Fed Reverses Self on Promises of Transparency, Continues to Stonewall on Collateral, Lending Disclosure

As this Bloomberg article discusses in detail, the Fed has violated promises it made to Congress, both regarding the amount it would lend (the amounts are vastly in excess of anything envisaged) and its commitments about transparency (which have gone completely by the wayside). Bloomberg has petitioned to get certain details disclosed via a Freedom of Information Act filing, which as we discussed in an earlier post, the Fed is fighting.

Again, proof that when dealing with bankers, you need to get everything in writing.

From Bloomberg (hat tip reader Scott):

The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn’t require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return.

“The collateral is not being adequately disclosed, and that’s a big problem,” said Dan Fuss, vice chairman of Boston- based Loomis Sayles & Co., where he co-manages $17 billion in bonds. “In a liquid market, this wouldn’t matter, but we’re not. The market is very nervous and very thin.”

Bloomberg News has requested details of the Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit Nov. 7 seeking to force disclosure…

“It’s your money; it’s not the Fed’s money,” said billionaire Ted Forstmann, senior partner of Forstmann Little & Co. in New York. “Of course there should be transparency.”…

Total Fed lending topped $2 trillion for the first time last week and has risen by 140 percent, or $1.172 trillion, in the seven weeks since Fed governors relaxed the collateral standards on Sept. 14. The difference includes a $788 billion increase in loans to banks through the Fed and $474 billion in other lending, mostly through the central bank’s purchase of Fannie Mae and Freddie Mac bonds.

Before Sept. 14, the Fed accepted mostly top-rated government and asset-backed securities as collateral. After that date, the central bank widened standards to accept other kinds of securities, some with lower ratings. The Fed collects interest on all its loans…

At a Sept. 23 Senate Banking Committee hearing in Washington, Paulson called for transparency in the purchase of distressed assets under the TARP program.

“We need oversight,” Paulson told lawmakers. “We need protection. We need transparency. I want it. We all want it.”

At a joint House-Senate hearing the next day, Bernanke also stressed the importance of openness in the program. “Transparency is a big issue,” he said…

The Fed lent cash and government bonds to banks, which gave the Fed collateral in the form of equities and debt, including subprime and structured securities such as collateralized debt obligations, according to the Fed web site. The borrowers have included the now-bankrupt Lehman Brothers Holdings Inc., Citigroup Inc. and JPMorgan Chase & Co.

Banks oppose any release of information because it might signal weakness and spur short-selling or a run by depositors, said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, a Washington trade group.

“You have to balance the need for transparency with protecting the public interest,” Talbott said. “Taxpayers have a right to know where their tax dollars are going, but one piece of information standing alone could undermine public confidence in the system.”…

“I talk to Geithner and he was pretty sure that they’re OK,” said [Barney] Frank, a Massachusetts Democrat. “If the risk is that the Fed takes a little bit of a haircut, well that’s regrettable.” Such losses would be acceptable, he said, if the program helps revive the economy….

Revealing how the Fed values collateral could help thaw frozen credit markets, said Ron D’Vari, chief executive officer of NewOak Capital LLC in New York and the former head of structured finance at BlackRock Inc…

“As a taxpayer, it is absolutely important that we know how they’re lending money and who they’re lending it to,” said Lucy Dalglish, executive director of the Arlington, Virginia- based Reporters Committee for Freedom of the Press.

Ultimately, the Fed will have to remove some securities held as collateral from some programs because the central bank’s rules call for instruments rated below investment grade to be taken back by the borrower and marked down in value. Losses on those assets could then be written off, partly through the capital recently injected into those banks by the Treasury.

Moody’s Investors Service alone has cut its ratings on 926 mortgage-backed securities worth $42 billion to junk from investment grade since Sept. 14, making them ineligible for collateral on some Fed loans

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  1. Anonymous

    Doesn’t this hiding of what they’re doing imply that the U.S. itself is on the road to bankruptcy? You only hide things when the news is really ugly.

  2. Anonymous

    WE need a senator or representative to introduce legislation to change the back of the currency to read, “In Bernanke and Paulson We Trust”. At least then we’d telling the truth.

  3. ruetheday

    Imagine the outrage in this country if it were announced that the federal government would lend trillions to the automakers and other industrial companies, but the exact amount loaned and the recipients of the loans would be kept secret.

    Separately, Barney Frank (and Chris Dodd) make my skin crawl. Frank talked to the Fed and they told him not to worry? Are you kidding me? Those two have no business whatsoever being in financial market oversight roles.

