Letter to the Honorable Ben S. Bernanke, Chairman, Board of Governors of the Federal Reserve System

Letter

Even after a new law uncloaked what were secret subsidies for big banks and other financial institutions, Federal Reserve Chairman Ben Bernanke remains evasive about details of $3.3 trillion in emergency loans.

A provision by U.S. Sen. Bernie Sanders (I-Vt.) in the Wall Street reform law forced the Fed on Dec. 1 to disclose which banks, corporations and individuals received loans doled out during the financial crisis. Sanders posed a series of follow-up questions in a letter to Bernanke on Dec. 6 about loans to foreign automakers, help for credit card companies that soak consumers with loan-shark interest rates, and potential conflicts of interest involving Fed governors. Sanders' questions remained mostly unanswered in a letter from Bernanke dated Jan. 5.

"When I wrote to Chairman Bernanke, I was concerned that credit did not flow to small businesses despite the Fed's claims that it would, that the Fed boosted sales of foreign cars at the very moment the American auto industry was in collapse, that billionaires got Fed assistance to make even more money at the same time that millions of Americans lost their jobs and many lost their homes. I was especially concerned that directors of the Fed simultaneously worked for banks and corporations that were bailed out - that the foxes were in fact guarding the henhouse," Sanders said.

"I called for clear responses to these reasonable concerns, but got none," the senator added. "I find it amazing, but not surprising, that Chairman Bernanke could write a six-page letter in response to questions I had regarding the Fed's emergency lending programs without directly answering a single one of my specific questions."

Bernanke would not say how many of the 2 million in auto loans spurred by the Fed's emergency actions helped buy foreign cars, although the initial disclosure revealed that BMW, Nissan, Volkswagen, and Honda received substantial assistance.

Bernanke said the emergency lending program supported "hundreds of millions of U.S. credit card loans," but would not reveal how many of these cards carried interest rates of 20 percent or more.

Bernanke claimed the Fed does not know how much money wealthy private investors gained from an emergency lending program. Several multi-millionaires - including the wife of the CEO of Morgan Stanley (Christy Mack); the former owner of the Miami Dolphins (H. Wayne Huizenga); a multi-billionaire hedge fund manager (John Paulson); and the founder of one of the largest computer companies in America (Michael Dell) - stood to make significant profits or to have the Fed cover 90 percent of any losses they might incur.

Bernanke refused to disclose details of securities pledged as collateral by recipients of over $885 billion in emergency Fed lending, a lapse that a former Fed official called a violation of "the spirit of what the requirements were in Dodd-Frank," the Wall Street reform bill.

Bernanke also declined to detail steps to avoid conflicts of interest by Fed governors. Those concerns were heightened by disclosures that the Fed lent $16.1 billion to General Electric and more than $160 billion to JPMorgan Chase during the financial crisis, even as Jeffrey R. Immelt of G.E. and Jamie Dimon of JPMorgan were directors of the Federal Reserve Bank of New York.

"The American people deserve direct answers to these important questions. If Chairman Bernanke won't answer these questions, I hope that the Government Accountability Office will," Sanders said. A Sanders' provision in the Wall Street reform law ordered the non-partisan investigative arm of Congress to conduct a top-to-bottom audit of the Fed.

December 6, 2010

The Honorable Ben S. Bernanke
Chairman
Board of Governors
of the Federal Reserve System
20th Street and Constitution Avenue, N.W.
Washington, DC 20551

Dear Chairman Bernanke:

Thank you very much for the Federal Reserve's compliance with a provision in the Wall Street Reform and Consumer Protection Act requiring the Federal Reserve to post the exact details of its emergency lending activities. As the author of that provision, I have a number of questions that I hope that you will answer.

I believe that most Americans who have gone through this information are truly shocked by the sheer amount of lending the Fed provided during the financial crisis, particularly to financial institutions and corporations that have senior executives serving on the Fed's board of directors. What is especially disturbing is that while most of the Wall Street banks and corporations that received these low-interest loans have returned to profitability and continue to provide huge compensation packages to their executives, the unemployment rate is still close to 10%, small businesses still can't get access to the credit they need, and the foreclosure rate is still breaking new records.

