Saturday, November 8, 2008

The Federal Reserve has been rather sneaky about its transactions

I agree with Bloomberg. The Federal Reserve Bank has not been transparent enough with its recent liquidity facilities and loan decisions that total $1.2 trillion since last year. Although the Fed has made efforts to improve the transparency of its new liquidity measures in its H.4.1 release, “Factors Affecting Reserve Balances,” there are still too many measures that go unannounced or are not properly itemized.

Bloomberg is suing the Fed for information on collateral being held for its various lending programs (via Real Time Economics):
"Bloomberg News on May 21 asked the Fed to provide data on the collateral posted between April 4 and May 20. The central bank said on June 19 that it needed until July 3 to search out the documents and determine whether it would make them public. Bloomberg never received a formal response that would enable it to file an appeal. On Oct. 25, Bloomberg filed another request and has yet to receive a reply.

The Fed staff planned to recommend that Bloomberg’s request be denied under an exemption protecting “confidential commercial information,” according to Alison Thro, the Fed’s FOIA Service Center senior counsel. The Fed in Washington has about 30 pages pertaining to the request, Thro said today before the filing of the suit. The bulk of the documents Bloomberg sought are at the Federal Reserve Bank of New York, which she said isn’t subject to the freedom of information law.

“This type of information is considered highly sensitive, and it would remain so for some time in the future,” Thro said."
I have spent a considerable amount of time piecing together the Fed’s liquidity measures on its balance sheet, and often the items listed are too vague. A good example is the Fed's description of the Treasury Supplemental Financing Program (TSPF); it is obvious that many readers were unaware of the specifics of TSFP because my explanation of the program was a very popular post (see this post for a lengthier discussion of TSFP). The only announcements of TSFP – a program worth $559 billion as of November 5 (you can see this on the liabilities side of Table 1) – included a short paragraph on the Fed’s September 25 H.4.1 release and a short blip on Treasury Department’s web-site.

Another point of cloudiness, and the main point of the Bloomberg lawsuit, is the Fed’s Term Securities Lending Facility (TSLF). The TSLF program is an asset swap program between the Fed and its primary dealers; the Fed assumes collateral of investment grade corporate securities, municipal securities, mortgage-backed securities, and asset-backed securities in exchange for highly-liquid U.S. Treasuries. One would think that the “collateral” would be itemized somewhere on the Treasury’s statement; it is not. The TSLF program is listed as one number, currently $200 billion, off balance in Table 1A, “Memorandum Items,” of the Fed’s Factors Affecting Reserves (H.4.1) release; how opaque is that?

Admittedly, the Fed has made efforts to increase the transparency of its liquidity measures in 2008. It has fully disclosed the value of the following measures: the financing of the Bear Stearns purchase by J.P. Morgan (Maiden Lane LLC), loans made under the Primary Dealer Credit Facility (PDCF), the AIG loan, and the values of its Commercial Paper Funding Facility (CPFF) and the Asset-Backed Commercial Paper Money Market Mutual Fund Facility (MMMFF).

The Table lists the page length and special announcements listed for each H.4.1 release since the beginning of the year. The average length of the Fed’s H.4.1 statement has increased from 4 pages in the first quarter of 2008 to 7 pages in October 2008, where the Fed has itemized some of its new liquidity facilities and made key announcements. Furthermore, the number of Tables in the release has increased from 5 to 8 in an attempt to incorporate some of the new information (Maiden Lane or TAF facilities).

However, the Fed is not doing enough. For example, it never announced where the new (and unlimited) currency swap lines or the interest paid on reserve deposits would reside on the statement. And if that isn’t bad enough, one had to read the statements very carefully from October 23 to October 30 to see that the Fed took a $2.3 billion hit to its Maiden Lane portfolio (the Bear Stearns loan to J.P. Morgan); this was not officially announced, just listed as part of the weekly balance sheet (Table 1).

I agree with Bloomberg: The Fed needs to be more transparent with its new measures. It’s printing money to extend $1.2 trillion (including TSLF) in new funding to the banking system since last year, and I for one would like to know exactly where that credit is going and what the Fed is getting in return.

Rebecca Wilder


  1. $1.4 trillion, isn't that about 10 percent of US GDP?

    How will the Fed ever unwind all this emergency credit?

  2. Scary, isn't it?

    I imagine that the Fed has about a 50/50 chance of getting the timing wrong. The problem - hence the Bloomberg lawsuit - is that nobody except Geithner and Bernanke (oh, Paulson, too) know exactly what types of assets the Fed is accepting as collateral, and hence the marketability of these assets once the Fed needs to extract the liquidity.

    Good to hear from you! I have been enjoying your posts (UK Bubble blog) lately.


  3. On the Federal Reserve's balance sheet, activation of the swap network is reflected as an increase in Federal Reserve Bank assets denominated in foreign currencies and an increase in the liability category "foreign deposits." --- Modern Money Mechanics