Who is the Fed accountable to?

June 15, 2009

It’s pretty clear the Federal Reserve is going to emerge as the big winner in the Obama administration’s proposed overhaul of the financial regulatory system. But any grant of new powers to the Fed must come with legislation requiring greater accountabilty from the nation’s central banker.

Now this is not meant to knock the job the Fed has done in the current financial crisis.  In many respects, Fed Chairman Ben Bernanke should be applauded for showing a willingness to improvise and come up  with creative solutions for trying to limit the damage to the banking system and the economy. But throughout the crisis, Benanke &  Co. have shown an utter disdain for transparency and full disclosure.

A good illustration of this is the contracts the NY Fed signed last fall with investment advisor Blackrock to manage the distressed assets the Fed acquired from AIG, the hobbled insurance giant.  The contract between the NY Fed and Blackrock for managing the CDOs that AIG insured and the Fed took off the banks’ hands is 37 pages. But a good number of those pages are blank–some 13 page to be exact.

And what is spelled out on these blank pages? Oh, just a few minor details like the fees paid to Blackrock, the firm’s potential CDO conflicts and the firm’s key personnel managing the assets. To be clear, this information isn’t totally secret. All this information has been disclosed to the NY Fed. It’s just that Fed officials have seen fit to keep this information secret from the public.

But if you’re counting on this veil of secrecy to be lifted by the Obama administration when it unveils its regulatory overhaul plan on Wednesday—think again. The architect of the financial regulatory overhaul is Treasury Secretary Tim Geithner, who just happened to head the NY Fed when these contracts with Blackrock were signed.

As I pointed out last week, Geithner hasn’t shown much interest in the need for government transparency in his new job. Treasury, in agreeing to let 10 banks repay money to the TARP, couldn’t even name the list of financial institutions.

Financial regulatory overhaul won’t mean much unless the general public and investors get more information about the inner workings of the financial institutions the government is seeking to better control. And the new regulations won’t inspire much confidence, if the public doesn’t feel the regulators are also being held to account.


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