As you recall, at a Senate Budget Committee hearing on March 3, 2009, I asked you a simple question with respect to the trillions of dollars in low-interest loans the Fed provided during the financial crisis: "I've got businesses in the state of Vermont who are in a lot of trouble...how do these guys, who are honest business people, get [these low-interest loans]? Do you have to be a large, greedy, reckless financial institution to apply for these monies?"

While only rhetorical at the time, it appears my question was quite appropriate. As it turns out, while small business owners in the state of Vermont were being turned down for loans, not only did large financial institutions and major corporations receive these ultra-low interest loans, but foreign companies and banks, and some of the wealthiest people in the world also received a major bailout from the Fed. The emergency response appears to any objective observer to have been a clear case of socialism for the rich, and rugged free market capitalism for everyone else.

Frankly, much of the information that you have provided on your website raises bigger questions than it answers, and some of the information mandated by the law appears to be missing. Therefore, while I expect that my office will have further questions once we have had time to dig a little deeper into these approximately 21,000 transactions, please answer the following questions that I have after preliminary review of this information.

1. Conflicts of interest at the Federal Reserve.

As we know, General Electric, JP Morgan Chase, Goldman Sachs, Banco Popular, Sun Trust, and Fifth Third Bank collectively received hundreds of billions of dollars in low-interest Federal Reserve loans at the same time that senior executives at these institutions served on the Federal Reserve's regional board of directors.

In my view, it is obvious conflict of interest when CEOs of banks and large corporations who serve on the Fed's board of directors receive cheap loans from the Fed. While Wall Street banks and large corporations received a huge amount of government support from the Fed, small businesses went bankrupt because they couldn't find affordable credit, workers were losing their homes to foreclosure and consumers were being charged 25-30 percent interest rates on their credit cards by the very same banks that the Fed bailed out.

Questions:
Did any of the senior executives of large corporations and financial institutions who serve on the Fed's regional board of directors use their influence to obtain emergency lending from the Federal Reserve?

Please provide me copies of all e-mails, phone logs and correspondence between each member of a Federal Reserve's regional board of directors who was also serving on the board of, or who was employed by, any financial institution or corporation that benefited from this emergency lending, and the chairman of the Federal Reserve, the president of the New York Federal Reserve, and/or any other president of a Federal Reserve's regional bank, between December 1, 2007 and July 21, 2010.

Above and beyond the provisions in the Wall Street Reform and Consumer Protection Act, is the Federal Reserve taking any steps to avoid these conflicts of interest in the future?

2. Wealthy investors receiving cheap loans from the Fed to invest in securities backed by car, credit card, home, student, and mortgage loans (TALF).

According to the information on your website, several billionaires and tens of multi-millionaires received cheap loans from the Fed to invest in securities backed by auto, mortgage, credit card, student, and mortgage loans. I have attached a list of material investors in TALF.

Question:
Please tell me how much money the Fed lent to each one of the material investors listed in the attached document and how much each one profited or lost as a result of participating in the TALF program - a material component of the required disclosure of "the value or amount of financial assistance" provided - including the following individuals:

A. Christy K. Mack
B. H. Wayne Huizenga
C. John A. Paulson
D. Michael S. Dell

3. Hedge funds and investment firms located in the Cayman Islands and other tax haven countries receiving assistance from the Fed.

In the TALF program alone, it appears that the Fed provided loans to over 100 separate hedge funds, offshore funds, and other investment funds that are located in the Cayman Islands and other notorious tax haven countries. (Please see the attached document.) It has been estimated that each year corporations and wealthy individuals avoid approximately $100 billion in U.S. taxes through the use of abusive and illegal tax shelters.

Questions:
How much money did the Fed lend to each of the firms and how much did each of them profit or lose as a result?

Why would the Fed lend to material investors located in the Cayman Islands?

In how many other instances did the Fed lend emergency money to individuals or entities located in the Cayman Islands or other tax haven countries?

