No One Discloses Who Took $586B in Fed Swaps

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 theinterest 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 RepresentativeRandy 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.

Unprecedented Transparency

The secrecy surrounding foreign central banks’ emergency lending contrasts with unprecedented transparency at the Fed, which was compelled by the 2010 Dodd-Frank Act and court-upheld Freedom of Information Act requests to release details on more than a dozenprograms used to combat the U.S. financial crisis from 2007 through 2010. Bernanke this year began holding regular press conferences and has said he is considering ways to make the Fed’s objectives more clear to the public.

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. “Decisions about disclosure by foreign central banks of their financial arrangements with financial institutions in their jurisdictions is an issue for the foreign central banks.”

Turmoil Overseas

Americans may have to accept nondisclosure as a condition of protecting the U.S. economyfrom turmoil overseas, said Dean Baker, co-director of the Center for Economic and Policy Research in Washington.

“As much as we might like to say they should have at least as much transparency as the Fed, I don’t know if we want to say, ‘Well, if you don’t, you’re not going to get the money,’” Baker said. U.S. policy makers should encourage international standards for disclosure through talks at forums such as meetings of the Group of 20 nations, he added.

The swaps are separate from Fed emergency loans to banks and other businesses that peaked at $1.2 trillion in December 2008, including about $538 billion that European financial companies borrowed directly, according to a Bloomberg News examination of available data.

The Fed last week released a letter from Bernanke and a staff memo criticizing recent news articles for portraying its crisis-lending efforts as secret, saying that it made aggregate amounts of the loans public. Bloomberg, which published a Nov. 28 article on the topic, said in a point-by-point response that it considered the data secret because the terms of the loans and names of borrowers were withheld. The Fed had resisted disclosing them for more than two years.