[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]




                               BEFORE THE

                            SUBCOMMITTEE ON

                        DOMESTIC MONETARY POLICY

                             AND TECHNOLOGY

                                 OF THE


                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION


                              JUNE 1, 2011


       Printed for the use of the Committee on Financial Services

                           Serial No. 112-35

67-930                    WASHINGTON : 2011
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                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan       BRAD MILLER, North Carolina
KEVIN McCARTHY, California           DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico            AL GREEN, Texas
BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK,              GWEN MOORE, Wisconsin
    Pennsylvania                     KEITH ELLISON, Minnesota
BILL HUIZENGA, Michigan              ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio               JOHN C. CARNEY, Jr., Delaware
ROBERT J. DOLD, Illinois

                   Larry C. Lavender, Chief of Staff
        Subcommittee on Domestic Monetary Policy and Technology

                       RON PAUL, Texas, Chairman

WALTER B. JONES, North Carolina,     WM. LACY CLAY, Missouri, Ranking 
    Vice Chairman                        Member
FRANK D. LUCAS, Oklahoma             CAROLYN B. MALONEY, New York
PATRICK T. McHENRY, North Carolina   GREGORY W. MEEKS, New York
BLAINE LUETKEMEYER, Missouri         AL GREEN, Texas
BILL HUIZENGA, Michigan              EMANUEL CLEAVER, Missouri
NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan

                            C O N T E N T S

Hearing held on:
    June 1, 2011.................................................     1
    June 1, 2011.................................................    19

                        Wednesday, June 1, 2011

Joint statement of Scott G. Alvarez, General Counsel, Board of 
  Governors of the Federal Reserve System and Thomas C. Baxter, 
  Jr., General Counsel, Federal Reserve Bank of New York.........     4


Prepared statements:
    Paul, Hon. Ron...............................................    20
    Clay, Hon. William Lacy......................................    23
    Joint statement of Scott G. Alvarez and Thomas C. Baxter, Jr.    26

              Additional Material Submitted for the Record

Paul, Hon. Ron:
    Written responses to questions submitted to Scott G. Alvarez 
      and Thomas C. Baxter, Jr...................................    36
        Data files corresponding to the response to question 11..    77
    Bloomberg article entitled, ``Fed Gave Banks Crisis Gains on 
      $80 Billion Secretive Loans as Low as 0.01%................    78