4. Federal Reserve lending to other foreign banks and corporations.

I believe that the requirement of the law that the Fed describe "the specific rationale for each...facility and program" is not satisfied in the Fed's recent disclosure. We have lost over 5 million American manufacturing jobs since 2001, and our bridges, highways, and schools, are crumbling. Yet there are startling examples of massive levels of financial assistance to foreign governments and banks under these programs.

Questions:
Why did the Federal Reserve bail out the Korea Development Bank, the wholly state-owned bank of South Korea, by purchasing over $2.2 billion of its commercial paper? In addition, why did the Fed extend over $40 billion to the central bank in South Korea?

At a time when small businesses in my state cannot get the loans they need to expand their businesses, why did the Federal Reserve bail out the state-owned bank of Bavaria by purchasing over $2.2 billion of its commercial paper?

Why did the Federal Reserve choose to bail out the Arab Banking Corporation based in Bahrain by providing it with a total of over $23 billion in loans with an interest rate as low as 0.25%?

At a time when hundreds of thousands of Americans have had their jobs shipped to Mexico, why did the Federal Reserve extend over $9.6 billion to the Central Bank of Mexico?

5. Federal Reserve lending to help foreign automobile companies.

According to your website, the Federal Reserve purchased nearly $5 billion in commercial paper from Toyota and Mitsubishi.

The Federal Reserve also lent wealthy investors large sums of money to invest in foreign automobile securities owned by BMW Vehicle Lease Trust; Nissan Auto Lease Trust; Volkswagen Auto Lease Trust; and Honda Auto Receivables.

Question:
At a time when the American automobile sector was on the verge of collapse, why did the Federal Reserve feel that it was necessary to financially assist Toyota, Mitsubishi, BMW, Nissan, Volkswagen, and Honda?

6. Collateral

I am disappointed that the Fed chose not to disclose all of the specific details on individual securities pledged as collateral by recipients of some $885 billion in emergency lending. As Robert Eisenbeis, a former Research Director at the Atlanta Federal Reserve recently told Bloomberg, "If you were going to audit the facilities, then would this enable you to do an audit? The answer is 'No,' you would have to go in and look at the individual amounts of collateral and how it was broken down to do that. And that is the spirit of what the requirements were in Dodd-Frank." I urge you to put this information on your website immediately.

Thank you in advance for your attention to these important questions. I look forward to receiving your response.

Sincerely,

Bernard Sanders
United States Senator

BREAK IN TRANSCRIPT

January 5, 2011

The Honorable Bernard Sanders
United States Senate
Washington, D.C. 20510

Dear Senator:

I am responding to your letter of December 6, 2010, in which you asked several questions about the information released by the Federal Reserve on December 1, 2010, regarding the usage of Federal Reserve credit and liquidity facilities. That release provided detailed information on credit and other transactions conducted to stabilize markets during the recent financial crisis, restore the flow of credit to American families and businesses, and support economic recovery and job creation in the aftermath of the crisis.

In your first question, you asked how the Federal Reserve managed the conflicts of interest arising for senior executives of corporations that borrowed from the Federal Reserve and also served on the boards of directors of Federal Reserve Banks.

The Federal Reserve, with input from a wide range of financial institutions and other market participants, developed a series of emergency lending facilities to address the financial crisis that emerged in the summer of 2007. Federal Reserve Bank directors had no involvement in a Reserve Bank's decision to make credit available under any of these emergency lending facilities. These facilities were all approved by the Board of Governors and were not subject to approval or review by the Reserve Bank boards of directors. Only borrowers that met the strict and transparent eligibility requirements for each particular emergency lending facility were able to participate in the facility.

Reserve Bank directors are explicitly included among the officials subject to the federal conflict of interest statute. 12 U.S.C. § 208. This statute imposes criminal penalties on Reserve Bank directors who participate personally and substantially as a director in any particular matter that, to the director's knowledge, will affect the director's financial or business interests or those of his immediate family. Reserve Banks routinely provide their new directors with specific training on the federal conflicts of interest statute. Reserve Bank corporate secretaries have the expertise to respond to inquiries by directors regarding possible conflicts of interest in order to assist them in complying with the statute.

