The problem: the Fed is accepting a lot of non-disclosed collateral in exchange for liquid credit. Essentially nobody knows what the Fed is accepting on behalf of the taxpayer – the ultimate counterparty – in exchange for liquidity. Here is a list of accepted collateral for the various liquidity measures as stated by the Fed.
- Term Auction Facility ($448 billion since last year): Various high grade securities that qualify for collateral at the discount window including U.S Treasuries, GSE debt, Municipal bonds, Asset Backed Securities (AAA), various consumer loans, and more. This is actually quite detailed.
- Primary Dealer Credit Facility ($53 billion since last year): Tri-party collateral that has been established for quite a while now. This is the normal collateral accepted for repurchase agreements conducted through the Fed’s open market operations.
- Term Securities Lending Facility ($185 billion off balance): Tri-party collateral plus investment grade corporate securities, investment grade municipal securities, investment grade mortgage-backed securities, investment grade asset-backed securities. That’s it, no more detail whatsoever on this one.
With the Fed buying up collateral at increasing rates, the taxpayer is holding an increasing share of shady assets. Well, that is what one assumes when the Fed refuses to disclose the recipients and types of collateral accepted for the massive liquidity measures. From Bloomberg:
The Federal Reserve refused a request by Bloomberg News to disclose the recipients of more than $2 trillion of emergency loans from U.S. taxpayers and the assets the central bank is accepting as collateral.
Bloomberg filed suit Nov. 7 under the U.S. Freedom of Information Act requesting details about the terms of 11 Fed lending programs, most created during the deepest financial crisis since the Great Depression.
The Fed responded Dec. 8, saying it’s allowed to withhold internal memos as well as information about trade secrets and commercial information. The institution confirmed that a records search found 231 pages of documents pertaining to some of the requests.
“If they told us what they held, we would know the potential losses that the government may take and that’s what they don’t want us to know,” said Carlos Mendez, a senior managing director at New York-based ICP Capital LLC, which oversees $22 billion in assets.
The Fed stepped into a rescue role that was the original purpose of the Treasury’s $700 billion Troubled Asset Relief Program. The central bank loans don’t have the oversight safeguards that Congress imposed upon the TARP.
Total Fed lending exceeded $2 trillion for the first time Nov. 6. It rose by 138 percent, or $1.23 trillion, in the 12 weeks since Sept. 14, when central bank governors relaxed collateral standards to accept securities that weren’t rated AAA.
The final sentence refers to the Term Securities Lending Facility, or the off balance $185 billion of riskier collateral accepted in exchange for the hottest asset around, U.S. Treasuries.
The nebulous description of the collateral accepted through TSLF is suspect. I further wonder if the Fed – with ostensible lack of concern for transparency - is still adhering to its schedule of collateral accepted for TAF auctions. Who knows, anything is possible.
The Fed is doing its job. But the assumed balance sheet risks should be revealed to the public, especially since credit markets are showing only slight improvements at best.