“This makes it clear that the Fed can no longer operate under the kind of secrecy it has been operating under,” said Sen. Bernie Sanders, I-Vt., the measure’s author.
The legislation is attached to sweeping bank-reform legislation under consideration on Capitol Hill. It would need to be reconciled with a more expansive audit-the-fed provision approved in the House last December.
The Senate measure would — for the first time in the central bank’s 95-year-history — require a Government Accountability Office audit of the financial institutions that borrowed from the Fed during the financial crisis.
In addition, the legislation would require the Fed on Dec., 1, 2010, to put on its Web site all of the recipients of the central bank’s emergency assistance between December 2007 and the date of the statute’s enactment.
Sanders agreed to make several changes to the legislation to garner the support of the Obama administration and wavering senators who had concerns with the original measure. With the changes, Sanders obtained the support of Senate Banking Committee Chairman Christopher Dodd, D-Conn., which he said was important to bringing on board other senators needed to obtain the 60 votes necessary for passage.
The legislation originally would have left open the possibility of future audits, however, Sanders eventually compromised to stipulate that it would be a one-time audit. The measure’s house counterparty, which was introduced by long-time Fed opponent, Rep. Ron Paul, R-Texas, permits continuing periodic audits.
The Senate measure originally would have required the names of bank recipients of the Fed’s emergency lending to be posted within 30 days of the reform bill’s approval, but the section was later changed so that the names need only be posted on Dec. 1, 2010. The original measure would have required posting of names annually.
With the compromise language, the GAO is also prohibited from conducting studies on the Fed’s interest rate policy. This change was in response to concerns from the Fed and others that such studies would impact the central bank’s independence when it came to monetary policy such as whether to raise or lower interest rates.
It also prohibits the GAO from auditing the Fed’s so-called normal discount window lending. However, it does permit an audit of the discount window emergency lending programs, such as Term Asset-Backed Securities Loan Facility, in response to the financial crisis. The discount window is a government lending facility through which commercial banks and, in response to the crisis, investment banks borrowed reserves.
The GAO would be required to begin its Fed audit within 30 days of enactment and completed within a year.
The House measure’s language is much shorter, yet in its brevity it gives the GAO leeway to conduct continuing periodic audits of a wide-range of issues beyond the Fed’s financial crisis response.
The Senate bill is more specific. The House bill says the GAO “may” post the names of recipients of Fed emergency loans where the Senate bill requires the GAO to do so. The Senate measure instructs the GAO to look into conflicts of interest at the Fed, while the House bill doesn’t provide any such instructions.
The measure has the backing of senators with wide-ranging political backgrounds, including Sam Brownback, R-Kan., and Charles Grassley, R-Iowa. It seeks to make clear that the audits won’t interfere with the Fed’s monetary policy.
Backers pointed out that no scrutiny would be placed on transcripts and minutes of the Federal Open Market Committee meetings, through which the central bank sets policy on interest rates.
“We should allow the GAO to audit the Fed since they have moved far beyond their traditional role of monetary policy,” said Grassley.
The Fed has argued that it would weaken its traditional independence and hamper its ability to protect the financial system. The central bank argues that institutions would be afraid to borrow from the discount window when they need to because they would be stigmatized as troubled firms, and the result would be a more troubled economic situation.
The Senate is expected next to vote on a controversial measure introduced by Sen. John McCain, R-Ariz., that would end the government’s control of mortgage finance giants Freddie Mac and Fannie Mae within two years of the enactment of the overall bank reform legislation.
Fannie and Freddie have been under government control since September, 2008. The measure, which has broad Republican support, would cap the amount of assets held on the entities books to 95% of the mortgage assets it owned at the end of the prior year. The measure would also have the entities pay state and local taxes.
However, Dodd is opposed to the measure arguing it is reckless because it doesn’t provide any alternative structure for the entities.