Importantly, Federal Reserve System policies also prevent a Reserve Bank director from influencing business matters involving firms owned by the director or with which the director is affiliated, thereby limiting actual or potential conflicts of interest that could arise from either affiliation or stock ownership. Reserve Bank directors are not involved, for example, in matters related to the supervision of particular banks or bank holding companies. While they do vote on recommendations to the Board regarding the level of the discount rate, directors are not involved in any aspect of decisions regarding discount window lending to any financial institution. Moreover, Reserve Bank directors played no role in either approving the establishment of the emergency facilities or authorizing the specific transactions undertaken pursuant to those facilities. The Board of Governors of the Federal Reserve, not the Reserve Banks, approved the establishment of each of the emergency facilities.

Each emergency facility had objective and well-documented eligibility requirements established by the Board of Governors, which are publicly available on the Federal Reserve's websites. Only those institutions that met the eligibility requirements for a particular program were able to participate in that program, and the Reserve Banks administering the programs had no discretion to waive or ease eligibility requirements in particular cases. An institution that was eligible to participate could do so if it chose without the need for "influence," while an institution that was not eligible would not have been able to participate without regard to any efforts at influence.

The Federal Reserve is working with the Government Accountability Office (GAO) on an audit mandated by the Dodd-Frank legislation that requires the GAO to identify changes to selection procedures for Federal Reserve Bank directors or other aspects of Federal Reserve Bank governance to eliminate actual or potential conflicts of interest in bank supervision. Another GAO report mandated by Dodd-Frank requires the GAO to assess whether there were conflicts of interest with respect to the manner in which various emergency lending programs were established or operated.

In your second question, you asked how much money the Federal Reserve lent to each of the material investors in the Term Asset-Backed Securities Loan Facility (TALF) and how much each one profited or lost as a result of participating in the TALF. The amount lent to each TALF borrower can readily be determined using the information provided on the Federal Reserve Board's website as part of the December 1, 2010, release. The published information includes the borrower for each TALF loan, the U.S. city and state in which the borrower was located, the terms of the loan, and collateral information.

Each TALF loan had a single borrower, which was required to be a U.S. company. The website also reports information on individuals or entities, if any, that are understood by the Federal Reserve to have held a "material" investment in a TALF borrower, defined as a 10 percent or greater interest in the TALF borrower. Information on material investors was collected by the TALF agents or, in some cases, provided directly to the Federal Reserve Bank of New York by the TALF borrower, as part of the TALF due diligence program. Some TALF borrowers had one or more material investors, while others had none. The Federal Reserve Bank of New York made loans to the TALF borrowers, not to the material investors in the TALF borrowers. The Federal Reserve does not know the amounts earned by the material investors.

It is also important to note that TALF was a broad market support program that benefited U.S. consumers and businesses. The TALF was introduced, in cooperation with the Treasury, to encourage the issuance of asset-backed securities (ABS) backed by new loans to U.S. consumers and businesses. ABS are a common instrument used to finance a variety of consumer and business credit, including small business loans, auto loans, student loans, and credit card loans. ABS markets became severely disrupted during the financial crisis in 2008, drastically reducing the supply of credit to consumers and businesses. By restarting the ABS market, the TALF supported nearly 2 million auto loans and over 1 million student loans to residents of the United States, nearly 900,000 loans to small U.S. businesses, 150,000 other U.S. business loans, and hundreds of millions of U.S. credit card loans.

The TALF worked by providing loans to ABS investors to finance part of their purchases of eligible ABS. The ABS investors provided the rest of the financing and so had their own capital at risk. The program was designed to encourage very broad participation; any U.S. company could potentially borrow from the facility. The broader the participation, the greater was the resulting flow of credit to U.S. consumers and small businesses. Nearly 200 different borrowers participated in the TALF, including traditional asset managers, pension funds, hedge funds, and banks, as well as many smaller companies.