  4. Stevie b.

    “Such losses would be acceptable, he (Geithner)said, if the program helps revive the economy”.

    So presumably if the economy doesn’t revive, the losses would be unacceptable – so then what, exactly? It’s all just more ad hoc-ery hocus-pocus.

  5. Stuart

    You only hide details when you’re afraid of the consequences of them becoming public.

    A Few Good Men famous quote: “You can’t handle the truth”.

    Taxpayers deserve nothing less. It just goes to show you the mindset of this financial oligarchy with respect to who they believe own this country. Pitchforks and Torches time.

  6. Anonymous

    “The Fed collects interest on all its loans…”
    But if I understand correctly, not as much interest as it pays on deposits.
    Surely current US policy seems to be throwing money over the wall and praying for a miracle to happen before it runs out.

  7. Tim

    With Timothy F. Geithner next in line to be Treasury secretary we are assured that this facade continues. T

  8. Matt Dubuque

    Read the article carefully.

    Paulson does not have the authority to commit the Federal Reserve to anything. He is with the TREASURY, not the Fed.

    Treasury is not the Fed. This is perhaps the most fundamental mistake Americans mistake in trying to interpret what is going on.

    The Fed is NOT required to assist Bloomberg in his personal campaign for the Presidency in 2012.

    Bloomberg has already botched New York. The Fed is NOT required to assist him in his personal aggrandizement schemes.

    Matt Dubuque

  9. Anonymous

    Obama campaigned on change, yet if he picks the next Treasury Secretary from this same crop of current managerial elite, nothing has changed. As stated above, the facade will continue. One of his 1st tests.

  10. Anonymous

    You might assume that the lack of transparency is to protect users of the FED’s schemes. While this seems plausable it seems likely that there may be a subtle twist in the problem with transparency. Notice that Dan Fuss and Ron D’Vari are talking about collateral rather than who received a bailout. I have a suspicion that what the FED does not want people to know is how bad that collateral is, and generally who has been passing off the worst collateral to the FED. We suspect that the recent monoline further downgrades have devalued a lot of the collateral such that certain companies will be forced to buy back or compensate. By publishing details the FED would almost certainly be exposing the structural frailties of certain institutions. The other possibility of course is that the FED has been giving different terms to different parties which if known would cause a certain about of chagrin, espeically in light of AIG’s rather special loan deal in exchange for mopping up in the CDS market.

  11. Stuart

    The truth is the US Government is insolvent and is at the point of either defaulting or printing its way out of this catastrophe. It’s now a game of hide the sausage. You’re damn right they absolutely do not want the truth openly talked about else the foreign financiers, the drug pushers to the US junkie, might keep their drugs (capital) at home as confidence in the US completely collapses. Transparency is an outright enemy in this regard.


    from my understanding the Fed is a private bank run by 12 banks including goldman and jp morgan, so while treasury and fed are separate entities both are run by bankers from the same circle, basically the same crew with the same agenda-
    -that is why i lump them together


  13. Red Baron

    If there was any doubt that the United States is a plutocracy, that has been wiped away in the past few months.

  14. S

    GS stock continues tio tank. Goldman has long been rumored to be on the opposite end of the AIG swaps. Kashkar whatever his name is is saying this am that AIG needed to be restructred as it was a systemic risk. So if it is a systemic risk it is systemic to who? To Goldman? To UBS? To BNP? The Treasury has now sufficiently destroyed the systemic risk meme. The article about Citi buying another bank in the WSJ is yet more of the samme – keep the body in motion casue if it stops it dies. peak debt becomes all the more apparent with every breaking news headline.

  15. shayre

    Would debasing the value of the US dollar to make it worthless not give every country that holds US government debt, the legitimacy to say that they are no longer going to respect any intellectual property rights of US companies?

    Will that be the pound of flesh they claim?

    That would be a high price to pay for defaulting on debt levels that have become too high to pay.

  16. Barney Frank

    Listen folks, everyone just calm down. I already said, I talked to Geithner and he’s pretty sure everything is OK. You don’t want to see how the sausage is made on this one. It’s for the the greater good, ok?

