Fed Res House Fin 9/25
House Financial Services Committee Hearing Sept. 25
9 a.m., Friday, September 25, 2009, 2128 Rayburn House Office Building
Witness List & Prepared Testimony:
- Mr. Scott G. Alvarez, General Counsel, Board of Governors of the Federal Reserve System
- Mr. Thomas E. Woods, Jr., Ludwig von Mises Institute
- Henserling credit cards, mortgages, executive compenstion... powers must be constrained... serial institutionalized bailouts... need a Fed Res tied to monetary policy
- Grayson 292 cosponsors new model of bipartisanship introduced in 1983...Fed needs to be accountable to the American people
- Bachman section 13-3 AIG $150 B allow Congress to dispute an use of that power
- Frank -- should put constraints on the emergency powers of the Fed, FedRes in 2008 were their consultation with the administration over Bear Stearns and AIG? How would you characterize the discussions about 13-3.
- Alvarez -- many conversations with Paulson at the time.
- Frank -- Independence... took these extraordinary steps at the urging of the Bush
- Alvarez -- 13-3 for BS AIG BofA we think
- Frank... no resistance to oversight of specific actions under 13-3... need time lag for showing actions for open window market activities... maintain market integrity...
- Bauchus -- July we introduced HR 3310 ... within that bill is 1207 in entirety ...and we address 13-3 ... should look at Repub plan for reform #4 on Fed Res
- Paul -- Mr. Alvarez you mention the independence of the Fed and you talk about the private interest (page 1 of testimony) we are elected to protect the public and the idea that 12 individuals that work behind the scenes
- Alvarez --- we are not doing this alone we are doing this with other agencies... for monetary policy to be most effective had to be free from political considerations.. GAO are policy reviews not audits like a accounting... that would underrmine the ability of the markets to trust our efforts and make it more difficult
- Paul -- what information you don't want us to have?
- Alvarez -- we provide substantial information about facilities, collateral
- Frank -- exactly
- Alvarez -- GAO..
- Frank no types of information that would be damaging
- Alvarez --GAO second guessing of the policy
- Frank... that is an inadequate answer
- Watt -- ability to set in a room and not be revealed the next day -- Brian Demico of my district keeps contacting me about about Rep Castle's look at the Fed's website for what is already up... delighted to hear the emergent consensus to do this as part of the regulatory reform.. the difference between a CPA audit and a GAO audit?
- Alvarez -- Our accounting statements are audited by an accounting firm... GAO has access to all information about the agency and can make policy recommendations.... meant to be a policy guide
- Neugenberger -- what information not telling us? it's like a doctor not telling the patient
Al -- internatl discussions not be revealed... monetary policy depends on the markets understanding what direction the Fed is going ...
Neu --$2 trillion balance sheet and Treasury recommends additional to be systemic risk regulator we have the Fed coming to us saying we don't want to have full disclusre... international currency swap arrnagemetns do we require that these govs buy treasuries...people are very concerned about these actions... better job of articulating... it brought confidnece when the market knew a bank was receiving assistance... hard time understanding
Al -- foreign FX swaps... list countries and the amount outstanding and the terms and conditions we revise as amount drawn... our balance sheet... most is gov securities and listed in detail on our balance sheet...
Moore --- what risks US taxpayers take on when you lend 13-3 what collateral do you expect the Fed to lose any money?
Al -- 13-3 lending is secured and our adviros who monitor on a regulat babis we expect to be fully repaid ... types of collateral is fully described in reports... variety of collateral
Moore -- 385 have signed petition to maintain independence of policy setting
Al -- unfettered debate is vital
Moore -- 1207 what effect on economy and financial stability
Al -- 1207 would require an immediate on monetary policy... the markets would have confusion over policy and would make setting policy for full employment more difficult
Castle -- I understand their information on their website we want independent analysis... looking at additional information... expoloring ways to continue transparency... beyond what has been done so far... what areas looking at..
Al -- increaswed substantially the the amount of information that wee are releasing
Al - how much information abot borrowers make available... operations..
Castle -- disclosure of information any loses paid for by taxpayers.. how much congressional oversight of the institution is appropriate?
Al -- Cong oversight to the extent athat thte GAO is part of that we would like to continue to work with Congress implentation policy
Castle -- 13-3 power on lending... encourage discussions on transparency... need for this and transparency...Fed Res continue to llok at it
Sherman -- nobody inmy district thinks the Fed has done such a great job that we should protect them from critisism... 13-3 let's say next year the entire Fed Res board Congress would pass Tarp 2 if you don't agree that we can invest in no risk instruments and singe A could 13-3 be used to make single A collateral loans...
Al -- some rated and unrated securities
Sher --- do you have to be fully insured...
