Senators Byron Dorgan and Charles Grassley plan to propose an amendment to financial reform legislation requiring the Federal Reserve to disclose the terms and recipients of its loans during the credit crisis.
“The Fed has gone beyond what was viewed as its historical authority in the last two and a half years without any transparency or accountability,” Grassley, an Iowa Republican, said yesterday in a press release. “Our amendment changes that by making the Fed’s emergency loan authority subject to the light of day.”
The central bank loaned to dozens of banks, U.S. corporations and bond dealers during the financial crisis through programs designed to provide liquidity backstops. The Fed, by withholding the names of borrowers and the type of collateral they offered, has raised questions about whether the central bank kept insolvent firms afloat.
A report by Lehman Brothers Holdings Inc. bankruptcy examiner Anton Valukas said the investment bank created securitizations for one of the Fed’s emergency programs known as the Primary Dealer Credit Facility “with a view toward treating the new facility as a ‘warehouse’ for its illiquid leveraged loans.”
The U.S. Court of Appeals in New York ruled March 19 that the Fed must release records of the unprecedented $2 trillion U.S. loan programs launched primarily after the 2008 collapse of Lehman. The ruling upheld a decision of a lower-court judge who in August ordered that the information be released.
The Fed argued in the case, which was launched by Bloomberg LP, the parent of Bloomberg News, that disclosure of the documents threatens to stigmatize borrowers and cause them “severe and irreparable competitive injury,” discouraging banks in distress from seeking help. The appeals court panel rejected that argument.
“The American people are entitled to know where these dollars have gone,” Dorgan, a North Dakota Democrat, said in the joint press release. “The Fed refuses to disclose this information to the American people, so we are taking congressional action to determine how the Fed has used these trillions of dollars.”
The Federal Reserve Board asked the appeals court this week to reconsider the March 19 ruling requiring the agency to disclose documents identifying financial firms that might have collapsed without the largest U.S. government bailout ever. If the court refuses, the Fed can appeal to the U.S. Supreme Court.
“The decision is of exceptional importance,” the Fed’s lawyers wrote in a legal brief. “The real-world consequence of the panel’s decision will be serious, perhaps irreparable harm to the institutional borrowers whose information will be revealed.”
The Dorgan-Grassley amendment says that within 60 days after the passage of financial reform legislation the Fed must provide the names of financial institutions that received assistance over the past five years, terms of the loans, and a “full description of any collateral required by the Board of Governors.”
Bloomberg, majority-owned by New York Mayor Michael Bloomberg, sued after the Fed refused to name the firms it lent to or disclose loan amounts or assets used as collateral under its lending programs. Most of the loans were made in response to the deepest financial crisis since the Great Depression.
Lawyers for Bloomberg argued in court that the public has the right to know basic information about the “unprecedented and highly controversial use” of public money.