                        Wednesday, June 1, 2011

             U.S. House of Representatives,
                  Subcommittee on Domestic Monetary
                             Policy and Technology,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 3:40 p.m., in 
room 2128, Rayburn House Office Building, Hon. Ron Paul 
[chairman of the subcommittee] presiding.
    Members present: Representatives Paul, Jones, Luetkemeyer, 
Schweikert; Clay, Maloney, and Green.
    Ex officio present: Representative Bachus.
    Chairman Paul. This hearing will come to order.
    I would like to advise the members that the microphones we 
have improvised will be live all the time. So be careful what 
you say; the microphone is on. I imagine that is true down 
there, as well.
    First, I want to welcome our two witnesses, and I will 
introduce them a little bit later. But, once again, I apologize 
to everybody for the inconvenience. I apologize to myself, 
because nobody likes to be inconvenienced. But it looks like we 
have a system set up here so that we can pursue our hearing.
    And, without objection, all members' opening statements 
will be made a part of the record.
    I will go ahead with an opening statement, and I will have 
time for anybody else who wants to have an opening statement.
    I want to emphasize that I consider these hearings to be 
very, very important. They have come about because of many 
things that have happened over the last few years, and a lot of 
movement in the country for more transparency, in general, as 
well as with the Federal Reserve System. And I think my 
position on this is fairly well-known.
    But, also, there has been legislation passed. The Dodd-
Frank bill has stipulations about more information coming to 
us. That legislation passed last year. There have also been the 
court cases that are under the Freedom of Information Act. We 
will be dealing with a lot of that today. And, also, the 
provisions in the law that was language that was put in by, 
basically, Senator Sanders, that has required some additional 
    But, what is referred to today so often in hearings on the 
materials that came out of the Freedom of Information Act, it 
is called ``the dump.'' And I find that rather interesting, to 
call it that, because it sounds like a lot of material was 
dumped. And when you think of 29,000 pages of technical 
information, it is very large, and a lot of people have been 
studying it. Our staffs have been working very hard, and, quite 
frankly, it isn't all that easy to figure out.
    It reminds me of a story that was told, supposedly a true 
story, that an individual was being audited by the Federal 
Reserve. And they came to him, and they said, ``We want 5 years 
of everything that you have ever done, every receipt you have 
ever had.'' And, of course, that made him very unhappy, so he 
put them all together in a bushel basket and he dumped them. 
And I will tell you what, it didn't go over very well, and he 
got into a lot of trouble. I am not suggesting this is similar, 
but it is a story that reminds me, when I look and try to 
figure out really what we have, it is a lot of material, and to 
sort this out is not easy.
    One argument, and I understand the argument very clearly, 
on the hesitancy of the Federal Reserve not to give out too 
much information too early, with the idea that it might be 
proprietary and it might set the stage for concerns in the 
    But, I think it is in contrast to the purpose of the SEC. 
The SEC has a purpose to investigate, demand reports, and get 
the information out immediately, and that is their 
responsibility. And if a company doesn't let us know exactly 
what they are doing and what their accounting procedures are, 
they get into a lot of difficulty. But the argument seems to be 
different for the Federal Reserve, that, oh, if we have 
information about a bank that might be in difficulty, in a 
market situation, that information should be available to us. 
So I take the position that information shouldn't be that 
detrimental to us and the more we can get, the better.
    I am hopeful that today we will be able to ask some 
pertinent questions to get more information and that members 
can follow up with more questions later on, and that there will 
be more transparency without ever injuring anybody. That 
certainly would be my goal.
    I would now like to yield 5 minutes to Mr. Clay.
    Mr. Clay. Thank you, Mr. Chairman. And thank you so much 
for holding this hearing to examine information disclosed by 
the Federal Reserve in compliance with the Dodd-Frank Wall 
Street Reform and Consumer Protection Act and the Freedom of 
Information Act.
    Also, I want to thank the witnesses for appearing today.
    Due to the U.S. financial crisis, the Congress passed the 
Dodd-Frank Wall Street Reform and Consumer Protection Act of 
2010. This legislation was crafted as a response to the 
financial crisis, which has cost nearly 10 million American 
jobs and over $10 trillion in household wealth. Nearly 4 
million families have lost their homes to foreclosure and an 
additional 4.5 million have slipped into the foreclosure 
process or are seriously behind on their mortgage payment.
    According to the Financial Crisis Inquiry Report, a 
combination of excessive borrowing, risky investments, and a 
lack of transparency put the financial system on a collision 
course of self-destruction. In the years leading up to the 
crisis, too many financial institutions, as well as too many 
households, borrowed too much, leaving them vulnerable to 
financial distress if the value of their investments declined 
even modestly.
    For example, as of 2007, the 5 major investment banks were 
operating with extraordinarily thin capital. By one measure, 
their leverage ratios were as high as 40:1, meaning for every 
$40 in assets, there was only $1 in capital to cover losses. 
Less than a 3 percent drop in asset value could wipe out a 
    Leverage was often hidden in off-balance-sheet entities, in 
derivatives positions, and through ``window dressing'' of 
financial reports available to the investing public. Within the 
financial system, the danger of this debt was increased because 
transparency was not required or desired. Undercover corporate 
dealings assisted in the financial meltdown which still plagues 
us today.
    In order for democracy and capitalism to exist correctly, 
transparency must be at the core. Trust and transparency and 
the rule of law are fundamental to this Nation's success. And 
business depends in some way on trust--a trust that business 
produces good products and a trust that business will deliver 
good services. Democracy depends in some way on trust. 
Transparency promotes government accountability, free and fair 
elections, competition and free markets; and the rules of law 
are critical to it.
    The Dodd-Frank Wall Street Reform and Consumer Protection 
Act addresses these issues by reforming the Federal Reserve in 
two ways:
    One, it limits the Federal Reserve's 13(3) emergency 
lending authority by prohibiting emergency lending to an 
individual entity. The Secretary of the Treasury must approve 
any lending program, and the program must be broad-based and 
loans cannot be made to insolvent firms. Collateral must be 
sufficient to protect taxpayers from losses.
    And two, it requires the Federal Reserve to disclose 
counterparties and information about amounts, terms, and 
conditions of 13(3) and discount window lending, and open-
market transactions on an ongoing basis, with specified time 
    These are just a few examples of the importance of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act.
    Thank you, Mr. Chairman. I look forward to the witnesses' 
    Chairman Paul. I thank the gentleman.
    Mr. Luetkemeyer, you are recognized for an opening 
    Okay. There are no more opening statements, so I will go 
ahead and introduce our witnesses.
    First, we have Mr. Scott Alvarez, who is General Counsel at 
the Board of Governors, a post he has held since 2004. He has 
been with the Board for 30 years. And, also, Mr. Thomas Baxter, 
Jr., has been General Counsel and Executive Vice President of 
the legal group at the Federal Reserve Bank of New York since 
1995. He also serves as Deputy General Counsel of the FOMC. Mr. 
Baxter has been with the New York Fed for more than 30 years.
    It has been agreed upon by the witnesses, Ranking Member 
Clay, and myself that Mr. Alvarez will deliver the oral remarks 
for the joint written testimony of Mr. Alvarez and Mr. Baxter. 
This testimony may run longer than the customary 5 minutes. And 
without objection, your joint written statement will be made a 
part of the record.
    I now yield to Mr. Alvarez.