Al -- secured to our satisfaction...
Sher -- it is aloan that is not fully insured under a liberal interpertion under 13-3
Al --- would it be possible to feel secure without 100% collateral ... guarnateed repayment sometime credit is guaranteed by a third party...
Sher -- some loans would significantly less than loans for libor or libor +1 be allowed you might allow them to buy a $1 trillion of junk bonds
Al -- if they thought they would be repaid yes...
Sher -- have to be in a position to be fully repaid...
Paul -- license to spend and Fed has been politized to fund wars and welfare state...mandate was full employment and low interest rate... 21% interest rate and inflation... full employment and employment of 16%... more oversight and transparency... not more secrecy... what example has the GAO of influencing policy... foreign activity... they are essentially treaties with other entities
Cleaver --lunch with the chair of the Kansas City Fed and we had an interesting conversation... how many people walking by here can make 2 sentences about what the Fed does... none he said... most people have no understanding... not defending the Fed... when the bailout happens that sours the opinions of the people and the Congress... we did not specifically vote to give money to the banks... then how did the banks get the money.. we bailed out the banks.
Al -- Treasury in a better position to discuss that program.... those funds would be used to buy troubled assets... in Oct we realized it would take a long time to do that... economy struggling and confidence in the banking industry need to be restored... most efficient to inject capital in the industry... being repaid with interest...
Cleaver --- the funds that you earn return to the US Treasury...
Al- all monies we return to the Treasury
Garrett -- monetary policy issues and everything else... you have worked with the adminstration on those polices and the Fed has tried to respond and an Ok thing Frank on credit lending practices.. new guidelines on credit cards... it is the monetary policy that this legislation covers... the audit doesn't say if you have a meeting on Monday then they release it on Tuesday
Al -- the time frames would be responsive to what the Congress wants... it is not about the timing of the release of the audit... the audit would respresent an intrusion int he the making of policy... its report would be a judgement if the Fed
Garrett -- we have authority right now to second guess
Al- GAO much more intrusive process talk to all the participants and look at underlying that review gives it a different aura
Garrett-- if they the Governors are as independent as they say they are why
Al -- do their best in unfettered discussion allowed they would become worried about what they say
Foster -- historical archiving of data and good policy for history to look... email between 2 people
Al -- we have policies for email and memorandum and complete transcript make available afterr 5 years
Foster -- will all that be available to historians after 20 30 years
Al -- depends on the type of information
Foster -- less formal info... any delibaretly destroyed...
Al -- any that archivist thinks can be destroyed...\\
Foster -- please provide general guidelines
Bachman -- update on the Bloomberg matter
Al -- Bloomberg and Fox cases ... identical issues... one says should be released and one not second circuit appeal
Bachman -- share prices of Citi and etrade increased after support known
Al -- used by healthy insitutions to unfreeze markets... CP and TALF faciliities... they would be viewed as unhealthy... we help troubled and untroubled
Bach 13-3 some disagreement of opening the discount window for the first time?
Al -- in the 1930's not to investment banks... TSLF and Bear
Bach -- concerns about BS and investment banks Congress revisit and tighten up the language of 13-3 Fed seems to have the power to do whatever they want would it be prudent
Al -- 13-3 lending are subject to GAO audit... whether the Fed should continue if resolution authority should be enacted... some revision to 13-3 would be appropriate
Frank --- we have had 28 appreances of the Fed officials
Wilson -- primer on the bank who many banks and governors
Al -- 12 banks...
Wilson -- bd of govs?
Al -- bd selected by the president and president of the banks chosen by the bank board ad approved by board in DC
Wilson --- 13-3 unudual and exigent
Al - 5 members of the board in DC vote secured to their satifaction that other credit accomendations are not availalbe..
Wilson --- did that happen in Bear Stearns describe what happened in that process?
Al -- 5 govs extension of credit for BS all on phone the night before discussing market conditions and condition of BS convened boad meeting only 4 govs available ... Lehman constant updates.. days leading up we had a number of conference
Henserling -- potential increase borrowers fears... for TARP no fear of lining up... beneficial aspect
Al -- TARP CCP program cap injection was presented as a confidence injcting program for healthy institutions participation in the CCP has become a red letter... more direct lending to AIG
Hens --13-3 Fed's interpretation of limits
Al-- unusual and exignet vote and secured... the main thing if those assets were kept on the books of ???
Hens -- don't think unfettered activities what constraints on 13-3 authority
Al -- dual key authority between Fed and Treas and if resolution authority no need for 13-3
Biggert --- have any of the fin institutions provided feedback on 1207?
