldman Sachs in the early 1990s before becoming Treasury secretary under Democratic President Bill Clinton. Rubin took a shine to Dudley, who at age 43 was promoted to chief U.S. economist.

“Bill struck me as very bright and very thoughtful and also -- and this is not always the case, with academic economists at least -- very practical,” Rubin says. “He was able to meld academic understanding with the practicalities of markets and how business and economies actually work.”

Bogey Golfer

Rubin says he called Dudley from time to time when he was Treasury secretary for his views on the economy. “The other thing about Bill is, if you’re Treasury Secretary, you don’t want to speak to people who are going to speak to others,”Rubin says. “He is very discreet and very honorable.”
When Dudley resigned from his post at Goldman in 2005, he joked with clients that he was leaving to lower his golf handicap. “Didn’t happen,” says Dudley, a bogey golfer. In 2007, he jumped at an offer from Geithner to lead the New York Fed’s markets group.

Dudley’s move has contributed to Goldman’s nickname, Government Sachs. So many of the firm’s employees have gone on to public posts that it has created the impression that Goldman and the government are in bed together. The links between the two are so great that Geithner had to clarify on multiple occasions to Congress and the media that he has never worked for a bank, including Goldman.

6 a.m. Pickups

“At the end of the day, policy is my life,” Dudley says.“To me, it was a tremendous opportunity to come here and do policy without any moral ambiguity.”
udley, who lives with his wife, Ann E. Darby, a retired JPMorgan banker, in Cranford, New Jersey, gets picked up for work by a bank-supplied car at 6 a.m. most mornings. He’s putting in long hours as officials move to tighten regulations -- over the objections of bankers -- to prevent another financial calamity.

“We clearly want to make it so that this never happens again,” he says.

Dudley is also a U.S. representative on the Basel Committee on Banking Supervision, a group of regulators and central bankers from 27 nations that released nonbinding rules in December requiring banks to bolster capital and reduce borrowing. The Basel Committee agreed that only common shares would constitute top-quality capital and that global firms should hold capital worth 7 percent of their risk-weighted assets. Banks deemed “too big to fail” must hold additional capital on top of the 7 percent, ranging from 1 percentage point to 2.5 points more.

Dimon Complaints

Dudley and his Fed colleagues are now writing their own rules to reconcile the Basel mandates with Dodd-Frank reforms. They’re addressing issues such as how much liquidity banks must have and how they manage risk.

Dudley is staring down his own director, JPMorgan’s Dimon, over the rules. The CEO says higher capital requirements, mortgage standards and other rules are leading to tightened lending standards.
“I have a great fear someone’s going to try to write a book in 20 years, and the book is going to talk about all the things that we did in the middle of the crisis to actually slow down recovery,” Dimon told Bernanke at a conference of bankers in Atlanta on June 7.

The New York Fed president says bankers don’t make a strong case for looser standards.

Cutting Compensation

“The basic argument that higher capital requirements are going to lead to a dramatic drying up of lending that’s going to hurt the economy over the medium to longer run -- I just think that’s vastly exaggerated,” Dudley says. “They act like the only lever that they can adjust is the lending lever, but when in fact profitability can come down a little bit, compensation can fall.”

Simon Johnson, former chief economist at the International Monetary Fund who’s now a professor at Massachusetts Institute of Technology, says Fed officials should be forcing banks to hold even more capital against losses than the Basel guidelines suggest.

“They have erred on the side of agreeing too much with the banks,” Johnson says. “The New York Fed is very close to the Wall Street banks, and in many instances, its thinking is excessively and unfortunately swayed by the models and arguments of the banks.”

Dudley says regulators also need to do a better job of sharing information across borders and coming up with plans to unwind institutions.

‘Let Them Fail’

“Hopefully, by doing this, one, probability of failure becomes less, and two, if failure occurs, we can actually let them fail,” he says.