    Mr. Alvarez. Chairman Paul, Ranking Member Clay, members of 
the subcommittee, Thomas Baxter, the General Counsel of the 
Federal Reserve Bank of New York, and I appreciate the 
opportunity to discuss the ways the Federal Reserve informs the 
Congress and the American people about its policies and 
    Central bank lending facilitates the implementation of 
monetary policy and allows the central bank to address short-
term liquidity pressures in the banking system. This role of 
lender of last resort is a critical one, long filled by central 
banks around the world, especially during times of economic 
crisis, when discount window lending can mitigate strains in 
financial markets that could otherwise escalate and lead to 
sharp declines in output and employment. In the United States, 
all discount window loans are fully secured, and the Federal 
Reserve has not suffered a loss to date on its discount window 
    The Federal Reserve regularly releases significant detailed 
information about its operations in order to promote the 
understanding of how the Federal Reserve fosters financial 
stability and economic stability and to facilitate an 
evaluation of our actions while preserving the ability to 
effectively fulfill the responsibilities that Congress has 
given the Federal Reserve. Since 1914, the Federal Reserve has 
published its balance sheet every week.
    We also publish full financial statements annually that are 
audited by an independent public accounting firm, which for the 
last 4 years has been Deloitte & Touche. These audits cover 
Maiden Lane, Maiden Lane II, and Maiden Lane III, as well as 
the transactions conducted through the discount window and with 
foreign central banks.
    The Federal Reserve also publishes a special monthly report 
to Congress, posted on our Web site, that details the Federal 
Reserve's emergency lending programs, including providing 
information on the amount of lending under each program, the 
type and level of collateral associated with those loans, and 
information about the borrowers under those facilities.
    In addition, the Federal Reserve Bank of New York maintains 
a Web site that includes schedules of purchases and sales of 
securities as part of open-market operations, with CUSIP 
information describing the securities involved.
    The Federal Reserve is fully cooperating with the GAO in an 
extensive review of each of the special lending facilities 
developed during the crisis. This review will assess 
operational integrity, internal controls, security and 
collateral policies, policies governing third-party 
contractors, and the existence of any conflicts of interest or 
inappropriate favoritism in the establishment or operation of 
the facilities.
    As provided by the Dodd-Frank Act, on December 1, 2010, the 
Board published detailed information on its Web site about the 
Federal Reserve's actions during the financial crisis. This 
release includes the names of borrowers, the amount borrowed, 
the date credit was extended, the interest rate charged, 
information about collateral, and the description of the credit 
terms under each facility.
    Similar information was provided for the draws of foreign 
central banks on their dollar liquidity swap lines with the 
Federal Reserve. For agency MBS transactions, details included 
the name of the counterparty, the security purchased or sold, 
and the date, amount, and price of the transaction.
    On March 31, 2011, the Federal Reserve released documents 
related to the discount window in response to requests filed 
under the Freedom of Information Act. The March 31st release 
included documents containing information related to borrowers 
at the discount window between August 8, 2007, and March 1, 
2010, that was not required to be disclosed under the Dodd-
Frank Act.
    Going forward, the Dodd-Frank Act provides for the release 
of information on any broad-based emergency lending facility 1 
year after the termination of the facility, as well as a GAO 
audit of the facility. The Act also provides for the release of 
information regarding discount window lending and open-market 
operations conducted after July 21, 2010, with a 2-year lag.
    For lending facilities, including both emergency lending 
facilities and the discount window, and for open-market 
operations, the Federal Reserve will publish information 
disclosing the identity of the borrower or counterparty, 
transaction amount, interest rate or discount paid, and the 
collateral pledged.
    The Federal Reserve believes the lags provided by the Dodd-
Frank Act for the release of transaction-level information 
establish an important balance between the public's interest in 
information about participants in transactions with the Federal 
Reserve and the need to ensure that the system can effectively 
use its congressionally authorized power to maintain the 
stability of the financial system and implement monetary 
    We will carefully monitor developments in the use of the 
discount window and other Federal Reserve facilities and keep 
the Congress informed about their effectiveness. The Federal 
Reserve has worked and will continue to work with the Congress 
to ensure that our operations promote the highest standards of 
accountability, stewardship, and policy effectiveness, 
consistent with meeting our statutory responsibilities.
    We appreciate the opportunity to describe the Federal 
Reserve's efforts on this important subject and are happy to 
answer any questions you may have. And we will be responsive to 
any written questions you may submit, as well.
    Thank you very much, Mr. Chairman.
    [The joint prepared statement of Mr. Alvarez and Mr. Baxter 
can be found on page 26 of the appendix.]
    Chairman Paul. I thank the gentleman.
    I will yield myself 5 minutes, but announce that we will 
likely be able to have repeat questioning. I think the time 
will permit that. But I will start off with 5 minutes.
    I first want to ask unanimous consent to submit an article 
for the record from Bloomberg called, ``Fed Gave Banks Crisis 
Gains on $80 Billion Secretive Loans as Low as 0.01%.'' Without 
objection, it is so ordered.
    I want to refer to one document. And this little document 
from the material that we got from the Federal Reserve is 
called a ``Chart Pack of Market Monitoring Metrics for Fed 
Facilities.'' I am sure you know all 29,000 pages, and you 
probably know exactly what I am talking about, but it tells you 
about the problem that we have in trying to find out 
    And this particular document has 327 pages to it, but, in 
this particular document, it has some interesting material that 
I did not know about, and I want to ask about it. It reveals 
that there was a previously undisclosed Fed lending program 
known as the single-tranche open-market operations, and it is 
referred to as ``ST OMO.'' This is something new, and it allows 
the Fed to give .01 percent--that is, free money--to companies 
like Goldman Sachs and was essentially a free loan to these 
well-connected businesses.
    But, also, the problem that we had in analyzing this to 
find out information that we are looking for is, it turns out 
that, just in this particular area, 81 percent of the contents 
has been redacted. So, we end up with a lot of pages, and then 
we end up with 19 percent that actually has information that we 
have to sort out.
    The question is, why were these details not mentioned? Is 
it that everything has to be done in secret? We would like to 
