[Infowarrior] - Fed Defies TARP Transparency

[Richard Forno]

Fed Defies Transparency Aim in Refusal to Identify Bank Loans

By Mark Pittman, Bob Ivry and Alison Fitzgerald

http://www.bloomberg.com/apps/news?pid=20601087&sid=aatlky_cH.tY&refer=worldwide

Nov. 10 (Bloomberg) -- 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.

The Fed made the loans under terms of 11 programs, eight of them  
created in the past 15 months, in the midst of the biggest financial  
crisis since the Great Depression.

``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.''

Federal Reserve spokeswoman Michelle Smith declined to comment on the  
loans or the Bloomberg lawsuit. Treasury spokeswoman Michele Davis  
didn't respond to a phone call and an e-mail seeking comment.

The Fed's lending is significant because the central bank has stepped  
into a rescue role that was also the purpose of the $700 billion  
Troubled Asset Relief Program, or TARP, bailout plan -- without  
safeguards put into the TARP legislation by Congress.

$2 Trillion

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.

The plan to purchase distressed securities through TARP called for  
buying at the ``lowest price that the secretary (of the Treasury)  
determines to be consistent with the purposes of this Act,'' according  
to the Emergency Economic Stabilization Act of 2008, the law that  
covers TARP.

`We Need Transparency'

The legislation didn't require any specific method for the purchases  
beyond saying mechanisms such as auctions or reverse auctions should  
be used ``when appropriate.'' In a reverse auction, bidders offer to  
sell securities at successively lower prices, helping to ensure that  
the Fed would pay less. The measure also included a five-member  
oversight board that includes Paulson and Bernanke.

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.

Banks Resist Disclosure

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.''

Frank Backs Fed

The nation's biggest banks, Citigroup, Bank of America Corp., JPMorgan  
Chase, Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley,  
declined to comment on whether they have borrowed money from the Fed.  
They received $120 billion in capital from the TARP, which was signed  
into law Oct. 3.

In an interview Nov. 6, House Financial Services Committee Chairman  
Barney Frank said the Fed's disclosure is sufficient and that the risk  
the central bank is taking on is appropriate in the current economic  
climate. Frank said he has discussed the program with Timothy F.  
Geithner, president and chief executive officer of the Federal Reserve  
Bank of New York and a possible candidate to succeed Paulson as  
Treasury secretary.

``I talk to Geithner and he was pretty sure that they're OK,'' said  
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.

Frank said the Fed shouldn't reveal the assets it holds or how it  
values them because of ``delicacy with respect to pricing.'' He said  
such disclosure would ``give people clues to what your pricing is and  
what they might be able to sell us and what your estimates are.'' He  
wouldn't say why he thought that information would be problematic.

`Unclog the Market'

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.

``I'd love to hear the methodology, how the Fed priced the assets,''  
D'Vari said. ``That would unclog the market very quickly.''

TARP's $700 billion so far is being used to buy preferred shares in  
banks to shore up their capital. The program was originally intended  
to hold banks' troubled assets while markets were frozen.

The Bloomberg lawsuit argues that the collateral lists ``are central  
to understanding and assessing the government's response to the most  
cataclysmic financial crisis in America since the Great Depression.''

AIG Lending

The Fed has lent at least $81 billion to American International Group  
Inc., the world's largest insurer, so that it can pay obligations to  
banks. The central bank is also responsible for losses on a $26.8  
billion portfolio guaranteed after Bear Stearns Cos. was bought by  
JPMorgan.

``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.

The Fed's collateral ``absolutely should be made public,'' said Mark  
Cuban, an activist investor, the owner of the Dallas Mavericks  
professional basketball team and the creator of the Web site  
BailoutSleuth.com, which focuses on the secrecy shrouding the Fed's  
moves.

To contact the reporters on this story: Mark Pittman in New York at mpittman at bloomberg.net 
; Bob Ivry in New York at bivry at bloomberg.net; Alison Fitzgerald in  
Washington at afitzgerald2 at bloomberg.net.
Last Updated: November 10, 2008 00:01 EST