Al -- not aware on fin institutions weighing in on 1207 but economists have names of borrowers on facilities and caused them to be uninterested in borrowing from the facilities
Paul -- international events are you aware of any precise times you are involved in the gold markets? many central banks are constantly
Al -- NYFed is the trustee for several cenbanks
Paul -- no activity
Al -- no knowledge
Grayson -- has the Fed Reserve ever manipulated the US dollar
Al -- not to my knowledge and something outside of the legal authority I would be required to
Royce == von Mises concluded that central banks have a tendency to exacerbate business cycles
Al -- I'm an attorney and don't know
Royce -- moral hazard and Paul Volcker and his opposition
Al -- concerned that the starting point that the public believes some institutioo are TBTF... need resolution regime where govs can impose haircuts on creditors and more strenuous regulation on institutions considered systemically important
Royce -- why wouldn't you heed Volckers and consider that von Mises was right...
Paulson -- I support the e
Al -- haven't been as good as we could be about the information that we share with the public
Paulson -- I attend parades and people ask me about Rep Paul's bill since the Fed is buying and holding so much debt
MN--- R? secret... current law... why you think that permission of another agency to perform an audit of a bank... audits of the Fed may not include foregin country or bank how could this hurt the function of the Fed? this should not be secret... discount window operations, reserves of member banks... transactions made under the direction of the federal market committee... discussion between members of the board... that these are eternally secret is astounding to me...
Al - consulting with the primary examiner on a bank is meant to protect the bank
Manzillo --- they came and demanded $700 billion and they never spent the money on toxic assets... AIG and the Fed is that reflected as part of the national debt
Al -- no not part of the outstanding debt
Ma -- you just print money?
Al -- no the Fed does a variety of actions it has government securities it can sell to raise funds
Ma -- Fed and Treasury has sufficient reserves to back all this out in case of collapse
Al -- yes it does
Ma -- are really distrustful of the Fed... monetary policy and discount window... more transparency would help the people
Al -- this is an area for Congress to consider... clearly for a decision for the Congress
Watt -- opening the books... do you distinguish between an opening the books audit and a policy audit?
Woods -- I'd like to know what they are doing all down the line... some discussion about time lags... there is a distinction
Watt -- no responses just political responses here, July 15 WSJ Economists warn Fed at risk
Paul -- secrecy of the Fed... expand on the economic consequences...
woods -- clearer we can be with the business community it's easier for them to see... independence is a red herring and not getting off the subject... there is political influence on the Fed..
Paul Dow Jones, AP, NYT Bloomberg support this... a lot of this going on for a long time
Woods since 1913 they have succeeded in depoliticizing themselves... technocrats can better handle this... scare tactics by the Fed... entirely discount all the economists who protect the Fed..
Frank -- central bank has a dual mandate to worry about unemployment equally with interst rates making public all the transactions should be done instaneously or time lag
Woods -- time lag would be ok
Frank -- anyone who disagrees is bought and paid for we have a disagreement here
Bachman -- why is the Fed in panic mode over this bill?
Woods -- we can only speculate... they have been engaged in activity they would rather don't want to be known... my own private speculations... article in Forbes ... "Fed has to become boring again.." stop the extraordinary actions... Blinder said the monetary affairs need to be left to technocrats
Bachman- concerned about the balance sheet and toxic assets.. don't know who the overnight loans go to... 13-3 whether it would be prudent for Congress to limit the Fed's authority.. get a full perspective what has been going on since 1913.. they can do anything and we are left holding the bag...
Woods -- I support what you are saying... tighten things up... hit may not be direct... lots of tozic assets impairs the ability to suck money back in... we suffer from inflation tax
Sherman -- secrecy plus power equals corruption... the power to lead money on concessionary terms to particular companies... Alvarez answers very scary... he testified any loan in any amount under 13-3 as long as the bd felt secured.. make higher risk loans...
Woods -- this is why Bloomberg is in favor of right to know... this is unacceptable for the custodian of their assets
Sher -- high risk loans on without disclosure... pick one company over another ... power plus secrecy to convey to individual companies... Fed best arguments this bill are that the oral statements at teh FOMC meetings should be kept private
Woods -- legislative aspect defer to Rep Paul... get some info now 5 years after the fact
Paul -- want to hear some day the sooner the better...
Royce -- negative interest rates 4 years running... what worries me right now is a 1999 study of Richmond Fed that 45% of liabilities were guaranteed by the Fed... bringing the Fed in deeper on the moral hazard
Woods -- moral hazard is the key problem.. the Fed institutionalizes the moral hazard problem... Greenspan put... LTCM in 1998... why are equity rations so low in the financial sector?
Royce -- might set the interest rate too low to keep companies from going bust... compounding the depth of the cycles... getting Congress involved would compound the problem