WASHINGTON (MNI) – Federal Reserve Chair Ben Bernanke Tuesday sent
a letter to key congressmen defending the Fed’s emergency lending
activities during the financial crisis, citing “egregious errors and
mistakes” in recent reports about those activities. The following memo
was included and has point-by-point corrections to those reports.
This if the first of two parts:
Correction of Recent Press Reports Regarding
Federal Reserve Emergency Lending During the Financial Crisis
Recent press reports contain numerous errors and misrepresentations
about Federal Reserve emergency lending during the financial crisis.
First, these articles have made repeated claims that the Federal
Reserve conducted “secret” lending that was not disclosed either to the
public or the Congress. No lending program was ever kept secret from the
Congress or the public. All of the programs were publicly announced when
they were initiated, and information about all lending under the
programs was publicly released–both on a weekly basis through the
Federal Reserve’s public balance sheet release and through detailed
monthly reports to the Congress, both of which were also posted on the
Federal Reserve’s website.
It is true that, generally, the names of the counterparties and
borrowers from the emergency facilities were not immediately disclosed,
consistent with general central banking practice. Releasing the names of
these institutions in real-time, in the midst of the financial crisis,
would have seriously undermined the effectiveness of the emergency
lending and the confidence of investors and borrowers. These matters
were discussed extensively at the time in the press, and the Chairman
and other members of the Board discussed them numerous times in hearings
before the Congress.
In point of fact, the Federal Reserve took great care to ensure
that Congress was well informed of the magnitude and manner of its
lending. As required by the Emergency Economic Stabilization Act, passed
in late 2008, the Federal Reserve reported regularly on the outstanding
balances in its Sec. 13(3) lending facilities as well as on collateral
(by type and quality) for the loans. Beginning in June 2009, the Federal
Reserve went well beyond these legal requirements in the information it
made available in its monthly public reports to the Congress, which were
also posted on the Federal Reserve’s website.
Moreover, Congress was well informed of the volume of borrowing by
large banks. For instance, the monthly reports showed the daily average
borrowing during the month in the aggregate for the five largest
discount window borrowers, the next five, and the rest. Similar
information was also provided for lending at the emergency facilities.
In addition, the issue of counterparty disclosure was well-known to
the Congress and was addressed as part of the Dodd-Frank Act. Under
provisions of the Sanders Amendment, the names of all counterparties and
borrowers from the emergency lending facilities and the Term Auction
Facility (TAF) were disclosed on December 1,2010. Data provided included
the names of the borrowers, the date that credit was extended, the
interest rate, information about the collateral, and other relevant
terms. Similar information is supplied for swap line draws and
repayments. Details for each agency MBS purchase included the
counterparty to the transaction, the date of the transaction, the amount
of the transaction, and the price at which each transaction was
conducted. Additional disclosures of discount window borrowers and
transactions information were made on March 31, 2011.
Second, one article asserted that the Federal Reserve lent or
guaranteed more than $7.7 trillion during the financial crisis. Others
have estimated the amounts to be $16 trillion or even $24 trillion. All
of these numbers are wildly inaccurate. As disclosed on the Federal
Reserve’s balance sheet, published weekly and audited annually by
independent auditors, total credit outstanding under the liquidity
programs was never more than about $1.5 trillion; that was the peak
reached in December 2008.
To be sure, that is a very large amount, but it was a necessary
response to ensure that the crucial mistake made during the Great
Depression — failing to prevent the collapse of the financial system —
was not repeated. Importantly, such lending helped support the continued
flow of credit to American families and businesses.
The inaccurate and misleading estimates could be based on several
errors, including double-counting — for example, including a series of
loans, paid and then reissued, as separate loans. Because much of the
lending was on a revolving basis and made either overnight or for short
durations (30, 60, or 90 days, or even overnight), such double counting
could lead to a gross overestimate of the actual amount of lending.
Lending is not spending and thus it is misleading to add up a
succession of loans that were paid off on a revolving basis. A good
analogy might be a family’s mortgage: if a family received a $200,000
mortgage loan, then refinanced two years later to take advantage of
lower rates, again borrowing $200,000, it would be misleading to say it
had borrowed $400,000. Likewise, if a bank lends $1,000 for a year at a
time, $1,000 a month at a time for a year, and $1,000 a day at a time
for a year — repaying the loans at the end of each period — the
economic result is that the borrower has borrowed just a total of $1
,000 in each case, and it would be incorrect to say that the borrower
would have borrowed $12,000 in the second instance, and $365,000 in the
third instance.
Other inaccuracies may occur if total potential lending is counted
as actual lending. For instance, the TALF program was authorized at $200
billion, but its total lending never exceeded $70 billion. The same
mistake would also apply in reference to other lending programs, like
the commercial paper funding facility, which were authorized at far
higher amounts than were ever provided.
-end part 1 of 2 –
** Market News International Washington Bureau: 202-371-2121 **
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