  17. luther

    anon@11:18 — great article, thanks

    love this last paragraph:
    “It’s just like after September 11. Back then no one wanted to be seen as not patriotic, and now no one wants to be seen as not doing all they can to save the financial system,” said Lee A. Sheppard, a tax attorney who is a contributing editor at the trade publication Tax Analysts. “We’re left now with congressional Democrats that have spines like overcooked spaghetti. So who is going to stop the Treasury secretary from doing whatever he wants?”

    everyone should keep their eye out for the sneaky tricks coming the next 2 months….

  18. doc holiday

    Follow the yellow brick road:


    I’m gonna follow Special Purpose Financial Statements — screw Dorothy and Toto, but it does seem as if we are headed to a place other than where we have been….

    The Q: “For example, an entity wishing to sell a division or product line may prepare an offering memorandum that includes a special-purpose financial statement that presents certain assets and liabilities, revenues and expenses relating to the division or product line being sold. Section 623, Special Reports, paragraph .22 states that the auditor may report on a special-purpose financial statement prepared to comply with a contractual agreement. Does an offering memorandum (not including a filing with a regulatory agency) constitute a contractual agreement for purposes of issuing an auditor’s report under this section?”

    A: An offering memorandum generally is a document providing information as the basis for negotiating an offer to sell certain assets or businesses or to raise funds. Normally, parties to an agreement or other specified parties for whom the special-purpose financial presentation is intended have not been identified. Accordingly, the auditor should follow the reporting guidance in section 508, Reports on Audited Financial Statements.

    Q: Does an agreement between a client and one or more third parties other than the auditor to prepare financial statements using a special-purpose presentation constitute a contractual agreement for purposes of issuingan auditor’s report under this section?

    A: Yes. In such cases, the auditor should follow the guidance in section 623.22–.26, and use of the auditor’s report should be restricted to those within the entity, to the parties to the contract or agreement or to those with whom the entity is negotiating directly.

  19. doc holiday

    It does seem that this TARP-related Madness revolves around the premise that there are no contracts, terms or agreements in place to be legally binding. I’ve suggested before that The Chrysler Bailout is a great example of a loan with terms and conditions — it was a contract and I’m wondering if TARP is constructed in a special way, in which there are no contractual terms.

    IMHO, special purpose financial statements or hocus pocus accounting related to this windfall bailout capitalization will result in misstatements by mis-reporting unrealized gains and then failing to reconcile proper GAAP accounting.

    The matter related to Bloomberg wanting accountability for taxpayers is thus, kinda, probably a moot point, because there are no contracts, no deals, no MOUs, no agreements and nothing to disclose in legal terms, because this is all fraud!

    Peace to Earthlings

  20. Carlosjii

    November 9, 2008
    by FT
    Money market on strike
    Dr Jon Danielsson and Prof Casper G. de Vries
    Neither the recent massive money market injections, the coordinated lowering of interest rates nor the use of public funds to recapitalise banks have done much to restart interbank lending. This action did not solve the underlying problem preventing interbank lending: extreme information asymmetry.

  21. djap113

    Compelling, but the taxpayer still doesn’t seem to mind. They voted for men who both voted for that TARP piece of _____. I’m pretty sure the entire system needs to come crashing down with a heaping serving of inflation. This simply hasn’t come to people’s doorstep… yet.

  22. Anonymous

    >>WE need a senator or representative to introduce legislation to change the back of the currency to read, "In Bernanke and Paulson We Trust".<<
    No need for legislation here, the two jokers have earned full rights to do it without anybody's permission.

  23. Mike Norman

    It is clearly stated under Section 13 Paragraph 3 of the Federal Reserve Act that in exigent and unusual circumstances the Fed is allowed to lend to whomever it pleases against any collateral that it deems satisfactory.


    Moreover, all banks come under regulatory scrutiny by the Fed and Office of the Controller of the Currency and can only have bank-regulated collateral. The list can be found at the Fed’s Discount Window of Marginable Collateral.


    Furthermore, the Fed asking for collateral from US member banks is ‘redundant’ in that FDIC/OCC regulation/supervision already requires all bank collateral be ‘bank legal’ and that required capital be sustained.

    The Fed is not limiting transparency in its actions. All this information is publicly available. Your research and assertions are incorrect and misleading and you should publish a retraction with the proper information.

  24. doc holiday


    IMHO, you should not confuse The Treasury and TARP funding with Fed policy, i.e, Bernanke makes policy but does not manage taxpayer dough, while Paulson is in charge of the taxpayer revenue looting. You may also want to look at The Powers of The Treasury and make a call on why Treasury is involved in actions of commerce.

