Federal Reserve Audit by GAO Finds Problems in Some Borrowers’ Collateral

An audit of the Federal Reserve’s emergency lending programs found discrepancies in 2 percent of the collateral pledged by borrowing institutions, an official with the U.S. Government Accountability Office said today.

“Some of it was MBS,” or mortgage-backed securities, Orice Williams Brown, managing director of financial markets and community investment for the office, told a House subcommittee. Still, “it cut across a wide variety of assets” and raised questions about whether borrowers had appropriately priced the collateral, she said.

The financial crisis, which began with the collapse of the subprime mortgage market in 2007, exposed a lack of transparency at the central bank that’s being mistaken for a need to remain independent, the subcommittee’s chairman, Republican presidential candidate Ron Paul of Texas, said in opening remarks. Today’s hearing focused on whether the Fed should still be audited and the lessons learned from the GAO’s report.

“More people now are starting to realize the Fed is truly not independent from influence,” the congressman said. “The Federal Reserve has said that independence must be protected at all costs. I usually think once there’s an emphasis on independence, it means secrecy for the Fed.”

The GAO report, released in July, made seven recommendations to Fed Chairman Ben S. Bernanke for improving central bank policies in areas that include conflicts of interest, risk management, and transparency.

The audit “was a fairly big undertaking,” Brown told lawmakers. While no “major concern” was found among the Fed’s loans, the GAO “did point out some of the loans being made raised issues about the collateral around the loans,” she said.

Paul, an advocate of limited government, has written a book titled “End the Fed.” In 2010, the House passed his legislation requiring audits of central bank interest-rate decisions. The Senate rejected the measure, and Congress ended up approving a compromise that required the disclosure of details of the Fed’s emergency lending and monetary-policy actions during the financial crisis.

To contact the reporters on this story: Vivien Lou Chen in San Francisco at vchen1@bloomberg.net;

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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