The Fed Thumbs Its Nose at the Public
(Naked Capitalism) -- By Yves Smith and Tom Adams --
The Fed and its friends and enablers in power, most recently Rahm Emanuel, are fighting tooth and nail to beat back the Audit the Fed amendments to pending financial reform legislation.
That’s unfortunate and misguided. Even a cursory inspection of the Fed’s disclosures of its extraordinary rescue operations shows them to have been made only under duress, and then to be incomplete and deliberately unhelpful.
The reason this matters, is that, contrary to the Fed’s claims of independence, it has been operating as an extra-legal off balance sheet entity of the Treasury, circumventing normal Constitutionally-stipulated budget processes. And rather than make adjustments in its practices to reflect its enlarged and now overtly political role, the Fed has instead been engaging in cynical, blatant misrepresentation, giving lip service to the idea of greater transparency in public, while fighting disclosure tooth and nail.
Since the Fed has entered into an openly political stance (and this dates back to Greenspan) and cannot be relied upon to make truthful and complete disclosures, the only recourse is to put it on a much shorter leash, which includes greater scrutiny, including third party validation. The Fed has brought on the audit demands via the unabashed and repeated abuse of its privileged role.
The case study is its Maiden Lane disclosures. Readers may recall that the original Maiden Lane was a new entity formed to hold dodgy Bear Stearns assets, a backstop to induce JP Morgan to take the balance of the failed investment bank. JPM took a thin first loss position; the bulk of the capital came via a loan from the Fed, which means the Fed would lose money if losses exceeded the JP Morgan slice, which was a mere $1.15 billion out of $30 billion. Even though the backdoor subsidy to JP Morgan elicited a great deal of criticism, even from the normally taciturn Paul Volcker, the Fed was apparently so pleased with this idea that it used the same approach with AIG. The central bank created Maiden Lane II to hold dubious AIG mortgage assets, and Maiden Lane III for CDOs (alert readers may recall that Maiden Lane III was part of the mechanism that the New York Fed used to take various dealers that had credit default swap exposures to the Fed out at 100 cents on the dollar). All these vehicles are managed by BlackRock.
The Fed, aided and abetted by BlackRock, has long been publishing rosy valuations of the assets of the various Maiden Lane vehicles. Accuracy of valuation matters for a host of reasons. First, the public has a right to know how large the various government subsidies to the banking industry are, irrespective of Fed and Treasury efforts to camouflage them. Second, losses on the Fed’s accumulation of dreck may well rise to the level that it will require Treasury (meaning taxpayer) recapitalization of the Fed (the central bank can in theory “print” its way out of any shortfall, but as former central banker, now Citigroup chief economist Willem Buiter has pointed out, the Fed’s anti inflation mandate puts limits on how far it can go down that path). Third, this willingness to bend facts reveals troublingly cavalier attitude from a bank regulator. If the Fed thinks fudging its own marks is OK, it is likely to be unduly tolerant of truth-bending by the institutions it supervises...
The Fed is engaging in same practices that caused the crisis: failure to make timely disclosures, obfuscation, use of off balance sheet vehicles to distance itself from losses. This posture alone should disqualify the central bank from assuming a greater regulatory role.
The Fed and Treasury’s three card monte operation is anti-democratic and possibly illegal, and to add insult to injury, voters are treated as if they have no right to know when they are ultimately footing the bill. The Fed’s persistent stonewalling and deep seated hostility toward the public provide ample proof of the need for an audit...MORE...LINK
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