know, the people would like to know, but we didn't see any 
evidence until this was dug out of here. And maybe it was 
mistakenly not redacted or something like that. It makes us 
wonder why we don't know about this.
    That, of course, is one of my big beefs with the Federal 
Reserve, that the central bank wields so much power, so much 
financial power, you literally can have transactions greater 
than what we can do with our own budget. And that is why it is 
a deep concern to me, but to many other people as well.
    But why was this not published? And are these and other 
programs that have yet to be disclosed--are there others? Why 
were so many pages redacted? Can you really claim this to be in 
compliance with FOIA, the Freedom of Information Act, when we 
don't know what has been excluded?
    I would like to get your reaction to this and for you to 
talk specifically about this one program and what has been 
going on with it.
    Mr. Alvarez. Mr. Chairman, the program you refer to, the 
single-tranche OMO program, was not a secret program. It was 
actually publicly announced by the Federal Reserve on March 7, 
2008, when the program began. It was a short-term program that 
ended in January of 2009. And transactions that were conducted 
under that program as part of our open-market operations were 
reported, along with other open-market operations, on the New 
York Federal Reserve Bank Web site very quickly after the 
transactions occurred.
    The documents you have before you are from the response for 
the Freedom of Information Act request. And so that, itself, 
should explain why there are redactions. The way the Freedom of 
Information Act works, it is a request for certain types of 
information in documents. First, the agency collects all 
documents that may have any information that relates to the 
request. Then, information that is not requested is taken out 
of the documents, redacted from the documents, simply because 
it is not responsive to the request.
    So, it is not a desire to keep things secret. It is, 
instead, a desire to be responsive to the request. Often, when 
a requester asks for documents, there is information that is 
extraneous or not the kind of information that was requested, 
not relevant to the request, and that is taken out of the 
documentation. And that is why you see redaction in the 
documents before you.
    These documents were reviewed by the court and released by 
the court in accordance with the Freedom of Information Act.
    Chairman Paul. Does that mean, if somebody were to follow 
up and broaden that request, all that material could become 
available? Would they have to just change the Freedom of 
Information Act request?
    Mr. Alvarez. If another request was made for a broader 
range of information, we would review that information, 
determine what is confidential and what could be released, and 
a decision then would be made on that request.
    Chairman Paul. Could it be made so broad that you just turn 
over everything?
    Mr. Alvarez. I am not sure there are enough people in the 
world to look at everything we have to turn over, but we would 
do the best we could.
    Chairman Paul. Okay.
    My 5 minutes is up, and I now yield to Mr. Clay.
    Mr. Clay. Thank you, Mr. Chairman.
    And thank you, Mr. Alvarez.
    Just one question. Has the dramatic and, I believe, welcome 
increase in transparency, including your own initiatives and 
those called for in the Wall Street Reform Act of 2010, had any 
adverse or troubling consequences either for policymaking at 
the Fed or for the financial institutions that you regulate and 
interact with?
    Mr. Alvarez. We think the increases in transparency, 
particularly around monetary policy, that we have taken in the 
last few years have been very helpful and responsive and have 
improved understanding of the Federal Reserve and the policy 
actions we are trying to take.
    We have provided a lot of detailed information about the 
credit transactions we engaged in during the crisis. Congress, 
we think, struck a very important balance between the need for 
access to that information and providing a delay so that 
participants in the transaction don't experience the stigma 
that often occurs when there is an immediate release of 
information, allowing, therefore, an explanation for why 
institutions have participated in the facilities.
    We are monitoring whether there will be any effect. We, of 
course, won't know until we see how these facilities operate in 
the future. We will keep the Congress informed on the 
effectiveness. If there is any bad effect, we will let you 
    Mr. Clay. So you will inform the Congress as to if there 
needs to be changes in the--
    Mr. Alvarez. Absolutely.
    Mr. Clay. Okay. Thank you for your response.
    And, at this time, Mr. Chairman, I would like to yield the 
balance of my time to the gentlewoman from New York.
    Mrs. Maloney. I thank the gentleman for yielding, and I 
thank the chairman for holding this important hearing.
    And I welcome both of our witnesses.
    And I think we all have to remember that we were really on 
the verge of collapse, that this was a--we had the great 
recession instead of a great depression because of the monetary 
policy and many of the steps that we took.
    One of those steps that we have taken to stabilize our 
markets and move forward is the Dodd-Frank bill. And, in that, 
we required the GAO to conduct an audit of the Federal Reserve, 
and we also required the Fed to make information about the 
transactions through emergency lending facilities from December 
2008 to March 2010 available to the public. In addition, Dodd-
Frank required that the Fed disclose information about the 
entities that used the discount window or under I believe it 
was section 13(3) lending facilities.
    But in addition to what we required in Dodd-Frank, the 
Federal Reserve is also already subject to robust congressional 
oversight. And I would like to ask our two witnesses, can you 
give the committee some examples of the types of congressional 
oversight that you are already required to do, even before 
    Mr. Alvarez. Two of the most important types of oversight 
are: The Chairman of the Federal Reserve, who is also the 
Chairman of the FOMC, provides testimony on the economy twice 
each year, on the call of the House and the Senate. And that is 
an important check on monetary policy and the state of the 
    Another important method is this hearing and hearings like 
this that we are going through. The staff and the Governors and 
the Chairman of the Federal Reserve, and the Presidents of the 
Reserve Bank have often been called to Congress to report on 
every aspect of our duties and how we implement various 
policies. And you use those as oversight of us, and we explain 
positions that we have taken.
    So, I think it is the interaction between the Congress and 
the Federal Reserve in testimonies, in particular, that have 
been an effective form of oversight.
    Mrs. Maloney. Okay. My time is about to expire, but, as you 
know, there is a GAO audit authority now. Was there anything 
that is excluded from the GAO audit authority?
    Mr. Alvarez. The GAO is authorized to audit a full range of 
the Federal Reserve's responsibilities. That includes all of 
the emergency transactions, the discount window, our 
supervisory authority, our consumer authority, all the various 
aspects of authority.
