Federal Reserve Lending Revelations Intensify Criticism Of Central Bank's Secrecy
In the midst of the global financial crisis in 2008, the Federal Reserve lent Goldman Sachs, Credit Suisse and Royal Bank of Scotland at least $30 billion each at interest rates as low as 0.01 percent with no public disclosure of the details, Bloomberg News reported on Thursday.
The latest revelations about the covert infusions of credit provided by the Fed to some of the world's largest banks has amplified accusations that the central bank is a power unto itself, operating according to its own devices and in the interest of major financial institutions -- and beyond accountability to taxpayers.
"It just points out that this was about secrecy to protect banks basically from embarrassment from transparency, which is not supposed to be what the Fed's about," said Dean Baker, co-director of the Center for Economic Policy and Research, in Washington.
"That is the fundamental problem with the Fed," Baker added. "They're supposed to be an agency of the government, not an agency of the banks. But reflexively, there they are protecting the banks, again and again and again."
Some experts say that the Fed acted properly to withhold details of the transactions, asserting the broader financial system might well have been spooked had it been known to what degree the central bank was propping up major lenders.
"Releasing data closer to the time of the crisis could have had an adverse impact on some firms," said Ernest Patrikis, a partner at the law firm White & Case and a former chief operating officer of the New York Fed. "There's a difference between a crisis and a period of time after a crisis, in terms of impact."
That was the Fed's logic, as it handed out nearly free cash to major banks and other institutions while withholding from public view the names of the recipients, the dollar figures and the terms of the loans.
But in recent months, the Fed has been forced by Congress and by a Supreme Court decision -- in a case originally filed by Bloomberg LP, the parent company of Bloomberg News -- to release the details of its so-called emergency lending programs. The Fed undertook those programs throughout 2008, accelerating its lending that fall in the aftermath of the collapse of the investment banking giant Lehman Brothers.
In December, under orders from Congress, the Fed released a trove of documents that name the recipients of $3.3 trillion in aid intended to curb damage from the developing financial crisis. The documents describe a variety of Fed special lending facilities, including one program in which nine firms, five of them foreign, were able to borrow $5 billion for 28 days at the extremely low interest rate of 0.0078 percent, The Huffington Post reported.
In late March, the Fed released information about its primary lending facility -- the so-called discount window -- which had provided ultra-cheap cash during the height of the crisis to a range of firms. During the week in October 2008 when borrowing under the program peaked, foreign banks received more than 70 percent of the $110.7 billion that the Fed lent out, Bloomberg News reported. Arab Banking Corp., a $28 billion lender now majority-owned by Libya's central bank, got at least $3.2 billion that autumn, The Huffington Post reported.
In 2008, Bloomberg News asked for Fed records under the Freedom of Information Act, but the Fed resisted. Revealing the names of borrowers could cause "substantial competitive harm" to those institutions because they could be perceived as weak, the Fed argued in a court filing.
"[B]ecause Reserve Banks are the 'lenders of last resort,' the fact that an institution is borrowing at the [discount window], if publicly disclosed, can fuel market speculation and rumors that the entity's liquidity strains stem from a financial problem at the institution that is not publicly known," reads a May 2009 statement the Fed filed in a New York district court.
The case went to the Supreme Court, which rejected an attempt by a banking industry group to block the Fed's disclosure. So, for the first time since the Fed's discount window began lending in 1914, the central bank in late March released the identities of its primary facility's borrowers.
The latest details came via an investigation published Thursday by Bloomberg News, which reported that Goldman and other financial institutions borrowed additional tens of billions from the Fed's primary source of credit.
A spokesman for the New York Fed, which administered the emergency lending program, said the Bloomberg article merely added the names of the banks that received the loans to previous public disclosures about the existence of the transactions.
"The establishment and execution" of the program "were clearly communicated to the public," the spokesperson said in an e-mailed statement. "On March 7, 2008, the New York Fed announced through a public statement its intent to conduct these open market operations. Further, the aggregate results of each auction were immediately posted on the New York Fed's web site."
But the statement the spokesman referenced, written in highly technical language, does not name any recipients and indeed reads like a blanket assertion of lending authority.
Fed Chairman Ben Bernanke has often said the Fed should be a more transparent institution. Last month, the chairman spoke to reporters at the first press conference after a committee meeting in the central bank's history.
"I personally have always been a big believer in providing as much information as you can to help the public understand what you're doing, to help the markets understand what you're doing, and to be accountable to the public for what you're doing," Bernanke said during the conference.
But Christopher Whalen, managing director of Institutional Risk Analytics, pointed to the latest disclosures about the extent of the Fed's covert operations as a sign that the institution has yet to live up to the standard its chairman has publicly laid out.
"People want the information, whether it's loan-level data or data on a security or on an issuer. Whatever it is, they want it," Whalen said. "But you still have the Fed, because they're such a reactionary organization, resisting this."
Chris Kirkham contributed to this report.