BOARDOFGOVERNORS
OFTHE
FEOERALRESERVESYSTEM
WASHINGTON,D,C.20551
December6,2011
BENS.BERNANKECHAIRMAN
TheHonorableSpencerBachusChairmanCommitteeonFinancialServicesHouseofRepresentativesWashington,D.C.20515TheHonorableBarneyFrankRankingMemberCommitteeonFinancialServiesHouseofRepresentativesWashington,D.C.20515DearMr.ChairmanandRankingMember:Therehavebeenaseriesofrecentarticles-onejustlastweek--concerningtheFederalReserve'semergencylendingactivitiesduringthefinancialcrisis.Thesearticleshavelargelyrepeatedthesameinformationindifferentformats,andhavecontainedavarietyofegregiouserrorsandmistakes.ThearticlesrecycleinformationthathasbeendisclosedtotheCongressandtheAmericanpeopleinvariousformsforsometime,andhasbeenthesubjectofinvestigations,reviews,andreportsbytheCongress,theGovernmentAccountabilityOffice,theCongressionalOversightPanel,theSpecialInspectorGeneralfortheTroubledAssetReliefProgram,andothers.Moreover,thedisclosureissuesraisedinthesearticleshavealreadybeenaddressedandsettled,firstbytheFederalReservethroughavarietyofreportsandpublicpostings,andthenbyCongressafterapublicdebate.SincethearticlesbeardirectlyontheFederalReserve'srelationshipwiththeCongressandtheAmericanpeople,IwantedtosharewithyouamemopreparedbyBoardstaffthataddressessomeofthemostseriouserrorsandclaimsinthosearticles.AsIhavesaidinspeechesandintestimonybeforetheCongress,andastheGovernmentAccountabilityOfficeandotherreviewingbodieshavefound,theFederalReserveimplementedtheseemergencylendingprogramstoprovideliquidityandtopreventthecollapseofthefinancialsystemduringaperiodoftremendousfinancialstress.WorkingwiththeAdministrationandtheCongress,weaccomplishedthatgoal.Intheprocess,thenationhasinstitutedimportantchangesintheregulatoryarena.Specifically,Congresshasprovidedavarietyoftools=includingenhancedsupervisionforlarge,systemicallysignificantfinancialinstitutionsandaresolutionmechanismtowinddownsuchfirmswhennecessary-sandtheFederalReserveandtheotherfinancialregulatorsareworkinghardtoimplementthesefinancialcrisismanagementtools.Ihopethatyouwillnothesitatetocontactmeifwecanbeofassistance.Sincerely,
~~
Enclosure
CorrectionofRecentPressReportsRegardingFederalReserveEmergencyLendingDuringtheFinancialCrisis
RecentpressreportscontainnumerouserrorsandmisrepresentationsaboutFederalReserveemergencylendingduringthefinancialcrisis.First,thesearticleshavemaderepeatedclaimsthattheFederalReserveconducted"secret"lendingthatwasnotdisclosedeithertothepublicortheCongress.NolendingprogramwaseverkeptsecretfromtheCongressorthepublic.Alloftheprogramswerepubliclyannouncedwhentheywereinitiated,andinformationaboutalllendingundertheprogramswaspubliclyreleased--bothonaweeklybasisthroughtheFederalReserve'spublicbalancesheetreleaseandthroughdetailedmonthlyreportstotheCongress,bothofwhichwerealsopostedontheFederalReserve'swebsite.
It
istruethat,generally,thenamesofthecounterpartiesandborrowersfromtheemergencyfacilitieswerenotimmediatelydisclosed,consistentwithgeneralcentralbankingpractice.Releasingthenamesoftheseinstitutionsinreal-time,inthemidstofthefinancialcrisis,wouldhaveseriouslyunderminedtheeffectivenessoftheemergencylendingandtheconfidenceofinvestorsandborrowers.Thesematterswerediscussedextensivelyatthetimeinthepress,andtheChairmanandothermembersoftheBoarddiscussedthemnumeroustimesinhearingsbeforetheCongress.Inpointoffact,theFederalReservetookgreatcaretoensurethatCongresswaswell-informedofthemagnitudeandmannerofitslending.AsrequiredbytheEmergencyEconomicStabilizationAct,passedinlate2008,theFederalReservereportedregularlyontheoutstandingbalancesinitsSec.13(3)lendingfacilitiesaswellasoncollateral(bytypeandquality)fortheloans.BeginninginJune2009,theFederalReservewentwellbeyondtheselegalrequirementsintheinformationitmadeavailableinitsmonthlypublicreportstotheCongress,whichwerealsopostedontheFederalReserve'swebsite.Moreover,Congresswaswellinformedofthevolumeofborrowingbylargebanks.Forinstance,themonthlyreportsshowedthedailyaverageborrowingduringthemonthintheaggregateforthefivelargestdiscountwindowborrowers,thenextfive,andtherest.Similarinformationwasalsoprovidedforlendingattheemergencyfacilities.Inaddition,theissueofcounterpartydisclosurewaswell-knowntotheCongressandwasaddressedaspartoftheDodd-FrankAct.UnderprovisionsoftheSandersAmendment,thenamesofallcounterpartiesandborrowersfromtheemergencylendingfacilitiesandtheTermAuctionFacility(TAF)weredisclosedonDecember1,2010.Dataprovidedincludedthenamesoftheborrowers,thedatethatcreditwasextended,theinterestrate,informationaboutthecollateral,andotherrelevantterms.Similarinformationissuppliedforswaplinedrawsandrepayments.DetailsforeachagencyMBSpurchaseincludedthecounterpartytothetransaction,thedateofthetransaction,theamountofthetransaction,andthepriceatwhicheachtransactionwasconducted.AdditionaldisclosuresofdiscountwindowborrowersandtransactionsinformationweremadeonMarch31,2011.
