It’s time to audit the Fed

June 16, 2009

The centerpiece of the Obama administration’s long awaited financial regulatory reform package is to give more power to the Federal Reserve to oversee any financial institution deemed too big to fail.

Team Obama seems to have decided that the Fed should emerge as the premier financial regulator, even though it has just as much egg on its face as the much-maligned Securities and Exchange Commission for failing to blow the whistle on Wall Street’s excesses.

After all, it’s the Fed that seemingly looked the other way when Citigroup was moving aggressively into collateralized debt obligations, structured investment vehicles and other exotic investments that now sit like a mountain of lead on the bank’s balance sheet. Go back to the Enron scandal and you’ll find that the Fed was just as oblivious as other regulators to how Citi and JPMorgan Chase & Co. were enabling Enron to disguise billions of dollars in loans as gas trades.

Now it’s not surprising the Obama plan puts a lot of stock in the Fed, given that Treasury Secretary Geithner most recently ran the NY Fed.

But there’s rightful indignation on Capitol Hill over the arrogance the Fed has displayed during the financial crisis — especially when it comes to disclosing the information about the banks that have borrowed trillions of dollars from the Fed since the crisis began and the nature of the collateral that’s been posted by those borrowers.

The Fed has been equally tight-lipped in discussing how its hand-picked money managers are valuing all those toxic assets that have been acquired from American International Group and Bear Stearns.

So one way the White House could garner congressional support for its reform package is to marry any expansion of Fed power to a proposal that requires greater accountability from the nation’s central banker.

A good place for the Obama administration to start would be to throw its support behind a bipartisan measure introduced by Representative Dennis Kucinich of Ohio that grants the Government Accountability Office the authority to audit the Fed’s response to the financial crisis for the next five years.

On June 4, the House Oversight and Government Reform Committee approved Kucinich’s measure as an amendment to the GAO Improvement Act of 2009 — a move that increases its chances of coming to a floor vote in the House of Representatives.

The proposal offered by Kucinich, a liberal Democrat, is similar to one introduced earlier this year by Texas Republican Representative Ron Paul. But the Kucinich measure is not as broad as Paul’s bill and would seem to have a better chance of passing.

An approving nod from the White House for the Kucinich measure would go a long way to securing its enactment and take some of the ammunition away from critics of financial regulatory reform. It’s time for team Obama to stop simply paying lip service to the need for greater transparency in the financial system.

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