Macro Tsimmis

intelligently hedged investment

Dear Senator Burr: Audit the Fed!

Posted by intelledgement on Thu, 06 May 10

The Senate is currently considering financial reform. As we stated a couple of weeks ago, in discussing this topic:

We don’t much care for the concept of establishing a permanent mechanism to coddle “too-big-to-fail” companies, either. Management of these enterprises should not be operating with the presumption that they will be bailed out if they screw things up. Can you say “moral hazard”? In a world of transparent markets, stringent capital requirements, and firmly enforced rules against chicanery, it ought to be rare for management to run large enterprises into the ground…but when and if they do, let them fail! That is the way capitalism is supposed to work: if you succeed, you are rewarded; if you fail, smarter, more adaptable competitors will take advantage of the opportunity to win your former customers by serving their needs better. Propping up the failures is bad for everyone: bad for the customers who continue to get suboptimal service, bad for the competitors who are not rewarded for working harder and smarter, and bad for the failing organization’s personnel, who instead of moving on to something they can better succeed at are in effect bribed by government largess to persist to fail at something they are bad at.

Well, the cardinal mechanism for bailing out the “too-big-to-fail” institutions has been secret sweetheart deal loans of American citizen’s tax dollars via the Fed. It was taxpayer money loaned to AIG, for example, that enabled Goldman Sachs to collect 100 cents on the dollar to redeem the credit default swaps they had purchased from the insurer as a hedge against declines in the value of mortgage-backed securities, while other less well-politically-connected enterprises were getting 20 cents on the dollar for similar instruments from similarly compromised CDS sellers.

When the House passed their version of a regulatory reform bill (H.R. 3996), an amendment sponsored by Ron Paul (R-TX) and Alan Grayson (D-FL) was tacked on that would require the Fed to reveal these deals. That development has alarmed Ben Bernanke, Timothy Geithner, and the rest of the Goldman Sachs mafia, as they fear that revealing to the public how Americans are putting themselves and their children in hock to recompense incompetent bankers might make conducting such transactions problematic. Thus the Dodd bill as reported out of committee in the Senate lacked the Paul-Grayson amendment provisions.

Fortunately, several Senators have spoken out in support of auditing the Fed, and a vote on a parallel amendment to the Dodd bill is now imminent, despite continuing opposition from Bernanke, et al.

So, if you agree that adding to the public debt level of Americans (and their progeny) to make good the losses of Wall Street banks is a bad idea, you might consider so informing your Senator, which thanks to Alan Grayson, you can conveniently do here. And here is the letter that Richard Burr and Kay Hagan received from us:

I’m writing to urge you to cosponsor and vote for the Federal Reserve Transparency Amendment. This amendment will allow the American people to know to whom the Fed loaned trillions of dollars of our money. I am very concerned that the Fed is, in effect, obligating me and my children to cover the debts run up by irresponsible, antisocial Wall Street fat cats and foolhardy foreign bankers (and some credulous domestic bankers, too)! I don’t believe the American people would stand for bailing out these fools if the extent of what’s happening is made public. But if this amendment does not pass, the Fed can continue to make sweetheart loans to whomever it wants, without telling Congress or the American people.

There are a number of problems with the existing bill:

1) It does not allow audits of the mortgage backed security purchase program, a $1.25 trillion program that at this point comprises the bulk of the Fed’s balance sheet. This program includes Freddie and Fannie backed debt.

2) It does not allow audits of possible losses on foreign currency swap lines, of which there were more than $500 billion at the height of the crisis. This includes unlimited credit lines granted to central banks all over the world, solely through at the discretion of Federal Reserve and without the input of any elected official or the State Department.

3) It does not allow audits of open market operations, where there is ample room for errors, market manipulation, and insider trading violations.

4) It does not allow audits of possible losses on securities acquired through non-section 13(3) facilities. This includes looking for possible losses, seigniorage, political conflicts and costs to the Treasury.

In the existing bill, all audits must remain redacted. The GAO can’t even tell Congress to whom the Fed is lending money, the amounts it is lending, or any details about collateral or assets held in connection with any credit facility. The GAO can never release a full version of any audit unless the Federal Reserve first chooses to shut down the audited credit facility.

The Federal Reserve Transparency Amendment that I am urging you to support does the following:

1) Requires the non-partisan Government Accountability Office (GAO) to conduct an independent and comprehensive audit of the Federal Reserve within one year after the date of enactment of the financial reform bill;

2) Requires the GAO to submit a report to Congress detailing its findings and conclusion of their independent audit of the Fed within 3 months; and

3) Requires the Federal Reserve within one month after the date of enactment to disclose the names of the financial institutions and foreign central banks that received financial assistance from the Fed since the start of the recession, how much they received, and the exact terms of this taxpayer assistance.

4) Does not interfere with or dictate the monetary policies or decisions of the Federal Reserve.

As you know, the House passed a similar amendment to HR 3996. Now is your chance to act, and to make a positive difference in our lives and the lives of future Americans. I urge you to cosponsor and vote for the Federal Reserve Transparency Amendment.

Thank you for your time and consideration.

3 Responses to “Dear Senator Burr: Audit the Fed!”

  1. BREAKING NEWS – SPN Headlines – New Financial Reform Bill to Regulate Hedge Trimmers, Not Hedge Funds:

    Keep smiling! 🙂

  2. Great segment from a Dylan Ratigan show earlier this week summing up what’s at stake with the Senate votes on amendments to the Dodd financial reform bill, including a handy scorecard you can use to see whose side your own senators are on:

  3. Unfortunately, the latest development is that it appears Bernie Sanders’ brain has been captured by agents of the evil vampire squid and he has agreed to gut his own amendment:

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