The onslaught of attacks on the Fed shows no sign of slowing. In September, Representative Barney Frank, the Massachusetts Democrat who co-wrote the financial-reform legislation, renewed his push to remove regional Fed presidents from voting on the FOMC and to replace them with presidential appointees.

Dudley says he escapes the pressures of his job by reading fiction. “Matterhorn: A Novel of the Vietnam War,” by Karl Marlantes, is fantastic, he says. The author received two Purple Hearts as a Marine during the war and struggled to write and publish his book for three decades.

Dudley says he will also persevere through the thicket of protests from all quarters to stave off another financial disaster, because it’s really what he wants to do.

To contact the reporter on this story: Caroline Salas Gage in New York at

To contact the editor responsible for this story: Chris Wellisz at

Usage of Federal Reserve Credit and Liquidity Facilities / Federal Reserve

Usage of Federal Reserve Credit and Liquidity Facilities

This section of the website provides detailed information about the liquidity and credit programs and other monetary policy tools that the Federal Reserve used to respond to the financial crisis that emerged in the summer of 2007. These programs fall into three broad categories--those aimed at addressing severe liquidity strains in key financial markets, those aimed at providing credit to troubled systemically important institutions, and those aimed at fostering economic recovery by lowering longer-term interest rates.

The emergency liquidity programs that the Federal Reserve set up provided secured and mostly short-term loans. Over time, these programs helped to alleviate the strains and to restore normal functioning in a number of key financial markets, supporting the flow of credit to businesses and households. As financial markets stabilized, the Federal Reserve closed most of these programs. Indeed, many of the programs were intentionally priced to be unattractive to borrowers when markets are functioning normally and, as a result, wound down as market conditions improved. The programs achieved their intended purposes with no loss to taxpayers.

The Federal Reserve also provided credit to several systemically important financial institutions. These actions were taken to avoid the disorderly failure of these institutions and the potential catastrophic consequences for the U.S. financial system and economy. All extensions of credit were fully secured and are in the process of being fully repaid.
Finally, the Federal Reserve provided economic stimulus by lowering interest rates. Over the course of the crisis, the Federal Open Market Committee (FOMC) reduced its target for the federal funds rate to a range of 0 to 1/4 percent. With the federal funds rate at its effective lower bound, the FOMC provided further monetary policy stimulus through large-scale purchases of longer-term Treasury debt, federal agency debt, and agency mortgage-backed securities (agency MBS). These asset purchases helped to lower longer-term interest rates and generally improved conditions in private credit markets.
The links to the right provide detailed information about the programs that were established in response to the crisis. Details for each loan include: the borrower, the date that credit was extended, the interest rate, information about the collateral, and other relevant terms. Similar information is supplied for swap line draws and repayments. Details for each agency MBS purchase include: the counterparty to the transaction, the date of the transaction, the amount of the transaction, and the price at which each transaction was conducted. The transaction data are provided in compliance with the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The Federal Reserve will revise the data to ensure that they are accurate and complete.
o rules about executive compensation or dividend payments were applied to borrowers using Federal Reserve facilities. Executive compensation restrictions were imposed by statute on firms receiving assistance through the U.S. Treasury's Troubled Asset Relief Program (TARP). Dividend restrictions were the province of the appropriate supervisors and were imposed by the Federal Reserve on bank holding companies in that role, but not because of borrowing through the facilities discussed here.
Additional information about the Federal Reserve's credit and liquidity programs is available on the Credit and Liquidity Programs and the Balance Sheet section.

The Fed's $16 Trillion Bailouts Under-reported Tracey Greenstein / Forbs

The Fed's $16 Trillion Bailouts Under-reported

federal reserve bank building
Image by telmo32 via Flickr

The media’s inscrutable brush-off of the Government Accounting Office’s recently released audit of the Federal Reserve has raised many questions about the Fed’s goings-on since the financial crisis began in 2008.

