The chairman of the House subcommittee that oversees the Federal Reserve demanded Tuesday that the Fed fully disclose details of billions -- perhaps trillions -- in secret emergency loans it made to almost every major bank in the U.S. and overseas during the financial crisis or face a congressional subpoena for the information.
In an interview with Fox Business, Rep. Ron Paul (R-Texas), chairman of the House Financial Services subcommittee on domestic monetary policy, said he wants to know “how much, when, where and why” from Fed officials when they testify about the loans at a subcommittee hearing Wednesday.
“We’re going to get to the bottom of what the Fed did during the big bailout a couple of years ago,” Paul said. “We have some precise questions. I imagine we won’t get all of them answered tomorrow because they’ll do a little bit of stonewalling, I’m sure.”
“If they don’t answer, they’ll hear from us,” he said. “We can use the subpoena power and say, ‘Look, you have to bring us the records.’ ”
The big loans started in 2007 and were disclosed in April under Freedom of Information Act requests by FOX Business and Bloomberg News after a two-year legal battle with the Fed and banks by the news organizations.
The loans came through the Fed's nearly 100-year-old confidential emergency lending program called the "discount window," in which the central bank provides funds to banks as the financial system's "lender of last resort" when firms can't borrow from each other or elsewhere.
More than 25,000 pages of previously-secret Fed discount window reports indicated most of the loans went to help many large U.S. banks, including Citigroup, Bank of America and JPMorgan Chase (NYSE:JPM), as well as many regional and community banks. They were short-term loans of one to 90 days.
But the day such loans peaked in October 2008 at $111 billion, records show about half the total went to two big European banks -- Belgium's Dexia and Ireland's Depfa -- as one-day overnight loans. Many more familiar foreign banks, from Barclays in Great Britain to Deutsche Bank (NYSE:DB) in Germany, borrowed as well.
“The most astounding thing we see in these documents is so much of it went to foreign banks—the whole system was bailing out foreign banks,” Paul said. “It’s a bit shocking on how big a deal this is and how much money was involved…The shenanigans are very international.”
Paul, a longtime Fed critic and a 2012 Republican presidential candidate, said he would wait until he knows more about the loans before he considers proposing any new legislation to expand audits of Fed operations or to force greater Fed disclosure about such lending--or even future limits on it.
“It’s ripe for reform, but I think transparency is the first step,” he said. “The (Fed’s responses to) written questions are going to be very important, the follow up’s going to be very important, so this is really just the beginning.”
In announcing the hearing, the Financial Services Committee suggested it was pushing the Fed for more voluntary disclosure about discount window operations. “The hearing will also explore how the Fed plans to disclose such information in the future,” it said.
Fed loans to foreign bank loans through the discount window are legal under U.S. law because the banks operate U.S. branches regulated by the Fed and make U.S. loans.
In April, the Fed declined to comment on the documents it released. But its records show the emergency loans were collateralized in full and have since been repaid.
Until April, details of discount window lending for all banks, foreign and domestic, had been private because the Fed and banks worried that naming firms that borrow for emergencies could scare customers, stigmatize banks, cause bank "runs" and hurt the financial system.
Under financial reform legislation Congress approved in 2009, the Fed disclosed details of $3.3 trillion in emergency lending through more than half-a-dozen temporary rescue programs it has since ended. The legislation also requires the Fed to now disclose discount window loans after two years.
It was unclear from the FOIA documents how much discount window lending totaled during the financial crisis. The Fed released copies of largely-unedited reports listing tens of thousands of individual transactions. Paul said the staff of his subcommittee had not totaled the loans itself in part because of the “complexity of it all.”
A Fed spokesperson said that the central bank welcomed the opportunity to discuss how the Fed informs lawmakers and the public about its policies and actions and that it releases "significant, detailed" information about its operations on a regular basis. The spokesperson said the Fed wants to promote understanding of how it fosters financial and economic stability and to facilitate an evaluation of its actions while also preserving the ability to fulfill its Congressionally-mandated responsibilities.
Scott Alvarez, the Fed’s general counsel, and Thomas Baxter, general counsel of the Federal Reserve Bank of New York, are scheduled to testify at Wednesday’s hearing, which is titled “Federal Reserve Lending Disclosure: FOIA, Dodd-Frank, and the Data Dump.”
In a May 25th statement announcing the hearing, the chairman of the Financial Services Committee, Rep. Spencer Bachus (R-Ala.), said, “Many of the actions taken by the government in response to the financial crisis took place behind closed doors with little, if any, information provided to the public. These actions demonstrated to many of us that the Federal Reserve was in need of transparency and accountability. Now that the Fed has released information on its actions during the financial crisis, it is important for the Committee to examine the disclosures by the Federal Reserve and ensure taxpayers are protected. This subcommittee hearing is a step towards ensuring transparency and accountability at the Federal Reserve.”