    An area that Congress has reserved is the implementation of 
monetary policy, the actual policymaking decision process. The 
GAO does look at how we implement the policy, in the form of 
making sure that transactions actually occur as appropriate, 
that they are accounted for properly on the balance sheet, that 
they are fully disclosed. But the decision-making process for 
monetary policy is the one thing outside the GAO's scope of 
    Mrs. Maloney. Mr. Chairman, may I follow up with one brief 
question on what are the arguments for excluding it? Why was 
that excluded? What is the argument for it?
    Mr. Alvarez?
    Mr. Alvarez. The importance of allowing the Federal Reserve 
and the FOMC to conduct monetary policy independently has been 
demonstrated throughout the world in both actions by other 
central banks and in a variety of studies of monetary policy.
    The point, I think, is that the Congress wanted to reserve 
to the FOMC the ability to have discussions that are full and 
free and frank and to explore all the possible alternatives for 
monetary policy to reach the best monetary policy decision.
    Moreover, the GAO doesn't do audits in the sense of a 
technical audit like a financial auditor might do, but does 
performance reviews and policy reviews. So that would mean that 
the GAO would review the alternatives considered for monetary 
policy, how the decisions were made, whether the decisions were 
actually appropriate. That would cause second-guessing of the 
FOMC, cast into doubt whether the FOMC was actually making the 
policy decisions or whether the GAO was making policy decisions 
in monetary policy, and make it more difficult for the monetary 
policy to be done effectively by the Federal Reserve.
    Mrs. Maloney. Thank you.
    Thank you, Mr. Chairman.
    Chairman Paul. Thank you.
    I now yield 5 minutes to the vice chairman, Mr. Jones from 
North Carolina.
    Mr. Jones. Mr. Chairman, thank you very much. And I 
appreciate you holding these hearings, as others have said.
    I am going to take a little different approach. I represent 
the Third District of eastern North Carolina. It is a great 
district to represent, the home to the Camp Lejeune Marine 
Base, Cherry Point Marine Air Station, and the Outer Banks.
    The frustration of the average businessperson down in my 
district is very deep and severe. And we have had numerous 
inquiries from the Third District, the citizens of the Third 
District, about the Federal Reserve and how decisions are made.
    I know you cannot go into some of the backroom negotiations 
at the Reserve; I am not even asking that. But how do you say 
to the small-business owner that, in this crisis situation, we 
seem to find ways to help foreign banks, foreign entities? And 
I am looking here at the note that my staff prepared for me--
Harley-Davidson, McDonald's, GE, Verizon, Toyota. And yet, I 
have people in my district saying, ``I go to the local banks, 
and I can't get any loans, and my credit has always been 
    Why and how does the Federal Reserve seem to be able to 
find the way to help these entities that are gigantic? And 
through greed and manipulation, they cheated, and, yet, they 
get bailed out. They get the help, when the average 
businessperson down in eastern North Carolina and probably 
across America, they can't even go to a bank that they have 
been banking with for 15 or 20 years and get a loan. And yet, 
here we are at the Federal Reserve, looking at those foreign 
banks who might need some help or these corporations that might 
need some help.
    It really is--that is why this hearing is very important. 
The transparency, the trust--and that is a big word to me, 
``trust''--is just not there with the average system, when it 
comes to the Federal Reserve. And yet, if it had not been for 
the push by--I won't name all the entities that pushed--to tell 
you to show the bottom line, to show what was in the closet of 
decisions, who was being helped, we never would have known it.
    And yet, I know you gentlemen are attorneys, and you are 
probably not at the position where the person ought to be here 
who ought to be putting a hand on the Bible to tell the truth 
to the American people.
    That is my concern, is, how do we build the confidence of 
the American people when we see what is happening at the 
Federal Reserve?
    Mr. Alvarez. Congressman, we understand that and feel that 
same frustration.
    The programs that were designed and implemented by the 
Federal Reserve during the financial crisis were not designed 
to aid big companies for the sake of aiding big companies. The 
programs that we designed--for example, the TALF program--were 
designed to pass money and credit and liquidity on to the 
American people. So, for example, the TALF resulted in 3 
million more auto loans during the crisis than would have 
occurred, a million more student loans, and almost a million 
small-business loans.
    The programs you are talking about that aided Harley-
Davidson and Toyota and other companies were the commercial 
paper facility, which provided short-term funding to those 
companies so they could continue to keep employment up and 
manufacturing up in the United States, so that they could 
continue to provide jobs and provide opportunities in the 
United States.
    Our efforts were all designed to try to keep the economy 
moving in order to help individuals and small businesses, not 
for the sake of helping the larger institutions.
    And I understand that there is a different perception. Part 
of that perception, I think, comes from the fact that most of 
the financial tools that we were given are designed to work 
through banks or work through large markets. So we use the 
tools the best we can in order to have the funding aid the 
broadest range of people possible.
    Mr. Jones. Mr. Chairman, I know my time is about up. But I 
guess, in a way, that if it had not been for Bloomberg and the 
Wall Street Journal and all of these raising the questions, 
doing investigation, I don't know if we would be having this 
hearing today. I don't know.
    Chairman Paul. I thank the gentleman.
    I yield 5 minutes to Mrs. Maloney from New York.
    Mrs. Maloney. I thank the chairman for yielding.
    And, as he is well aware, on Friday the jobs numbers come 
out. And the economy has been improving, not as fast as we 
would all like, but we are digging our way out of that hole.
    And now that we have the benefit of hindsight and we are 
slowly recovering from the financial crisis of 2008, I know 
that some have taken the position--a position that I do not 
agree with--that the Fed's lending during this time actually 
helped contribute to the crisis. And some have argued that the 
Fed didn't need to take the actions that it took because the 
situation would have stabilized on its own.
    But I would like to ask our panelists today, isn't it true 
that, without the actions that the Fed took, that by not 
setting up the facilities it did, by not giving institutions 
access to the discount window to provide additional liquidity 
to our economy, that the crisis would have been far worse?
    So your comments, please, Mr. Alvarez and Mr. Baxter?
    Mr. Alvarez. Thank you, Congresswoman.
    We believe that the facilities that the Federal Reserve 
established did ease the crisis, and they certainly were 
designed to do that. The studies that are beginning to come 
forward now show that they actually were successful in 
unfreezing various markets--the commercial paper market, the 
