Lawmakers, Investors Ask Fed for Lending Disclosure (Update1)
By Alison Fitzgerald
November 13, 2008
Nov. 13 (Bloomberg) -- Members of Congress, taxpayers and investors urged the Federal Reserve to provide details of almost $2 trillion in emergency loans and the collateral it has accepted to protect against losses.
At least five Republican members of Congress yesterday called for the Fed to disclose which financial institutions are borrowing taxpayer money and what troubled assets the central bank is accepting as collateral. More than 300 more investors and taxpayers also pressed for more disclosure in e-mails and interviews with Bloomberg News.
"There cannot be accountability in government and in our financial institutions without transparency,'' Texas Senator John Cornyn said in a statement. "Many of the financial problems we are facing today are the direct result of too much secrecy and too little accountability.''
House Republican Leader John Boehner and Republican Representatives Jeb Hensarling of Texas, Scott Garrett of New Jersey and Walter Jones of North Carolina also are pressing Fed Chairman Ben S. Bernanke to elaborate on the Fed's emergency lending. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in the separate $700 billion bailout of the banking system that was approved by Congress last month.
European Central Bank President Jean-Claude Trichet today urged greater disclosure to help strengthen the global financial system.
Complex Financial Products
"Despite all regulatory advances and progress in information technology, the financial system has been characterized by a lack of transparency about the ultimate allocation of risks,'' Trichet wrote in today's Financial Times, citing as examples "the sheer complexity of structured financial products, which even sophisticated investors are not able to assess properly, and the lack of regulation of certain financial institutions.''
Bloomberg News has sought records of the Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit Nov. 7 seeking to force disclosure.
`Full and Fair Disclosure'
The Fed "should comply with this Freedom of Information Act request, and in the interest of full and fair disclosure, they must begin providing lawmakers and taxpayers all information about how they are using federal tax dollars,'' Boehner said in a statement.
In a separate FOIA request, Bloomberg asked for details of the collateral the Fed accepted against a $29 billion loan to facilitate the merger between JPMorgan Chase & Co. and Bear Stearns Cos. to prevent the investment bank's collapse. The bank rejected that request in a letter dated Nov. 7.
"I have confirmed that the information you seek is confidential commercial information,'' Federal Reserve Governor Kevin Warsh said in the letter. "The information at issue contains confidential commercial business information regarding securities pledged as collateral in connection with JPMCs acquisition of Bear Stearns.''
Total Fed lending topped $2 trillion for the first time last week and had 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.
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 including those with lower ratings. The Fed collects interest on all its loans.
Federal Reserve spokeswoman Michelle Smith didn't respond to calls or an e-mail seeking comment.
"This constitutes exactly the scenario which landed these banks in their dilemma in the first place. The Fed is making sub-prime loans to these banks and taking their portfolio of sub-prime loans as collateral,'' said William Nein, an accountant from Woodland Park, Colorado, in an e-mail to Bloomberg. "Where and when does this stop?''
Nein was among the readers who wrote to Bloomberg saying they want to know more about the Fed's loan programs.
"Our government officials never seem to be held accountable for their actions and the American taxpayers are always the ones to pay the price,'' said Kathy Cunningham, a legal secretary in San Angelo, Texas.
"It's pretty obvious the government has sold us out,'' said Jeff Pasko, a quality control engineer in Minneapolis.
W. Edmund Clark, chief executive officer and president of Toronto-Dominion Bank, Canada's second-largest lender by assets, also said the Fed should provide more detail. The difficulty, Clark said, is packaging that disclosure in a way that will make it understandable because there is so much collateral and it involves so many securities.
Clark confirmed that TD Ameritrade, the bank's broker- dealer subsidiary, has tapped the Federal Reserve's Primary Dealer Credit Facility. "We, as a bank, operate a securities dealer out of New York that does (borrow from the Fed), but not to a significant amount,'' he said.
More disclosure would ease the public's suspicion about the bailout programs and could help loosen up credit markets, some analysts said.
"Confidence is very important and any window into why decisions are being made is helpful in making people more confident that there's a steady hand at the tiller,'' said Peter Peyser, head of Blank Rome Government Relations, a Washington lobbying firm. "Transparency is a cure to any speculation about the people implementing the policies and what their motivations may be.''
Not knowing which banks are in trouble shuts down the entire credit market said Joseph Mason, a banking professor at Louisiana State University in Baton Rouge.
"If you don't know where the losses are, it's rational to pull back from the whole system,'' Mason said. "I've heard the argument that government shouldn't pick winners or losers. Duh. That's what bank examiners and regulators do. Tell us where the losses are and there won't be a panic.''
Lawmakers, meanwhile, said transparency is needed because public money is involved.
"We're talking about using, between the Fed and Treasury, trillions of dollars of taxpayer money with scant to nonexistent oversight,'' Republican Study Committee Chairman Hensarling, a Texas Republican, said in an interview. "They have taken a lot of liberties with the taxpayers' checkbook. People have a right to know how this money, ultimately, is being used.''
Trust, said some Bloomberg readers, is the central issue.
"There's a lot of mistrust and they make it worse by sayng give us trillions and we'll have closed-door meetings and you just trust us to do what's best,'' said Dawn Klein of Feltz WealthPLAN, an investment management firm in Omaha, Nebraska.
"I absolutely do not trust them. Who's doing anything to establish trust, to get our trust back?''
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