Reform reading: Fed reveals details about $3 trillion in emergency loans

Introduction

The Fed did its own version of a document dump today, releasing the names of bank counterparties and other loan details from $3.3 trillion in emergency aid the central bank offered at the height of the financial crisis.

The Dodd-Frank law required the Fed to make public information about its unprecedented emergency loans to unfreeze U.S. credit markets in late 2008. The unusual mandate from Congress was inserted in the financial reform legislation by Vermont Sen. Bernard Sanders after Fed chief Ben Bernanke refused to identify which banks benefitted from the Fed loans.

Information released today included the amount of each loan and interest rate, as well as details about the Fed’s purchase of risky mortgage-backed securities and commercial paper from banks and big companies.

Bank of America Corp. and Wells Fargo & Co. were among the biggest borrowers from one of the Fed’s lending programs — the Term Auction Facility — with as much as $45 billion apiece, Bloomberg’s Craig Torres and Scott Lanman reported. Other beneficiaries were U.S. units of foreign banks UBS AG, Societe Generale and Dresdner Bank AG. General Electric Co., meanwhile, tapped a Fed program for some $16 billion in commercial paper, Bloomberg said.

Financial Research unit eyes counterparties

Wall Street has been warily watching the new Office of Financial Research to see what information it demands from market players to monitor systemic risk in the U.S. financial system. The office has taken its first official step by asking for public comments by Jan. 31 on how to set an industry-wide standard to identify banks, funds, broker-dealers, and their counterparties in financial contracts.

During the 2008-09 financial meltdown, the identities of insurance giant AIG’s counterparties remained a closely-guarded secret despite Senate Banking Committee attempts to pry loose the names. Many of AIG’s trading partners benefitted from the company’s $180 billion taxpayer bailout because U.S. regulators feared that AIG’s collapse would shake Europe’s financial stability. By creating what the Office of Financial Research calls a “legal entity identifier” for financial market contracts, it hopes to get a clearer picture of the interconnections among financial firms and systemic risk to the U.S. financial system.

The Dodd-Frank financial reform law gave the Office of Financial Research considerable power to collect data about individual loans from banks, hedge funds, and broker-dealers – and subpoena power if they balk. No word yet on who will be tapped by the Obama administration to head the new office, a position that requires Senate confirmation. The office will advise the new Financial Stability Oversight Council, the group of top regulators led by Treasury Secretary Tim Geithner.

Fed official questions bureau funding

The head of the St. Louis Fed has added fuel to Republicans’ attacks on the new Consumer Financial Protection Bureau by saying that he is “concerned” about the bureau’s unusual funding mechanism. The Dodd-Frank financial reform law requires the Fed to bankroll the bureau based on the equivalent of 10 percent of the Fed’s expenses in 2011, 11 percent in 2012, and 12 percent in 2013 and forward.

“The amount of money allocated in the law is not based on any careful assessment of what the needs of the Bureau will be as it attempts to fulfill the mandate of the Congress with regard to consumer protection. Nor is there any mechanism for changing these amounts going forward,” said James Bullard, president of the St. Louis Fed. The funding structure created in the Democratic-written law insulates the bureau’s annual budget of $500 million or so from lawmakers’ annual appropriations debates – a sore point with Republicans such as Spencer Bachus, the presumptive chairman of the House Financial Services Committee.

Among the new agency’s many responsibilities is to write consumer protection rules for all U.S. banks, and then to enforce the rules at about 82 U.S. banks that have $10 billion or more in total assets. In addition, the bureau will write regulations and conduct examinations for the so-called “shadow” network of consumer credit entities such as payday lenders, pawn shops, check cashers, and money transmitters.

TARP price tag drops to $25 billion

The Treasury Department’s $700 billion bailout program is turning out to be a relative bargain for U.S. taxpayers.

The Congressional Budget Office’s latest estimate says the Troubled Asset Relief Program (TARP), which Congress hurried to pass and ex-President George W. Bush signed into law amid a 2008 collapse in U.S. credit markets, will end up costing about $25 billion. That is down from the CBO’s August 2010 estimate that TARP would cost about $66 billion and its March 2010 estimate of $109 billion.

Why the drop? The CBO says it’s because of improvements at General Motors, Chrysler, and AIG, and additional repurchases of preferred stock by banks that received TARP funds.