asset-backed securities market--and providing liquidity to the 
financial system that was important for the financial system to 
continue to operate.
    The funding that we provided was without any losses to the 
taxpayer. Indeed, the emergency lending facilities resulted in 
$9 billion worth of interest and fees that were passed on to 
the Treasury.
    As I was explaining to Congressman Jones, the facilities 
were designed to provide real relief to American consumers and 
small businesses in the form of student loans, auto loans, 
small-business loans, credit card loans, as well as allowing 
the operation of companies that relied on the commercial paper 
market, which had frozen up, to continue to find a source of 
funding to keep their operations going.
    So, we think that the facilities were successful and were a 
good use of taxpayer funds.
    Mrs. Maloney. I would say that there is an impression--I 
hear it, and I think other Members of Congress hear it--that is 
out there, that all of the actions the Fed took during the 
crisis served only to help financial institutions. But I want 
to make clear the point that, and I want to make sure that 
people understand, that all of these actions were in the form 
of loans, and, in fact, over $125 billion has been returned to 
the Treasury over and above what was loaned out.
    That is what I read. I want to know if that is true. Is 
that true?
    Mr. Alvarez. We have, in the last 2 years, provided about 
$127 billion in earnings to the Treasury. Yes, that is correct.
    Mrs. Maloney. But can you bring this down to Main Street? 
Can you give the committee members and the general public some 
examples of how that lending helped not only stabilize the 
economy and keep our financial institutions in place, but 
literally helped Main Street and working men and women?
    Mr. Alvarez. I would like to return to the TALF program, 
which was one specifically designed to make sure that loans 
were made in the United States to help students obtain 
education loans for college, to help small businesses have SBA 
loans, credit card loans, to provide auto lending, to provide 
equipment leasing, and a variety of other kinds of loans that 
were not being made during the financial crisis because of 
liquidity shortages.
    That program was extraordinarily successful--
    Mrs. Maloney. Is it still operating?
    Mr. Alvarez. It is. It has closed, but there are still 
about $14 billion in loans outstanding. There were $70 billion 
of credits extended through the program through its life. Much 
of it has been repaid.
    Mrs. Maloney. I would like to ask about a number of 
programs that the Fed engages in, including holding gold for 
foreign countries, account services, and liquidity programs. In 
your experience, are these common activities for central banks?
    Mr. Baxter. Yes, Congresswoman, they are common for central 
banks. It is common for central banks around the world to hold 
reserves, and, as you know, the dollar is the principal reserve 
currency. At the Federal Reserve in New York, we hold over $3 
trillion on behalf of foreign central banks and countries.
    It is very important to hold those sizable reserves because 
those sizable reserves are principally invested in Treasury 
securities, which helps to finance the debt of the United 
States. So, holding dollar reserves is a very important 
function of the Federal Reserve, and we do that at the New York 
Fed. And it is similar to functions that other foreign central 
banks perform around the world.
    Mrs. Maloney. My time has expired. Thank you, Mr. Chairman.
    Chairman Paul. Thank you.
    I yield 5 minutes to Mr. Green from Texas.
    Mr. Green. Thank you, Mr. Chairman.
    I thank the witnesses for appearing, as well.
    I am interested in the central banks of other countries as 
compared to our country and this disclosure that they engage in 
compared to our country. I know that the systems are not going 
to be the same, but with reference to disclosure, can you give 
us some indication so that we can have some sort of comparison?
    Mr. Alvarez. The practices of disclosure vary quite a bit 
across the world, but I believe the Federal Reserve is one of 
the, if not the, most transparent central banks.
    Many central banks in developed countries do not, for 
example, announce their policy decision or the votes that are 
taken. The Federal Reserve does both of those. Many central 
banks do not provide minutes for their meetings. The Federal 
Reserve provides minutes 3 weeks after each meeting. Many 
foreign central banks do not publish at all the transcripts of 
their meetings, and the Federal Reserve publishes the 
transcript 5 years after each meeting.
    On the discount window lending, that is a common power that 
foreign central banks have, but they are much less transparent 
in that area, as well. Indeed, you may recall that, at the 
start of the crisis, it was a leak about a discount window loan 
made by the Bank of England to Northern Rock that resulted in a 
run on Northern Rock there. So, the foreign countries tend to 
be more circumspect about the information they disclose about 
their discount window lending operation.
    Mr. Green. Yes, sir?
    Mr. Baxter. With respect to the incident that Mr. Alvarez 
described, the British Parliament has written a report, which 
is entitled, ``The Run on the Rock,'' and it has a section that 
describes how that run began. And that was triggered by public 
reports about a borrowing by Northern Rock at the Bank of 
England. With the permission of the Chair, we could submit that 
report for the benefit of the subcommittee.
    Mr. Green. Thank you.
    One other quick question, Mr. Chairman, if I may.
    I know that you probably have gone through this, but 
explain to those who are viewing why it is important to have 
disclosure and why you try to achieve this balance that you 
have with reference to disclosure. For example, why not just 
have a CPA come in or someone come in and just audit everything 
all the time every day? What is the downside?
    Mr. Alvarez. We do have a CPA come in--Deloitte & Touche, 
currently--to do an audit of our financial statements, 
including all of our transactions, our discount window lending 
and our open-market transactions.
    The thought on disclosure is that disclosing the names of 
borrowers and the amount they have borrowed provides the 
American people with more information to make sure that the 
Federal Reserve is acting in a responsible way in its lending 
    The balance on the other side is that the discount window 
is a very important tool both in good times and in bad--in good 
times, for providing short-term liquidity to institutions when 
they need it and also as a monetary policy tool to help reduce 
the volatility of interest rates; and in emergency times, to 
provide liquidity to institutions that are generally healthy, 
but where panic has caused asset values to be out of whack, as 
it were, so that the institution can't fund itself in an 
appropriate way.
    So the discount window is a very important tool. The 
concern is that, because it is often used by both healthy and 
troubled institutions, the public will be confused if it sees 
the names of a borrower at the discount window and not be 
certain if that institution is healthy or not. And if a healthy 
institution is wrongly thought to be troubled because it has 
accessed the discount window, then that could cause problems 
