November 10, 2008,
re-printed with special permission.
— The Federal Reserve is refusing to
identify the recipients of almost $2 trillion of emergency loans from American
taxpayers or the troubled assets the central bank is accepting as collateral.
Fed Chairman Ben S. Bernanke and
Treasury Secretary Henry Paulson said in
September they would comply with congressional demands for transparency in a
$700 billion bailout of the banking system. Two months later, as the Fed lends
far more than that in separate rescue programs that didn't require approval by
Congress, Americans have no idea where their money is going or what securities
the banks are pledging in return.
“The collateral is not being adequately disclosed, and that's a big
problem,'' said Dan Fuss, vice
chairman of Boston- based Loomis Sayles & Co., where he co-manages $17
billion in bonds. “In a liquid market, this wouldn't matter, but we're not.
The market is very nervous and very thin.''
Bloomberg News has requested details of the Fed lending under the
Freedom of Information
Act and filed a federal lawsuit Nov. 7 seeking to force disclosure.
“It's your money; it's not the Fed's money,'' said billionaire Ted Forstmann, senior
partner of Forstmann Little & Co. in
“Of course there should be transparency.''
Treasury, Fed, Obama
President-elect Barack Obama's
economic adviser, Jason Furman, also
didn't respond to an e-mail and a phone call seeking comment from Obama. In a
Sept. 22 campaign speech, Obama promised to “make our government open and
transparent so that anyone can ensure that our business is the people's
The Fed's lending is significant because the central bank has stepped into a
rescue role that was also the purpose of the $700 billion Troubled Asset Relief
Program, or TARP, bailout plan — without safeguards put into the TARP
legislation by Congress.
Total Fed lending topped $2 trillion for the first time last week and has
risen by 140 percent, or $1.172 trillion, in the seven weeks since Fed
governors relaxed the collateral standards on Sept. 14. The difference includes
a $788 billion increase in loans to banks through the Fed and $474 billion in
other lending, mostly through the central bank's purchase of Fannie Mae and
Freddie Mac bonds.
Sept. 14 Decision
Before Sept. 14, the Fed accepted mostly top-rated government and
asset-backed securities as collateral. After that date, the central bank
widened standards to accept other kinds of securities, some with lower ratings.
The Fed collects interest on all its loans.
The plan to purchase distressed securities through TARP called for buying at
the “lowest price that the secretary (of the Treasury) determines to be
consistent with the purposes of this Act,'' according to the Emergency Economic
Stabilization Act of 2008, the law that covers TARP.
The legislation didn't require any specific method for the purchases beyond
saying mechanisms such as auctions or reverse auctions should be used “when
appropriate.'' In a reverse auction, bidders offer to sell securities at successively
lower prices, helping to ensure that the Fed would pay less. The measure also
included a five-member oversight board that includes Paulson and Bernanke.
At a Sept. 23 Senate Banking Committee
called for transparency in the purchase of distressed assets under the TARP
`We Need Transparency'
“We need oversight,'' Paulson told lawmakers. “We need protection. We need
transparency. I want it. We all want it.''
At a joint House-Senate hearing the next day, Bernanke also stressed the
importance of openness in the program. “Transparency is a big issue,'' he
The Fed lent cash and government bonds to banks, which gave the Fed
collateral in the form of equities and debt, including subprime and structured
securities such as collateralized debt obligations, according to the Fed Web
site. The borrowers have included the now-bankrupt Lehman
Brothers Holdings Inc., Citigroup Inc. and JPMorgan Chase & Co.
Banks oppose any release of information because it might signal weakness and
spur short-selling or a run by depositors, said Scott Talbott, senior
vice president of government affairs for the Financial
Services Roundtable, a
Frank Backs Fed
“You have to balance the need for transparency with protecting the public
interest,'' Talbott said. “Taxpayers have a right to know where their tax
dollars are going, but one piece of information standing alone could undermine
public confidence in the system.''
The nation's biggest banks, Citigroup, Bank of America Corp., JPMorgan
Chase, Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley,
declined to comment on whether they have borrowed money from the Fed. They
received $120 billion in capital from the TARP, which was signed into law Oct.
In an interview Nov. 6, House Financial Services Committee Chairman Barney Frank said the
Fed's disclosure is sufficient and that the risk the central bank is taking on
is appropriate in the current economic climate. Frank said he has discussed the
program with Timothy F. Geithner,
president and chief executive officer of the Federal Reserve Bank of
and a possible candidate to succeed Paulson as
“I talk to Geithner and he was pretty sure that they're OK,'' said Frank, a
Massachusetts Democrat. “If the risk is that the Fed takes a little bit of a
haircut, well that's regrettable.'' Such losses would be acceptable, he said,
if the program helps revive the economy.
`Unclog the Market'
Frank said the Fed shouldn't reveal the assets it holds or how it values
them because of “delicacy with respect to pricing.'' He said such disclosure
would “give people clues to what your pricing is and what they might be able
to sell us and what your estimates are.'' He wouldn't say why he thought that
information would be problematic.
Revealing how the Fed values collateral could help thaw frozen credit
markets, said Ron D'Vari, chief
executive officer of NewOak Capital LLC in
and the former head of structured finance at BlackRock Inc.
“I'd love to hear the methodology, how the Fed priced the assets,'' D'Vari
said. “That would unclog the market very quickly.''
TARP's $700 billion so far is being used to buy preferred shares in banks to
shore up their capital. The program was originally intended to hold banks'
troubled assets while markets were frozen.
The Bloomberg lawsuit argues that the collateral lists “are central to
understanding and assessing the government's response to the most cataclysmic
financial crisis in
since the Great Depression.''
The Fed has lent at least $81 billion to American
International Group Inc., the world's largest insurer, so that it can pay
obligations to banks.
today said it received
an expanded government rescue package valued at more than $150 billion.
The central bank is also responsible for losses on a $26.8 billion portfolio
guaranteed after Bear Stearns Cos. was bought by JPMorgan.
“As a taxpayer, it is absolutely important that we know how they're lending
money and who they're lending it to,'' said Lucy Dalglish,
executive director of the Arlington, Virginia- based Reporters Committee for
Freedom of the Press.
Ultimately, the Fed will have to remove some securities held as collateral
from some programs because the central bank's rules call for instruments rated
below investment grade to be taken back by the borrower and marked down in
value. Losses on those assets could then be written off, partly through the
capital recently injected into those banks by the Treasury.
Moody's Investors Service alone has cut its ratings on 926 mortgage-backed
securities worth $42 billion to junk from investment grade since Sept. 14,
making them ineligible for collateral on some Fed loans.
The Fed's collateral “absolutely should be made public,'' said Mark Cuban, an
activist investor, the owner of the Dallas Mavericks professional basketball
team and the creator of the Web site BailoutSleuth.com,
which focuses on the secrecy shrouding the Fed's moves.
The Bloomberg lawsuit is Bloomberg LP v. Board of Governors of the Federal
Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York
Mark Pittman is a Yonkers resident,
sits on the Yonkers Board of Ethics, and is married to Laura Fahrenholdt, Press
Secretary to the Yonkers City Council President.