    Re: “publish a retraction’ .. ROTFLMAO! Is that you, Warsh?

  25. Anonymous

    Bush Imperialism – 1 Trillion in about 8 years.

    Bush Fascism – 2 Trillion + ??? in 90 days with 60 to go.

    The consequences to these folks for bankrupting America – ZERO

    They plan to get their end of the world one way or another.

  26. Anonymous

    Best political thriller in a long time, makes the war in Iraq look like a kiddy show. Opening Sound Track to the Movie would be MAD WORLD by Michael Andrews & Gary Jules and Clocks by Cold play.

    Could this be a "slash and burn" tactic in strategic retreat by the old guard/Finnish looting before the gig is up?

    Would the confrontation be more destructive than sitting on our hands?

    @barney Frank
    Do we want to eat said sausage with out knowing what its really made of? 100% offal? and "pretty sure" is the same as crossing your fingers. Is that what it boils down too? Feel like a kid being told this is an "Adult Conversation", now go play out side.

    Word of warning if the American People ever en-mass emotionally invest in whats going on. The French will say "Let Them Eat Cake".

    The American politic has become just as arrogant.

    The American demographic is at a tipping point. This is when it's most volatile. Lots of tripwires out there.


  27. Anonymous

    The money is being created by and for the Fed’s. It’s their money – let them pay for it with their own assets. The money does not belong to Americans in any shape, fashion or form. Congress knows this and they know they can’t do squat about it. Read the Charter that the Fed holds the Congress’ feet to the fire with. There is NO money in any state of the Union that owns any money. It all belongs to the Fed. If they want to lend it out – then go ahead – but, don’t pretend that Americans should pay tribute to your Banking Scam for your loaning out money that YOU the Banks don’t really have…and you want to take our land as collateral. You know what you can do with yourselves.

  28. Yves Smith


    Another display of your lack of grounding in facts. Boomberg, as in the mayor, currently has no management role at Bloomberg, the company he founded, I believe he put his shares in a blind trust.

    And Bloomberg has done a great job with the city. Otherwise, he would not be able to get terms limits waived to run for a third term.

    I am losing patience with your relentless self promotion and pretenses to superior knowledge when you are frequently wrong. There are vastly better informed readers who do not come here and cop a ‘tude.

  29. Yves Smith


    The Fed has considerably relaxed its rules regarding the types and quality of collateral accepted. That was the initial focus of the Bloomberg FOIA request. Frankly, I am far more interested in that. For instance, they now accept credit card receivables, which they did not previously.

    A separate issue is that the Fed accepts the dealers’ pricing on many types of collateral for its various facilities (yes, it does apply haircuts, but the dealer provides the initial mark). Willem Buiter in particular is exercised about that. So the pricing of the collateral by the Fed is also an issue, one you fail to acknowledge.

    This “bank regulated collateral” had lead to hundreds of billions of losses and is now being swapped to the Fed for cash equivalent securities. Any losses will eventually be absorbed by the taxpayer or somehow come out of the hide of the public (if you don’t think central banks can’t go bust, you are woefully ignorant of financial history). The public has a right and reason to know, particularly after specific promises of transparency were made.

    I am not issuing any retraction. There is no misleading statement here. I quoted Willem Buiter on the dead dog issue, and he is a world recognized authority (he gave a presentation at the last Jackson Hole conference).

    From the earlier Bloomberg story (link provided in post above):

    Bloomberg News asked a U.S. court today to force the Federal Reserve to disclose securities the central bank is accepting on behalf of American taxpayers as collateral for $1.5 trillion of loans to banks.

    The lawsuit is based on the U.S. Freedom of Information Act, which requires federal agencies to make government documents available to the press and the public, according to the complaint. The suit, filed in New York, doesn’t seek money damages.

    “The American taxpayer is entitled to know the risks, costs and methodology associated with the unprecedented government bailout of the U.S. financial industry,” said Matthew Winkler, the editor-in-chief of Bloomberg News, a unit of New York-based Bloomberg LP, in an e-mail.

  30. Anonymous

    What else do you expect from the Bush administration? This is the exact same tactic as with Iraq, Guantanamo, Attorney General firings etc etc etc. The people from the supposed party of personal responsibility do everything they can to avoid owning up for their actions.

    Slime to the core.

  31. chrousa

    …making them ineligible for collateral on some Fed loans.

    Yeah, but that could change — after all, what they accept as collateral seems to be completely arbitrary.

Comments are closed.