The audit of the Fed’s emergency lending programs was scarcely reported by mainstream media – albeit the results are undoubtedly newsworthy. It is the first audit of the Fed in United States history since its beginnings in 1913. The findings verify that over $16 trillion was allocated to corporations and banks internationally, purportedly for “financial assistance” during and after the 2008 fiscal crisis.
Sen. Bernie Sanders (I-VT) amended the Wall Street Reform law to audit the Fed, pushing the GAO to step in and take a look around. Upon hearing the announcement that the first-ever audit would take place in July, the media was bowled over and nearly every broadcast network and newspaper covered the story. However, the audit’s findings were almost completely overlooked, even with a number as high as $16 trillion staring all of us in the face.
Sanders press release, dated July 21st, stated:

“No agency of the United States government should be allowed to bailout a foreign bank or corporation without the direct approval of Congress and the president.”
The report serves as a clear testimony of the Fed’s emergency action plan to bailout foreign corporations and banks in a time of crisis, but the GAO report does not berate the Fed; rather, it provides a lucid explanation of where the money was allocated and why.

According to The Washington Post, “The GAO report did not condemn the Fed’s actions, it simply illuminated them. The GAO also recommended that the Fed make clearer and more rigorous its policies for hiring independent contractors to manage investment programs.”

A wider investigation of the Fed is due on October 18th, which will provide more thorough details. The GAO report said that the Fed issued “conflict of interest waivers to employees and private contractors so they could keep investments in the same financial institutions and corporations that were given emergency loans.” The audit will inspect the “conflicts of interest” and the inner-workings of the Fed’s emergency-lending programs.

For Sanders, one thing is clear: “The Federal Reserve must be reformed to serve the needs of working families, not just CEOs on Wall Street.”

Federal Reserve Transparency Round-Up By MICHAEL SMALLBERG / POGO

Federal Reserve Transparency Round-Up

The federal reserve hq
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.
Transaction Data
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.

FOIA Litigation
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.
GAO Audit
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 presidentreceived 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

Euro Crisis Makes Fed Lender of Only Resort as Funding Ebbs By Craig Torres and Caroline Salas Gage / Bloomberg


Euro Crisis Makes Fed Lender of Only Resort as Funding Ebbs

September 28, 2011, 2:36 PM EDT

By Craig Torres and Caroline Salas Gage
(Updates Basel liquidity statement in 24th paragraph.)
Sept. 28 (Bloomberg) -- The Federal Reserve, chastised by Congress for lending money to foreign institutions including a Libyan-owned bank, is once again the lender of last resort for banks around the world it knows little about.

Three years after the collapse of Lehman Brothers Holdings Inc., money-market borrowing rates for dollars are rising, leading the Fed and European Central Bank to make the currency available to Europe’s institutions for as many as three months. U.S. prime money-market funds cut their exposure to euro-zone bank deposits and commercial paper, or short-term IOUs, to $214 billion in August from $391 billion at the end of last year, according to JPMorgan Chase & Co. data.

The failure of regulators worldwide to address European banks’ fragile dependence on short-term funding is “putting the Fed in a really awkward position,” said Karen Shaw Petrou, managing partner at Federal Financial Analytics, a Washington regulatory research firm whose clients include the biggest U.S. banks. The swaps with Europe “are an extremely advantageous political football” for critics of the Fed, she said.

The extended funding comes as the U.S. central bank is already under fire for its unprecedented monetary stimulus. Republican leaders including Representative John Boehner of Ohio and Senator Mitch McConnell of Kentucky wrote Chairman Ben S. Bernanke and the Board of Governors on Sept. 19, asking them to “resist further extraordinary intervention in the U.S. economy.”

Lawmaker Criticism

Representative Ron Paul, a Texas Republican who wants to abolish the Fed, and Senator Bernard Sanders, a Vermont independent, have criticized its loans to foreign institutions.

