By: Art Levine – Truthout Report
The fight by financial reformers to hold the secretive Federal Reserve accountable for its role in allowing Wall Street and big banks to spiral out of control - and then keeping secret how it bailed them out - faces its first major test today. The House Financial Services Committee will consider two competing amendments on auditing the Fed.
They can't come too soon. Earlier this week, for instance, Citizens for Ethics and Responsibility in Washington (CREW) even filed a lawsuit over the Fed's continuing refusal to disclose the financial institutions that have received federal funds in the last six months - and the terms, if any, of federal assistance.
One audit proposal offered by Reps. Ron Paul and Alan Grayson has garnered the backing of the leading reform coalition, the 200-group Americans for Financial Reform and over 300 House co-sponsors for an earlier version. The amendment by the libertarian Republican Ron Paul and Rep. Grayson demands unprecedented auditing of the Fed's actions and public exposure of which financial institutions get its money. As Heather Booth, the director of Americans for Financial Reform, puts it, "We need an audit of the Fed to examine what was the mismanagement of the economy before the meltdown, to look at the role of Chairman Benrnanke - and to see who has gotten what from the Fed and what they're doing with it."
She adds, "We know that lending isn't happening and bonuses continue to go up. So what's happened to the money?" Indeed, the $700 billion Wall Street bailout engineered by the Fed and Treasury Department is only a relatively small portion of $17.5 trillion in guarantees, loans and giveaways, as compiled from government documents by Nomi Prins, the investigative author of It Takes A Pillage.
The other Fed audit bill, offered by the liberal North Carolina Democrat Mel Watt (generally considered a "friend" of reform by Booth), considerably narrows the scope of any Fed decisions the General Accountability Office (GAO) could review. It also delays for at least a year disclosures of which financial institutions have received funds.
The reason for the more limited oversight in the Watt amendment is to protect the Fed's much-vaunted independence and avoid the dangers of Congressional politicization, Congressional supporters say. "It's already politicized," Booth counters. "The banks run it." Indeed, even the audit proposals under consideration don't change the governance of the Fed to make it more democratic and accountable.
The Watt amendment has been denounced by some watchdog groups, liberal economists and the progressive blogosphere as a sell-out designed to weaken oversight and draw votes from the tougher Paulson-Grayson amendment.
Dean Baker, the liberal economist, sarcastically declared in a column at TPM Cafe:
Representative Mel Watt (D-NC) is out to protect the independence of the Fed from the risk of an intrusive audit from the Government Accountability Office (GAO). The risk comes in the form of a bill initiated by Ron Paul and Alan Grayson that calls for an audit of the Fed. The bill, which now has more than 300 cosponsors, would allow Congress to find out to whom the Fed lent more than $2 trillion through its special lending facilities, and under what terms. Congress would also be able to find out which countries were allowed to take advantage of dollar swaps at the peak of the financial crisis last fall.
Allowing our elected representatives to know what our central bank (the Fed) is doing with our money might seem reasonable, but not to Mr. Watt. He has proposed an alternative which would keep this information secret. According to Mr. Watt, the prospect of a full GAO audit poses a huge risk to the Fed's independent conduct of monetary policy.
It is not clear how a GAO audit precludes Fed independence, but we should know exactly what we could be putting at risk...
We would not be sitting here in the wreckage of an $8 trillion housing bubble, with 10.2 percent unemployment and 2 million foreclosures a year, without the Fed's independent monetary policy. We would not have seen the projections of debt soar by $6 trillion at the end of the next decade without the Fed's independent monetary policy.
Watt, in turn, has circulated a letter to colleagues under the headline "Increase the Transparency of the Federal Reserve," claiming, "While my amendment will certainly fall short of demands by those intent on destroying the independence (if not the existence) of the Fed, the critics of my amendment will have to concede... that my amendment will provide transparency of the Fed's financial operations that will be completely unprecedented."
But critics don't concede that, as the Huffington Post first reported, asserting that his amendment has exemptions that would limit the ability to examine such vital Fed functions as loans and liquidity arrangements. Under the Watt amendment, auditors would even be barred from examining such loans' impact on "reserves, the balance sheet or financial condition of a Federal reserve bank or the Federal Reserve System."