The TALF loans rates were set at levels well above those that had prevailed under normal market conditions. As a consequence, even though no TALF loans have come due according to their stated maturity dates, about two-thirds of the loans by dollar amount have been repaid early, likely as borrowers replaced the TALF financing with cheaper market financing or sold the securities financed by the TALF loans. All remaining TALF loans are current in their payments of principal and interest and all remain well collateralized.

In your third question, you asked why the Federal Reserve extended TALF loans to material investors located in the Cayman Islands. As I noted in the response to your second question, the Federal Reserve did not lend to the material investors. Although some of the individuals or entities that reportedly had material investments in TALF borrowers were based abroad, the Federal Reserve only extended loans through the TALF to U.S. companies. Moreover, the program was designed to increase the flow of credit to U.S. consumers and businesses of all sizes. It accomplished that objective by requiring that all or substantially all loans backing TALF-eligible ABS be to U.S. residents or U.S. businesses; similarly, all or substantially all of the mortgages backing TALF-eligible commercial mortgage backed securities (CMBS) had to be secured by U.S. properties.

In your third question you also asked, more broadly, if the Federal Reserve lent under its emergency facilities to entities located in the Cayman Islands or other tax havens. As noted above, the Federal Reserve lent only to U.S. companies (including, in some cases, U.S. branches and agencies of foreign banks) under the credit facilities established under its emergency authority, including the TALF.

In your fourth question, you asked why the Federal Reserve lent to a U.S. branch of a foreign bank through the Term Auction Facility (TAF). Section 19 of the Federal Reserve Act as amended by the Monetary Control Act of 1980 requires the Federal Reserve to provide most U.S. branches and agencies of foreign banks with access to Federal Reserve credit on the same terms that it is provided to U.S. depository institutions. Bank funding markets, especially term funding markets, came under severe pressure during the financial crisis. To address these funding pressures, the Federal Reserve first took steps to increase the amount of liquidity available to financial institutions through the discount window. However, many banks were reluctant to borrow at the discount window out of fear that their borrowing would become known and would erroneously be taken as a sign of financial weakness. To meet the demands for term funding more directly, the Federal Reserve established the Term Auction Facility in December 2007.

Under the TAF, the Federal Reserve auctioned discount window loans to depository institutions (U.S. commercial banks, savings institutions, and credit unions, as well as U.S. branches and agencies of foreign banks) that were eligible for primary credit. All depository institutions that maintain deposits subject to reserve requirements are eligible to borrow from the Federal Reserve's discount window. TAF lending helped ease conditions in the term dollar funding markets used by depository institutions. Increasing the liquidity of depository institutions promoted increased lending to U.S. businesses and households. U.S. branches and agencies of foreign banks are important providers of credit to U.S. businesses.

In your fourth question, you also asked why the Federal Reserve lent to the central banks of South Korea and Mexico. The Federal Reserve did not extend credit to the central banks of South Korea or Mexico. The Federal Reserve established temporary central bank liquidity swap lines with a number of foreign central banks. Foreign central banks then drew on those lines to provide dollar liquidity to institutions in their jurisdictions. As a part of that program, the Federal Reserve swapped U.S. dollars with the central banks of South Korea and Mexico for an equivalent amount of foreign currency at market rates. The maximum amount of dollar liquidity provided to the Bank of Korea (the central bank of South Korea) at any point in time during the operation of the swap lines was $16.35 billion; the maximum amount of dollar liquidity provided to the Bank of Mexico (the central bank of Mexico) at any point in time was $3.22 billion.

These dollar liquidity swaps were conducted for the same reasons that dollar liquidity was provided to other central banks via the swap lines. Because of the role that the U.S. dollar plays in global financial markets, beginning in the second half of 2007, severe strains in dollar funding markets overseas disrupted financial conditions in the United States. The central bank liquidity swap lines were designed to address these strains and counter pressures that had developed in U.S. dollar financing markets in those countries. By relieving these pressures, the swap lines helped stabilize U.S. dollar funding markets both abroad and at home.

