Sunday, December 14, 2008

The Fed has been rather sneaky, Part 2

On November 7, 2008, Bloomberg filed a lawsuit against the Fed. It wanted the Fed to disclose the collateral being accepted in exchange for the Fed’s massive liquidity measures. The Fed’s has extended $1.6 trillion in new bank credit since last year, including $1.4 trillion in collateralized loans plus $185 billion under the off balance Term Securities Lending Facility (TSLF). On December 8, the Fed replied with a big fat NO.

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.

Rebecca Wilder


  1. Rebecca,

    Just a slight correction: the taxpayer does not hold the assets of the Fed. It is more accurate to say that "dollar holders" are the owners of those assets. This group extends to foreigners, and they are the ones who should be most concerned about Fed collateral.

    Also, a question. The Fed is moving away from a Fed Funds rate targeting regime. Where does this leave the FOMC, whose purpose is to set policy target rates? Will they vote on setting a quantitative Monetary Base target at each meeting? What if the Fed undertakes QE without a specific target quantity? Can the NY Fed undertake QE without FOMC approval?

    I ask because it seems likely that the NY Fed is about to acquire more power at the expense of the Regional Bank Presidents who vote on the FOMC.

  2. "Bankers became reluctant to borrow from the RFC, fearing that public revelation of a RFC loan would cause depositors to fear the bank was in danger of failing, and possibly start a panic"

    From article on the Reconstruction Finance Corporation.

    Just propaganda which makes the Fed's job more difficult.

  3. the rate-of-change in monetary flows (MVt), or [our means-of-payment money supply times it's rate of turnover] is now rising.

    interest rates have bottomed & the dollar has peaked (until April-May)

  4. I worked, managed numbers, & made decisions. I prioritized, sacrificed, & thought outside the box.

    I did end- arounds, broke the rules, & resolved problems in other organizations.

    Our department was sometimes 3-4 months behind in our work.

    My organization’s efforts never approximated six sigma.

    I reported solely to my boss, and no one above him in the chain of command. He required that I never tell him about a problem, without offering a solution. I had his complete support.

    There were obviously many details, that were not communicated beyond my level.

    And, my boss didn’t report to the stockholders, but a V.P. My department received recognition and rewards (we were first out of 7divisions).

    But, I never won the Malcolm Baldridge Award. So how is someone going to criticize the FED’s normal business practices? They aren't much different than other companies.

  5. Hi Flow5:

    Why? Because Bernanke is/was a big proponent of increasing transparency of the FOMC (central bank policy) to the public. Does he just throw this to the wayside because the credit markets are in dissaray? I don't think so.

    Thanks for reading and commenting, Rebecca