Moreover, the case for the Paul-Grayson amendment was underscored in a letter sent to the committee members on Wednesday by Americans for Financial Reform, signed by such leading member groups as the AFL-CIO and Public Citizen. "This audit would shed light on questions the Fed has so far refused to answer, including the names of financial institutions that have received special loans and the conditions under which those loans were made," the supporters said.
But Paul's backers also note the revisions that have been made to calm the concerns of Fed Chairman Ben Bernanke that too much internal decision-making would be exposed, although he also rejects the whole notion of any meaningful auditing oversight. "To shield policy discussions from political influence, the amendment exempts transcripts or minutes of meetings of the Board of Governors or the Federal Open Market Committee. It also provides for delayed release of audit information dealing with individual market actions," the reformers said.
Even so, Bernanke's attitude towards disclosing virtually anything the Fed does has essentially been to tell Congress to buzz off. Bernanke had told PBS, " "I don't think the American people want Congress running monetary policy." Maybe not, but they certainly want someone to look at the Fed's books as populist rage at the failures and waste of the bailout boondoggle have skyrocketed.
Indeed, the Senate and House are at odds over how much power to give the controversial Fed. The original Obama administration and Barney Frank reform proposals have aimed to strengthen the general regulatory role of the Fed (with the exception of supporting an independent consumer protection agency), while the Senate reform proposals under Sen. Chris Dodd (D-CT), have gone in the opposite direction. They seek to strip the Fed of much of its oversight role over banks and replace that function with a new super-agency.
All this comes at a time when the House Financial Services Committee is poised to finish its work on a package of reforms that could change the oversight of the financial industry. These range from loophole-laden derivatives reform to yesterday's backing of the power to break up firms that are "too big to fail" to a new consumer financial protection agency. Progressives critics contend, though, that many of the bills still haven't gone far enough, although liberals hailed the passage of the break-up power granted yesterday.
Previously, breaking up the big financial institutions if needed, favored by former Fed Chairman Paul Volcker, was just another item on the wish list of progressive bloggers and columnists such as Paul Krugman. It still doesn't mean that legislators are bringing back the repealed Glass-Steagall law that separated commercial banking and riskier investment divisions. Yet even a few months ago, with the Obama administration and Treasury Secretary Tim Geithner opposing measures to preemptively shut down dangerous financial giants, few imagined we'd be reading stories like this in today's newspapers (via the Los Angeles Times):
Reporting from Washington - A House committee voted Wednesday to give the government extraordinary new power to break up large financial firms that pose a potential risk to the economy.
The proposal by Rep. Paul E. Kanjorski (D-Pa.) would allow regulators to break up such big companies before their failure becomes imminent. It goes beyond the powers requested by the Obama administration to seize large firms on the brink of failure should their collapse threaten to damage the wider financial system.
"I recognize this is extraordinary power. Hopefully it will never have to be used," Kanjorski said. It would be used only if other regulatory measures did not reduce the potential threat of "huge, megalopolis-like" companies failing, he said.
A new council of financial regulators would have authority to dismantle large operations. Under the plan, the forced divestiture of assets worth more than $10 billion could not take place without the Treasury secretary's approval. The forced divestiture of more than $100 billion would require consultation with the president.
The House Financial Services Committee voted 38 to 29 to add Kanjorski's proposal to legislation that would grant federal regulators so-called resolution authority to dissolve large financial firms teetering near bankruptcy.
If passed into law, the measure would render moot the controversy over the concept that some companies are too big to fail.
And, strikingly, with pressure from tough-minded regulators such as Sheila Bair of the FDIC and liberal advocacy groups, even the bills that contain industry-friendly loopholes have been strengthened in several ways in recent weeks. "Organizing works," says Heather Booth. These improvements include closing a loophole exempting foreign-traded derivatives from oversight. Moreover, Truthout has learned, an amendment being backed by Barney Frank will be introduced today that would force major financial institutions to pay up front a total capped at $200 billion for a "resolution authority," likely managed by the FDIC, to shut down huge failed companies.
That latter major pay-ahead reform is a direct result of the case made by Bair in toughening the resolution authority, so the federal government wouldn't have to essentially go begging to Wall Street firms to pay for winding down a competitor after it failed. As Bair said in testimony in October:
To be credible, a resolution process for systemically significant institutions must have the funds necessary to accomplish the resolution. It is important that funding for this resolution process be provided by the set of potentially systemically significant financial firms, rather than by the taxpayer. To that end, Congress should establish a Financial Company Resolution Fund (FCRF) that is pre-funded by levies on larger financial firms -- those with assets of at least $10 billion.
