It's So Secret, Even the Fed Does Not Know Who It's Lending To

Some might think the Fed would care where dollar swaps to Europe go. However, if the Fed cares, it doesn't know.

Bloomberg reports No One Telling Who Took $586 Billion in Swaps With Fed Condoning Anonymity.

For all the transparency forced on the Federal Reserve by Congress and the courts, one of the central bank�s emergency-lending programs remains so secretive that names of borrowers may be hidden from the Fed itself.

As part of a currency-swap plan active from 2007 to 2010 and revived to fight the European debt crisis, the Fed lends dollars to other central banks, which auction them to local commercial banks. Lending peaked at $586 billion in December 2008. While the transactions with other central banks are all disclosed, the Fed doesn�t track where the dollars ultimately end up, and European officials don�t share borrowers� identities outside the continent.

The lack of openness may leave the U.S. government and public in the dark on the beneficiaries and potential risks from one of the Fed�s largest crisis-loan programs. The European Central Bank�s three-month dollar lending through the swap lines surged last week to $50.7 billion from $400 million after the Nov. 30 announcement that the Fed, in concert with the ECB and four other central banks, lowered the interest rate by a half percentage point.

�Increased transparency is warranted here,� given the size of the Fed�s aid and current pressures on European banks, said Representative Randy Neugebauer, a Texas Republican who heads the House Financial Services Subcommittee on Oversight and Investigations.

Whether the U.S. should make disclosure of the recipients a condition of the swap lines is �probably a discussion we need to have,� possibly in a hearing that includes Fed Chairman Ben S. Bernanke, Neugebauer said.

Michelle Smith, a Fed spokeswoman, said there is �no formal reporting channel� for the identities of borrowers from other central banks, which are the Fed�s only counterparties on the swap lines and assume any credit risk.

�U.S. taxpayers have never lost a penny� on the program, she said.

Might I point out that US taxpayers never lost a cent on Fannie Mae and Freddie Mac either, until of course they lost $200 billion and counting.

Fundamental Problem

Joseph Stiglitz, a Nobel Prize-winning economist who led President Bill Clinton�s Council of Economic Advisers, said the �fundamental problem� is that capital markets need information to work properly, yet the Fed is saying, �we believe in capital-market discipline without information.�

�It would be very useful to see� those names, said Stiglitz, a professor at Columbia University in New York. With the dollar auctions of foreign central banks shielded from disclosure, �what we have now is a very partial picture.�

If banks are in such dire straits that they would be at risk if everyone knew they were using the discount window, then they are also in such dire straits the Fed ought not be lending to them in the first place.

Actually, the problem is more fundamental. There should not be a Fed at all. Banks might then think twice about being so freaking leveraged.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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