“The Fed has made good on most of its investments over the years, but increasing its exposure and that of the U.S. government to foreign banks is a moral-hazard problem,” said Edward Royce of California, the third most-senior Republican on the House Financial Services Committee. “We are effectively incentivizing U.S. money-market funds to continue to finance these banks.”

U.S. regulators also are becoming less patient with what are turning out to be dollar-funding runs against foreign banks. Financial institutions are too dependent on short-term money- market investors that tend “to flee at the first signs of distress,” William C. Dudley, president of the Federal Reserve Bank of New York, said Sept. 23 in a Washington speech.
Regulators also lack access to data on foreign institutions operating in the U.S. that would allow them to “make informed judgments about the adequacy of such firms’ capital and liquidity buffers,” he said.
Large Losses

Investors are fleeing because of concern that banks will take large losses if a euro-zone nation such as Greece defaults. Europe’s debt crisis has generated as much as 300 billion euros ($407 billion) in credit risk for the region’s banks, the International Monetary Fund said last week.
Against the euro, the dollar is heading for its biggest monthly advance since November last year as European policy makers fail to contain their region’s sovereign-debt crisis. The euro traded at $1.3606 as of 1:25 p.m. today in New York.

The London Interbank Offered Rate at which banks say they can borrow for three months in dollars rose for a 14th day today to 0.36856 from 0.36522 percent yesterday, according to data from the British Bankers’ Association.
ECB Coordination

The ECB said Sept. 15 it will coordinate with the Fed and other central banks to provide three-month dollar loans to banks to ensure they have enough of the currency through the end of the year. The Fed bears no foreign-exchange or credit risk on the swap lines because the Frankfurt-based ECB is its counterparty.

There were $575 million in outstanding swaps with foreign central banks as of Sept. 21, Fed data show. The ECB loaned a similar amount of cash to two euro-area banks earlier this month in seven-day transactions. The first of three ECB three-month dollar-loan offers starts Oct. 12.

The Fed facility provides a critical “ceiling” on funding squeezes that allows investors to avoid panic and distinguish between healthy and troubled banks, said Jerome Schneider, head of the short-term strategies and money-markets desk at Pacific Investment Management Co. in Newport Beach, California.

“What you don’t want to have is liquidity risk become intertwined with solvency risk,” Schneider said. The swap lines are “the foundation right now to provide a backstop.”

Biggest Borrowers

After the criticism earlier this year of lending to overseas institutions -- including Arab Banking Corp., part- owned by the Central Bank of Libya, after Lehman collapsed in 2008 -- New York Fed researchers said U.S. branches of foreign banks were among the biggest borrowers from the discount window because they lack deposit bases. The window is the Fed’s oldest backstop-lending tool.
In an April 13 post on the New York bank’s research blog, the researchers said these institutions have relied more heavily on so-called wholesale funding for dollars, including the money markets and foreign-exchange swaps. Supporting these banks helped maintain foreign investment in the U.S., they said.

The Fed “does need to be concerned about how a liquidity run on the European banks will impact us -- our financial markets, our financial institutions, the economy as a whole,” said Republican Representative Kevin Brady of Texas, the vice chairman of Congress’s Joint Economic Committee. It needs to define its safety-net policies and use the extension of its credit as a lever to persuade European regulators to work on funding stability, he added. He will call on Bernanke to address these concerns at an Oct. 4 hearing, he said.

Policy Gap

“The Fed’s lack of a lender-of-last-resort policy really does create tremendous market uncertainty” and provides an incentive for institutions “to run to the politicians,” Brady said. “It does create moral hazard, no doubt about it.”
Euro-zone banks and other institutions were more than $350 billion in debt to the Fed’s emergency-lending facilities at one point during the 2008-2009 financial crisis, according to data compiled by Bloomberg News. The analysis was based on Fed documents released earlier this year after court orders upheld Freedom of Information Act requests by Bloomberg LP, the parent company of Bloomberg News, and News Corp.’s Fox News Network LLC. Fed lending to these entities totaled more than $100 billion on an average day.