The systemic resolution entity should have the authorities needed to manage this resolution fund...We believe that a pre-funded FCRF has significant advantages over an ex post funded system... it avoids the pro-cyclical nature of requiring repayment after a systemic crisis.
As a result of such advocacy, the scope of proposed reforms is striking, though long overdue and hardly yet law in the face of strong industry opposition.
The biggest remaining problem, reformers say, is what they see as the weak, but improving, House approach so far to monitoring derivatives such as the shady "credit default swaps" - the bets that blew up Wall Street.
Even worse, The Nation magazine's William Greider has reported, key portions of the House Financial Services Committee's derivatives bill exempting certain businesses and trades from being monitored were apparently written directly by industry, although the hard evidence for that still isn't clear. Some House staffers also challenge that notion of industry influence: "We could give two shits what the big banks say," one aide says.
Neverthless, The Washington Post, even if a bit breathlessly, reports today on the ambitious proposals moving through Congress:As lawmakers on Capitol Hill inch closer toward overhauling the nation's fractured financial regulatory system, each hour of debate, each tweak of legal language, each tedious roll call carries the potential to generate colossal changes in the relationship between Washington and Wall Street.
One proposal, spearheaded by Rep. Ron Paul (R-Tex.) would usher in unprecedented scrutiny of the Federal Reserve by allowing auditors to examine every aspect of the central bank's actions. That measure could come to a vote in the House Financial Services Committee on Thursday, though its prospects for success remain uncertain.
Another provision, pushed by Rep. Paul E. Kanjorski (D-Pa.), would empower federal regulators to dismantle financial firms before they grow so large that their failure could endanger the entire financial system -- even if those firms appear to be healthy and well-capitalized.
The proposals are among scores of ideas floated on bill after bill in recent months. Thus far, Rep. Barney Frank (D-Mass.), the chairman of the House Financial Services Committee, has steered his version of financial reform through that legislative minefield, navigating past Republican opposition, unrelenting pressure from industry lobbyists and consumer advocates, and occasional discord among some Democrats -- all while trying to emerge with a bill that can both pass the entire House and still resemble the original blueprint.
He is moving closer to that goal.
Frank's committee so far has approved legislation to create a new agency to oversee mortgages, credit cards and other loans to consumers, as well as measures to oversee the largely unregulated derivatives market, improve investor protections and impose stricter rules on credit-ratings agencies.
Each issue required noteworthy concessions, always with the endgame in mind.
Yet that endgame won't be good enough if the final result is reform in name only. So while mainstream advocacy groups continue to press for tougher oversight, they also don't want to alienate potential Congressional supporters by denouncing legislators too harshly. Such pragmatic concerns don't worry critics who are still troubled by the shape of emerging legislation. As Greider said in a new column attacking the hypocricy of Goldman Sachs:
Goldman and the other big dogs of Wall Street are afflicted with the stink of greed, having harvested swollen fortunes from the calamity they caused for the rest of the country. [CEO of Goldman Sachs Lloyd] Blankfein made it worse by recently telling a British interviewer that, when you consider all the good things Goldman Sachs does for the economy, "we're doing God's work." God evidently rewards such good works up-front. Goldman executives expect to collect more than $20 billion in bonuses at year's end. The rest of the economy is still waiting for its reward.
To soften the sting, Blankfein announced the firm will devote $500 million to assist small businesses, either as loans or grants to help the little guys learn better managerial skills. More to the point, Blankfein spoke the words that financial titans have avoided. "I apologize." The firm, he acknowledged, did some bad stuff, though he did not say what...
Wall Street is belatedly responding to its public relations problem. But this is really a political problem because public anger is gathering force and focus and scaring the bejeesus out of Washington pols...
If Wall Street wants really to win back public respect, there is a more substantial gift it can make that does not involve money. Goldman Sachs and the other banking behemoths can take their foot off the Congress and free servile politicians to enact true financial reforms. Call off your lobbyists, let democracy function in behalf of the public interest, not yours.
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