[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
FEDERAL RESERVE LENDING DISCLOSURE:
FOIA, DODD-FRANK, AND THE DATA DUMP
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
DOMESTIC MONETARY POLICY
AND TECHNOLOGY
OF THE
COMMITTEE ON FINANCIAL SERVICES
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
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67-930 WASHINGTON : 2011
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HOUSE COMMITTEE ON FINANCIAL SERVICES
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
SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
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
LYNN A. WESTMORELAND, Georgia ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri JOE DONNELLY, Indiana
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 HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO R. CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee
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
DAVID SCHWEIKERT, Arizona
C O N T E N T S
----------
Page
Hearing held on:
June 1, 2011................................................. 1
Appendix:
June 1, 2011................................................. 19
WITNESSES
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
APPENDIX
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
FEDERAL RESERVE LENDING DISCLOSURE:
FOIA, DODD-FRANK, AND THE DATA DUMP
----------
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
information.
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
market.
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
company.
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
delays.
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'
comments.
Chairman Paul. I thank the gentleman.
Mr. Luetkemeyer, you are recognized for an opening
statement.
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.
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
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
actions.
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
lending.
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
policy.
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
information.
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
know.
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
Dodd-Frank?
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
economy.
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
authority.
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
good.''
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
facilities.
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
banks.
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
question.
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
country.
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
country.
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
1934.
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
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