Senator Drops Proposal to Audit Fed’s Monetary Policy Decisions

Senator Bernard Sanders dropped a proposal to audit the Federal Reserve’s monetary policy that the central bank had said posed a threat to its independence, broadening support for greater central bank disclosure.

The Vermont independent narrowed the scope of an amendment to financial-overhaul legislation to “a one-time audit of all loans and other financial assistance,” starting in December 2007. He also included a review of how regional Fed bank directors are appointed.

Senate Banking Committee Chairman Christopher Dodd threw his support behind the revised legislation after opposing previous versions that called for broader audits of the Fed’s decisions. Senators are debating the most sweeping overhaul of financial regulation since the Great Depression.

“There was a concern about whether or not the independence of the Fed in any way would be compromised, and he has guaranteed with his language here that that is no longer an issue whatsoever,” Dodd, a Connecticut Democrat, said from the Senate floor yesterday. Republicans Charles Grassley of Iowa and Sam Brownback of Kansas also voiced support.

Calls for greater transparency by the Fed have been sparked by its use of emergency powers to help rescue financial firms during the crisis. The central bank in 2008 used its balance sheet to purchase nearly $30 billion in high-risk assets to facilitate Bear Stearns Cos.’ merger with JPMorgan Chase & Co.

The new version of the amendment “deals with areas where the Fed has ventured into fiscal policy,” said Sarah Binder, a senior fellow at the Brookings Institution in Washington. “It makes it harder for the Fed to say this is an area where we need independence.”

Sixty Votes Needed

“My assumption is this really puts it over 60 votes” needed to win passage of legislation in the Senate, she said.

Federal Reserve Chairman Ben S. Bernanke opposed earlier versions of the Sanders amendment, saying in a letter released yesterday that it could “seriously threaten” monetary policy independence, fuel concerns about inflation and damage economic stability and job creation.

Sanders pushed back against critics in remarks on the Senate floor.

“This does not tell the Fed when to cut short-term interest rates and when to raise them,” Sanders said. “What the opponents of this amendment are doing is equating independence with secrecy, and there is a difference.”

As the financial crisis intensified, the Fed used the Depression-era authority to provide billions in backstop credit to U.S. corporations, bond dealers, and insurer American International Group Inc. Demand for the special lending facilities waned as financial markets improved, and the Fed closed four of them on Feb. 1.

Collateral Policies

The Sanders amendment specifies that the Government Accountability Office will look into whether taxpayers were protected by collateral policies, whether there were conflicts of interest, and whether any of the facilities “inappropriately favors one or more specific participants.” The GAO will also look into how Fed regional directors are appointed.

The amendment also requires the Fed to publish the names of institutions that received assistance from Fed emergency facilities by Dec. 1.

Bernanke already said he would support such legislation during his February semi-annual testimony to Congress.

Operational Integrity

“We would support legislation authorizing the GAO to audit the operational integrity, collateral policies, use of third-party contractors, accounting, financial reporting, and internal controls of these special credit and liquidity facilities,” Bernanke told legislators. “We are also prepared to support legislation that would require the release of the identities of the firms that participated in each special facility after an appropriate delay.”

Bernanke in the same testimony said the anonymity of banks borrowing from the Fed’s discount window, which isn’t an emergency facility, must be maintained. Otherwise, he said, banks would be reluctant to borrow from the Fed. The Sanders legislation appears to limit disclosure to borrowers of emergency facilities only.

Bloomberg LP has sued the central bank to release records of discount-window loans following a request under the Freedom of Information Act. The U.S. Court of Appeals in New York ruled March 19 that the Fed must release the records.

The Federal Reserve Board asked the appeals court this week to reconsider the March 19 ruling. If the court refuses, the Fed can appeal to the U.S. Supreme Court.

Deputy Treasury Secretary Neal Wolin welcomed the revised Senate measure, saying it preserves central bank independence while throwing its operations open to greater public scrutiny.

“We appreciate the work of Senator Sanders and Senator Dodd to work together on a strong amendment that ensures full and open transparency regarding emergency lending programs, without compromising the Federal Reserve’s full independence with respect to the conduct of monetary policy,” Wolin said in a statement.

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