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Before 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
Today's hearing 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 Reserve’s lending
programs have greatly increased our knowledge of the Fed's monetary policy
during the height of the financial crisis.
In December 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
Act’s (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 Fed’s operations during the financial crisis and the
nearly $3 trillion balance sheet it has built up.
On November 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.
Recent news 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.
Not surprisingly, 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 Fed’s emergency lending
authority? Why did investors who participated in TALF have to have a
relationship with the Fed’s 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?
More issues emerge from the Fed’s handling of
the FOIA requests brought by Bloomberg and Fox News. The Fed used several
arguments in refusing to comply. Among them was the Fed’s 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 Fed’s
long-standing defense of the secrecy of the discount window. One of the
judges in the case summed up the Fed’s 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.
Ron Paul
www.house.gov/paul
Copyright Dr. Ron
Paul
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