Dexia SA, based in Brussels and Paris, was the biggest euro-area borrower, with as much as $58.5 billion of Fed loans on Dec. 31, 2008. BNP Paribas SA in Paris borrowed as much as $29.3 billion on April 18, 2008. The largest U.S. borrower, New York-based Morgan Stanley, took $107.3 billion of loans on Sept. 29, 2008.

Unstable Funding

Banks that rely on unstable short-term funding risk having to return to official sources for money until liquidity and capital are bolstered, said Viral Acharya, a New York University Stern School of Business professor and author of books on financial stability.

“All the national regulators have to agree that their banks need to raise capital,” he said. “The regulators are not sufficiently united. No one country is taking the leadership to realize the problem is getting out of hand.”

The Basel committee said today it would speed up work on a minimum liquidity rule designed to make lenders more resistant to a short-term funding crunch. Work on “key areas” of the so- called liquidity-coverage ratio now will be completed “well in advance” of the original mid-2013 deadline, the committee said. The measure is scheduled to take effect in January 2015.
While the Fed is legally required to lend to banking entities in its districts, it “does have a choice” regarding how it will extend the swap lines, said William Poole, former president of the Federal Reserve Bank of St. Louis.

“European governments have substantial dollar holdings of U.S. Treasury securities, so why not sell some of their dollar securities to support their own banks?”

--With assistance from Rebecca Christie and Jim Brunsden in Brussels, Phil Kuntz and Bradley Keoun in New York and Sandrine Rastello in Washington. Editors: Melinda Grenier, Chris Wellisz
To contact the reporters on this story: Craig Torres in Washington at; Caroline Salas Gage in New York at
To contact the editor responsible for this story: Chris Wellisz at


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Showing 10 of 14 comments

  • George 4 comments collapsed Collapse Expand
    When are the idiots in our government going to realize the whole mess is going to come crashing down at some point and their attempts to prevent that from happening will just make everything a whole lot worse. If only the banks that were failing were allowed to fail and the countries that are going to go bankrupt would just be allowed to go bankrupt, we'd be able to start the upward climb out of the hole. Instead, all we are doing is punting our problems down the road, and in the process we are going to make the hole we climb out of much much deeper.
  • 254s 1 comment collapsed Collapse Expand
    Take down the banks and the nation states survive. That is not the goal. To replace nation states with world government, one transfers liability to the governments so that they collectively become insolvent. If you consider the end goal, the methods make sense.
  • JJJ 2 comments collapsed Collapse Expand
    Dear George

    You are presuming there will be something left to climb out of the hole FOR!

    Let's supose that the crisis is of such magnitude that we will not recover - would that be reason enough to conconvince you that their current action is the correct course?
  • brock 1 comment collapsed Collapse Expand
    If the international banking system is so massive and fragile that simply introducing a market clearing rate of interest would cause the start of a new Dark Age, then banks around the world should be nationalized and broken up into small regional lenders.
  • Constitution_First 1 comment collapsed Collapse Expand
    Hmmm. Given that the "FED" is as "Federal" as Federal Express, it should give everyone pause about how much power is being given to private (& foreign) banks.

    Tell me again why are individuals on the hook for bankers greed?
  • Sheikh Yerbouti 2 comments collapsed Collapse Expand
    Meanwhile, Angela Merkel is saying to Ben Bernanke "What part of 'Nein!' do you NOT understand!?"
  • brock 1 comment collapsed Collapse Expand
    Political theater. German parliament will concede to their masters demands, regardless of the will of the people.
  • Carl Hedgepeth 1 comment collapsed Collapse Expand
    Obama say he'd redistribute the wealth and he and the Bernank are doing just that....
  • Mike55_Mahoney 1 comment collapsed Collapse Expand
    The Fed and it's supporters act like they have a personal interest in maintaining the Ponzi scheme that is fiat currency and fractional reserve banking. Gee, ya think?
  • John 1 comment collapsed Collapse Expand



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