for that institution. That causes institutions to back away 
from using the discount window, and that makes it a much less 
effective tool, both in good times and in bad times, for 
addressing liquidity crises.
    So it is important to have a balance in the disclosure. 
That is why we think the lag time, the 2-year period between 
the actual loan and the announcement of the borrower, is 
important. That leaves the institution some period of time to 
explain itself, to demonstrate its health, and to not be tied 
to a troubled transaction at a difficult time.
    Mr. Green. I think my time is up. Thank you, Mr. Chairman.
    Chairman Paul. Thank you.
    I would like to direct this question to Mr. Baxter. And I 
want to follow up on Mr. Jones' question about how some of 
these decisions are made and how sometimes the big guy seems to 
benefit and the little people lose their mortgages and lose 
their homes and they lose their jobs. And, quite frankly, it is 
very difficult at times in this country, because it seems like 
people are too-little-to-save--there are people who are too-
big-to-forget about them, too-big-to-let-them-fail.
    But I want to direct a question about the foreign loans. 
And it seems to me from the figures I look at, that nearly one-
third of all the loans during this period of time went to 
foreign banks. And, at one time, at the peak of this, 88 
percent of these overall discount window loans went to foreign 
banks. But at the New York Fed, I think practically, 
essentially 100 percent of the loans were going to foreign 
    And the answer I get is that, they are foreign banks but 
they have subsidiaries, and they qualify under the rules--I 
wouldn't say under the law, but under the rules--that they can 
go to the discount window. But it just seems to be way out of 
proportion, when you think of that tremendous amount of loaning 
that went to these foreign banks. And this is not easy for the 
average American citizen to understand.
    Could you enlighten us on why it seems to be 
disproportionate? I am sure they don't represent that 
percentage of the financial problems that existed. A third of 
the problems didn't deal with foreign banks, surely. What is 
the explanation for that?
    Mr. Baxter. Yes, Chairman Paul. Thank you for that 
    First, the starting point is Federal statutory law. And 
section 13, paragraph 14, of the Federal Reserve Act says to 
the Federal Reserve that, with respect to discount window 
borrowing, we are to treat the branch or the agency of a 
foreign bank just like we treat our own U.S.-charterd 
depository institutions. So, there is this principle of 
national treatment that we start with, and it is a principle 
that is embedded in the Federal Reserve Act itself. And so, we 
must treat the branch and agency of a foreign bank in the same 
manner we treat our own. That is the starting point.
    The second is, New York is the money center of the United 
States. And with respect to foreign banks that intend to come 
to our country and invest in our people and form branches and 
agencies in the United States, many of those foreign banking 
organizations look to form those organizations in the money 
center, which is in New York.
    The short answer to your question, Chairman Paul, is the 
law requires us to lend to branches and agencies. And with 
respect to New York in particular, that tends to be the place 
where foreign banking organizations enter our country.
    Chairman Paul. Okay. Proportionately, it still seems to be 
out of whack. Wouldn't the system invite foreign banks? They 
are making most of their money overseas. Just open up a 
subsidiary in New York. And, therefore, they get the line of 
credit and the protection of the bank, and it is almost like 
free insurance for them.
    Do you think this is a good idea, that a foreign bank, all 
they have to do is open up and get these bailouts? It just 
doesn't seem fair at all.
    Mr. Baxter. These were loans, Chairman Paul. They weren't 
gifts in any way. And the foreign banks have to repay, just 
like everyone else, the principal and interest.
    Second, if a foreign bank--and some do--decides that they 
would prefer not to form a branch or an agency but to start a 
subsidiary bank in the United States, that is their option. And 
some foreign banks do just that. And, of course, the subsidiary 
bank, which would have a U.S. charter, that has access to the 
discount window as well.
    Mr. Alvarez. I would add one more thing.
    There is a limit on the amount that they can borrow. They 
are limited by the amount of collateral that they have, that 
they can post at the discount window. So, that is dollar 
collateral in the United States. That doesn't allow the foreign 
bank to borrow to the full extent of its assets worldwide. It 
borrows in order to support its dollar activities. And those 
dollar activities are largely, though not exclusively--you have 
a point there--but largely in the United States.
    Chairman Paul. Could the argument be made that maybe the 
banks in Greece should have had a lot more subsidiaries in New 
York, and maybe then Greece wouldn't be in so much trouble, the 
Fed would have bailed them out too?
    Mr. Alvarez. No, their assets are in Greece, so they are 
Greek assets. And they would go to the Greek central bank to 
borrow there, not to the United States.
    Chairman Paul. Okay.
    Mr. Green, do you have any more questions?
    No? Okay. Mr. Jones, for 5 minutes.
    Mr. Jones. Mr. Chairman, thank you again.
    Looking through a lot of these reports--and I want to go to 
Libya and see if you can help me understand the rationale by 
the Treasury and the Reserve.
    I will just read one paragraph: ``Arab Banking Corporation, 
the lender part-owned by the Central Bank of Libya, used a New 
York branch to get 73 loans from the U.S. Federal Reserve in 
the 18 months after Lehman Brothers Holdings collapsed.''
    Help me understand, so that I can explain to people back in 
my district, that here we are, an undeclared war. Any time--and 
I thank God we haven't lost any American military at this 
point, but we certainly have fired a bunch of missiles. And we 
are spending millions and millions of dollars, probably 
billions by now. And we are helping other countries.
    What is the protection if Libya is Gaddafi and Gaddafi is 
Libya--or, at least, it has been for a period of time--and we 
have made these loans to their affiliate or to Libyan banks, 
their relationships, what happens in a wartime situation, where 
we are trying to drive Gaddafi out of business and we have made 
these loans to him or to Libya?
    How do you explain to that person that each and every one 
of us, on both sides of the political aisle, has talked about 
today that can't get the loans? How do you explain this to 
Walter Jones, who happens to be a Member of the Congress, so he 
can explain it to his people back home?
    Mr. Alvarez. The Arab Banking Corporation is a bank located 
in Bahrain. It is not located in Libya. The Libyans bought a 
substantial part of that bank after all the loans that were 
extended by the Federal Reserve were repaid.
    We work with the Treasury Department and the State 
Department, which have responsibility for identifying banks 
that the United States should not deal with for foreign policy 
reasons. The responsibility for designating those banks rests 
with them. We consult with them to make sure that we don't lend 
to institutions that they have determined we should not be 