Page2of4Second,onearticleassertedthattheFederalReservelentorguaranteedmorethan$7.7trillionduringthefinancialcrisis.Othershaveestimatedtheamountstobe$16trillionoreven$24trillion.Allofthesenumbersarewildlyinaccurate.AsdisclosedontheFederalReserve'sbalancesheet,publishedweeklyandauditedannuallybyindependentauditors,totalcreditoutstandingundertheliquidityprogramswasnevermorethanabout$1.5trillion;thatwasthepeakreachedinDecember2008.Tobesure,thatisaverylargeamount,butitwasanecessaryresponsetoensurethatthecrucialmistakemadeduringtheGreatDepression=failingtopreventthecollapseofthefinancialsystem--wasnotrepeated.Importantly,suchlendinghelpedsupportthecontinuedflowofcredittoAmericanfamiliesandbusinesses.Theinaccurateandmisleadingestimatescouldbebasedonseveralerrors,includingdouble-counting-forexample,includingaseriesofloans,paidandthenreissued,asseparateloans.Becausemuchofthelendingwasonarevolvingbasisandmadeeitherovernightorforshortdurations(30,60,or90days,orevenovernight),suchdoublecountingcouldleadtoagrossoverestimateoftheactualamountoflending.Lendingisnotspendingandthusitismisleadingtoaddupasuccessionofloansthatwerepaidoffonarevolvingbasis.Agoodanalogymightbeafamily'Smortgage:ifafamilyreceiveda$200,000mortgageloan,thenrefinancedtwoyearslatertotakeadvantageoflowerrates,againborrowing$200,000,itwouldbemisleadingtosayithadborrowed$400,000.Likewise,ifabanklends$1,000forayearatatime,$1,000amonthatatimeforayear,and$1,000adayatatimeforayear=repayingtheloansattheendofeachperiod=theeconomicresultisthattheborrowerhasborrowedjustatotalof$1,000ineachcase,anditwouldbeincorrecttosaythattheborrowerwouldhaveborrowed$12,000inthesecondinstance,and$365,000inthethirdinstance.Otherinaccuraciesmayoccuriftotal
potential
lendingiscountedas
actual
lending.Forinstance,theTALFprogramwasauthorizedat$200billion,butitstotallendingneverexceeded$70billion.Thesamemistakewouldalsoapplyinreferencetootherlendingprograms,likethecommercialpaperfundingfacility,whichwereauthorizedatfarhigheramountsthanwereeverprovided.Althoughthearticlesdonotstressthispoint,itisimportanttonotethatnearlyalloftheemergencyassistancehas,infact,beenfullyrepaidorisontracktobefullyrepaid.ThisfacthasbeenverifiedbothbytheBoard'sindependentauditorsandtheGovernmentAccountabilityOffice(GAO).Importantly,FederalReservelendingshouldinnowaybecomparedwithgovernmentspending.FederalReservelendingisrepaid,withinterest,andtheFederalReservehasneversufferedacreditloss.AsprovidedintheDodd-FrankAct,theGAOconductedareviewofalloftheemergencylendingfacilitiesandconfirmedinitsreportonJuly21,2011,thatnotonlyweretherenomaterialissueswithrespecttothedesign,implementationandoperationofthefacilities,butthatallloanstothefacilitieswerefullyrepaidorexpectedtobefullyrepaid.
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Bernanke Letter to Frank and Bachus on Fed Bailouts
This is a letter from the Federal Reserve to the top officials of the Financial Services Committee on the bailouts.
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