Amid the financial crisis affecting much of the world, a report by the US Federal Watchdog was published on emergency loans granted by the FED.
The investigation was conducted by the Government Accountability Office (GAO), an equivalent to the AGN in Argentina, who first discussed the financial aid that the Fed conducted between December 1st 2007 and July 21st of last year.
According to the GAO, on "numerous occasions" during 2008 and 2009, coinciding with the explosion of the so-called 'real estate bubble', the Fed Board invoked a status granted by a governing law of 1913: authority in the emergency. Therefore, "extensive programs of financial assistance to private institutions to stabilize markets" were approved. So broad, that by the end of 2008 the values of loans already exceeded one billion dollars.
Among all the operations performed by the Fed, the watchdog put more emphasis on analyzing what happened with the Federal Reserve Bank of New York. In the Big Apple, in 2009 and 2010, loans that ended in "large-scale purchases of financial agencies that were backed by mortgage emissions to support the market for housing construction" were granted. In numbers, those so-called Reserves- including the New York FED- awarded 103 "contracts" (credits) for $659,400,000 "to carry out its emergency".
Like describing the prelude to what was the financial debacle, the GAO notes that the entire mechanism involved in the aid, like the Reserve bank and Limited Corporate Loan, were controlled "by independent audit firms" and "these (reports) financial statements, as well as other audits conducted by the Board and the Fed, the Inspector General and internal control functions of the Reserve Banks reviews, did not mention any significant aspect of financial emergency programs." This means that in these reports, no warning ever went off about the emergency situation that crossed these entities.
The report shows that the money came from the Federal Reserve and went to the Reserve banks, which then lend it to the Loan Corporations Limited, who finally granted the aid. In this mechanism, the agency noted that U.S. control "Reserve Banks relied more on grantors attending a single institution to a comprehensive development program." But not only that, the GAO says, "Many of the contracts, eight of the highest in value were assigned as uncompetitive." Thus, the report concludes that "procurement policies of the Federal Reserve Bank of New York could be enhanced to provide additional guidance (a kind of manual procedures) based on the requirements of competitiveness such as the search for greater concurrency" of potential beneficiaries of the loans.
Regarding the possible danger of granting money that way, the audit says that "the procedures for managing the Fed risks of lending did not provide a comprehensive guide" to indicate how to restrict the supply of credit to creditworthy makers. Therefore, the watchdog recommended that the Reserve document a plan that includes a greater effort in terms of risk assessment and deepen (methods) to manage access to financial aid.
The GAO report also notes that the Fed "does not always document their processes (or) decisions relating to restrict the access of some institutions" to credit. In fact, research points out that the Reserve Banks should exercise discretion to restrict or deny program access for higher risk borrowers that were otherwise eligible for TAF, 30 institutions were restricted TAF access.
According to the report, “in a few programs, FRBNY placed special restrictions, such as borrowing limits, on eligible institutions that posed higher risk of loss.”
While the Audit stated that the Federal Reserve System took steps to mitigate risk of losses on its emergency loans, they also recognized that the Fed “took opportunities to strengthen risk management practices for future crisis lending”. For example, Reserve Banks required borrowers under several programs to post collateral in excess of the loan amount. For programs that did not have this requirement, Reserve Banks required borrowers to pledge assets with high credit ratings as collateral. For loans to specific institutions, “Reserve Banks negotiated loss protections with the private sector and hired vendors to help oversee the portfolios that collateralized loans”. The emergency programs that have closed have not incurred losses and FRBNY does not project any losses on its outstanding loans
Conflict of Interests
In the Fed’s regulation the report says “we also obtained and reviewed documentation of the basis for decisions on any waiver requests to allow FRBNY officials, staff, or vendors to participate in decisions related to the programs that might otherwise present a conflict of interest”. But in the middle of the crisis, the “new roles assumed by FRBNY and its employees during the crisis gave rise to potential conflicts that were not specifically addressed in the Code of Conduct or other FRBNY policies”. FRBNY’s existing restrictions on its employees’ financial interests did not specifically prohibit investments in certain nonbank institutions that received emergency assistance. To manage potential conflicts related to employees’ holdings of such investments, FRBNY relied on provisions in its code that incorporate requirements of a federal criminal conflict of interest statute and its regulations.
Furthermore, for the "new powers" enjoyed by the Fed GAO recommended "to better ensure an appropriate level of transparency and accountability for decisions to extend or restrict access to emergency assistance, GAO recommends that the Federal Reserve Board set forth its process for documenting its rationale for emergency authorizations and document its guidance to Reserve Banks on program decisions that require consultation with the Federal Reserve Board.