lending to.
    At the time our credits were extended, Arab Banking 
Corporation was not identified by Treasury or State Department 
as a bank that was of concern. It was a foreign bank that had 
an operation in the United States that was well-rated in all 
other respects, like another foreign bank from a foreign 
    Mr. Jones. Mr. Chairman, I tell you, knowing that you, for 
many years, have picked up more and more support for your 
legislation to audit the Federal Reserve, I wish, truthfully--
and it has nothing to do with you gentlemen here today, but I 
am telling you that the distrust out here by the American 
people is as deep and as severe as I have ever seen it. And not 
only Congress itself, not only the Administration, but the 
Federal Reserve is just, at this point, at a very low ebb as it 
relates to trust.
    And I am not talking about you personally. You are two men 
of high integrity, I know that. But, right now, the Federal 
Reserve is not held in high esteem by many people in this 
    I will yield back.
    Chairman Paul. I thank the gentleman.
    I have a few short questions, and then we will finish up.
    One thing is, on a follow-up on what Mr. Jones says, is, 
the confidence is very low. But when you speak of 
independence--and I understand your terms, and I disagree with 
the need for that, but I understand it. But what people hear, 
when you say ``independence,'' they hear ``secrecy.'' You are 
going to keep it from us.
    And like the point I made at the beginning, the SEC is to 
pressure companies to reveal information, where the Federal 
Reserve does the opposite. They want--no, we can't tell 
anything because it might disturb the markets.
    I have one question: During the crisis or at any time that 
you are aware of, has the Federal Reserve or Treasury 
participated in any gold swaps arrangements?
    Mr. Alvarez. The Federal Reserve does not own any gold at 
all. We have not owned gold since 1934. So we have not engaged 
in any gold swaps.
    Chairman Paul. But it appears on your balance sheet that 
you hold gold.
    Mr. Alvarez. What appears on our balance sheet is gold 
certificates. Before 1934, the Federal Reserve did own gold. We 
turned that over, by law, to the Treasury and received, in 
return for that, gold certificates.
    Chairman Paul. If the Treasury entered into--because under 
the Exchange Stabilization Fund, I would assume they probably 
have the legal authority to do it--they wouldn't be able to do 
it, then, because you have the securities for essentially all 
the gold?
    Mr. Alvarez. No, we have no interest in the gold that is 
owned by the Treasury. We have simply an accounting document 
that is called ``gold certificates'' that represents the value 
at a statutory rate of the gold that we gave to the Treasury in 
    Chairman Paul. It is still measured at $42 an ounce, which 
makes no sense whatsoever.
    But, the conventional wisdom today says that gold is really 
not money. We don't want it to be money. If you are for the 
gold standard, there is something wrong with you. And, yet, we 
hold the gold.
    And, there has been the suggestion made, and I have sort of 
encouraged the suggestion, if gold is not money and it is an 
asset and you don't even use it because it is on your balance 
sheets and you don't even use it at the real value, why--would 
you have a position on this? Why shouldn't the Treasury just 
sell the gold and give it back to the people? The people had it 
at one time. Let the people have it.
    Would you have any objection to that? Would you advise us 
and say, ``No, that is not good; we ought to hold the gold?'' 
Do you think holding the gold is a good idea or a bad idea?
    Mr. Alvarez. I have no position on that at all. That is 
clearly a matter for the Treasury.
    Chairman Paul. No position?
    Mr. Alvarez. It is a matter for the Treasury. It is not 
within the purview of the Federal Reserve.
    Chairman Paul. Mr. Baxter, would you have an opinion?
    Mr. Baxter. My opinion is, I agree with Mr. Alvarez.
    Chairman Paul. No position.
    It is amazing, because I have asked questions of the 
Federal Reserve, the Members of the Board, for years. And 
whether it has been Mr. Greenspan--I can't recall exactly what 
I have asked Mr. Bernanke--but it is always, ``Well, no, we 
have to hold on to these assets.'' But if it is not money and 
we don't need it and we are not going on a gold standard, I 
would think that they shouldn't be holding it.
    The reason I ask that is, the truth is, gold is money. And 
people don't throw it away, and people do cling to it. But I 
would be really--there are a lot of people who suspect, because 
of this lack of transparency, that there have been a tremendous 
amount of gold swaps and loans made and central banks sold a 
lot of gold off after the last 10 years. A lot of the gold has 
left the West and has gone to the East. And the central banks 
now have positive trade balances; they buy up the gold.
    There has to be a message in there and a significance, even 
for those who don't want the restraints of gold, there has to 
be a message out there that we should look at, because we are 
in a financial mess and it has to do with our monetary system, 
and it is being reflected today in rising prices and a weak 
economy. And just printing all this money isn't doing any good.
    All this stuff that has been done for 30 years--when you 
look at the economic statistics now, they are horrible. And 
these people who lost their jobs, they are still unemployed. 
The people who bought stocks in the year 2000, if they held on, 
they probably haven't even broken even. They probably lost 
purchasing power.
    So, eventually, I think--I know this is off the subject a 
little bit. But it is reflected only in that we don't know 
exactly what goes on. And people, when they don't know, then 
they get suspicious, and they say, ``Well, it is kept secret 
from us. Why aren't we allowed to know?'' And we just march on.
    And the type of dollars we are talking about, and when we 
hear about this money going to central banks and banks that 
Qadhafi was a part owner in, this really stirs up the emotions 
of a lot of people.
    I do appreciate you being here. And I know that there will 
be a lot of questions, there will be written questions 
submitted. And we would appreciate your cooperation in sending 
us your answers.
    The Chair notes that some members may have additional 
questions for this panel which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for members to submit written questions to these 
witnesses and to place their responses in the record.
    Also, I would like to emphasize at this time that this 
hearing deals with a very complex matter and is a large amount 
of material. And, therefore, written questions, I am sure, will 
be followed up. So I ask for as much cooperation as you can 
give us, because there are times when questions are sent in and 
they sort of get lost. But because there is so much and it is 
complicated and now that our time looks like it is going to be 
shortened, we may have to depend a lot on our written 
questions. So we ask you for your cooperation there.
    And I thank you.
    Mr. Alvarez. Thank you very much.
    Mr. Baxter. Thank you, Mr. Chairman.
    Chairman Paul. This hearing is adjourned.
    [Whereupon, at 4:40 p.m., the hearing was adjourned.]

                            A P P E N D I X

                              June 1, 2011