In your fourth and fifth questions, you asked why the Commercial Paper Funding Facility (CPFF), which was established by the Federal Reserve, purchased the commercial paper (CP) of a number of firms with non-U.S. parents. The CPFF bought only commercial paper issued by entities organized under the laws of the United States, including in some cases U.S. firms with foreign parents, or U.S. branches of foreign banks. The commercial paper market is a critical source of financing for U.S. businesses and financial intermediaries. Liquidity conditions in the commercial paper market had deteriorated sharply in the fall of 2008, reducing the availability of credit to U.S. businesses and households. The CPFF increased the liquidity of the CP market by providing greater assurance to investors in CP that firms would be able to roll over their maturing commercial paper. For the CPFF to be effective in improving the liquidity of the U.S. commercial paper market, it had to provide a liquidity backstop to a substantial portion of the market. The CP that was bought paid interest rates that were significantly about market rates in more normal times and participants in the program were required to pay a material fee. Each emergency lending facility, including the CPFF, had objective and well-documented eligibility requirements, which are publicly available on our website. Since the U.S. companies with foreign owners you listed qualified for the program and paid the appropriate fee, the CPFF bought their commercial paper. The entire CP purchased by the CPFF was repaid, with interest.

You also asked in your fifth question why the Federal Reserve accepted ABS backed by loans to U.S. households and businesses to purchase automobiles manufactured by foreign companies as collateral for the TALF. As I noted above, the TALF was designed to increase the availability of credit for U.S. households and businesses including, importantly, loans to purchase automobiles. All TALF-eligible auto ABS had to be backed entirely or almost entirely by loans to U.S. households and businesses. This helped U.S. consumers and the U.S. economy. I would note, also, that a much larger volume of TALF-eligible ABS was issued by the financing arms of U.S. auto manufacturers and retailers, including Ford, Chrysler, General Motors (through Ally Bank), and Harley Davidson.

Lastly, in your sixth question you urged the Federal Reserve to include on our website information on individual items of collateral pledged to back certain loans. Loans provided under some of the Federal Reserve's liquidity programs (such as the TALF) were closely tied to specific items of collateral, and the Federal Reserve had little or not recourse beyond these specific pieces of collateral in the event of default. In most cases, the assets were generated or acquired by the borrower with the view of participating in the Federal Reserve facility. In this way, the facility restarted markets that were frozen. For all of these programs, the Federal Reserve provided detailed information on all the individual assets that were pledged as collateral. For other lending programs, our loans were not tied to any particular piece of collateral, and the Federal Reserve had recourse to the borrower in the event of default--that is, the Federal Reserve was relying on all of the resources of the borrower, not just the general collateral pledged, for repayment of the loan. In these cases, the assets posted as collateral for the loan were not generated for the purpose of borrowing from the Federal Reserve and, instead, generally represented assets generated by the normal business activities of the borrower. For example, a bank would pledge a sizable portion of the mortgages, auto loans and other consumer loans it generated in the ordinary course of its business as collateral for loans from the TAF. For these programs, the Federal Reserve provided considerable information on the aggregate amount of collateral pledged along with a breakdown of the collateral by type and by credit rating. This information provides the public with a very clear view of the nature of the assets that were accepted as collateral and the risk embedded in that collateral and complies fully with the disclosure requirements of the Dodd-Frank Act.

As you know, the Dodd-Frank Act requires the Government Accountability Office to conduct a financial audit of all of the Federal Reserve's emergency lending programs, including an assessment of the effectiveness of the security and collateral policies established for each facility in mitigating risk to the relevant Federal Reserve Bank and thus to taxpayers. The Federal Reserve is working closely with the GAO and will provide any information on collateral that the audit team deems necessary for its review.

As you point out, the Federal Reserve released information on over 21,000 transactions on December 1, 2010. In addition, we have been providing on our website an ongoing basis on extensive information about the emergency credit facilities the Federal Reserve established in response to the financial crisis. My staff is available to help navigate the information, if that would be useful to you or your staff.

I hope this information is helpful. Please let me know if I can be of further assistance.

Sincerely,

Ben Bernanke

Source