Frank to Consider Fed Audit Amendment Tomorrow

Ron Paul already said his bill "has been gutted", thanks to Mel.

Bloomberg reports that Barney Frank's committee (House Financial Services Committee) will take up "Fed audit proposals". The article isn't quite clear on what exactly will be taken up, but it looks like the amendment by North Carolina Democrat Mel Watt, which Texas Republican Ron Paul has said "has gutted" his proposal, H.R. 1207 (which has wide bipartisan support of 310 co-sponsors in the 435-member House).

Huffington Post is more explicit, and surprisingly forthcoming in denouncing the Watt amendment:

Audit The Fed Effort Under Threat in House
(Ryan Grim, 11/17/2009 Huffington Post)

"A bipartisan effort to force transparency on the Federal Reserve is suddenly in jeopardy after a House Financial Services Committee member introduced an amendment that would let the multi-trillion dollar organization continue throwing tax dollars around in secret.

"Rep. Mel Watt, a Democrat from North Carolina, has introduced an amendment intended as an alternative to the measure to audit the Federal Reserve introduced by Reps. Ron Paul (R-Texas) and Alan Grayson's (D-Fla.) . But instead of increasing transparency, as the amendment claims to do, Watt's measure would instead make the institution more opaque."

The article has a link to Watt's amendment, which I reproduce here.

According to the article, Representative Watt, whose district is a home to one of the largest recipients of the Fed bailout money (Bank of America), has said that his amendment will provide unprecedented transparency. But the writer of the article doesn't buy that argument:

"In fact, the critics are conceding no such thing. "The Watt Amendment, as written today, actually places new restrictions on the little authority that exists, such as it is, for independent auditing of the Fed," Grayson said. "It keeps in place all existing restrictions and adds four more. So I don't see why anybody would reasonably think that it creates unprecedented authority to audit the Fed."

"The devil, as always, is in the details. While Watt's amendment talks a big game about opening up the Fed to a complete audit, all of the new powers granted must be carried out "each case in accordance with subsections (b) and (e)."

"Those subsections of the current law delineate the many restrictions that an auditor confronts when seeking to audit the Fed. Watt's measure not only leaves those in place but requires all audits to abide by them.

"And in addition to the current restrictions in place, it creates new ones. An auditor could not look at loans or liquidity arrangements the Fed enters into, the terms of those arrangements, or the effect of those loans and other liquidity deals on "reserves, the balance sheet or financial condition of a Federal reserve bank or the Federal Reserve System."

Florida Representative Grayson is downright sarcastic:

""The new exemptions are described as limited but they are extremely broad," Grayson said. They're so broad, in fact, that there would be very little left for an auditor to look into. What could an auditor check up on?

""Count the pencils on the desks," Grayson speculated. "Perhaps check on proper Metro card usage.""

I want to add two problems I see regarding "Audit the Fed".

First, the Federal Reserve is audited, contrary to the claim otherwise, by one of the large accounting firms (Deloitte & Touche). So, those people demanding the audit because "it's never been done" are showing their ignorance.

Second, the root problem seems to me to be the fact that the Federal Reserve doesn't do their books like other banks, corporations, or even non-profit organizations. The Federal Reserve has its own uique set of rules that it has developed, and does not follow GAAP (Generally Accepted Accounting Principle). If you look at the audit report, it is full of exceptions because of the Federal Reserve's unique status as policy-setting institution. Here's from the Deloitte & Touche's audit report for 2008:

Accounting principles for entities with the unique powers and responsibilities of a nation's central bank have not been formulated by accounting standard-setting bodies. The Board of Governors has developed specialized accounting principles and practices that it considers to be appropriate for the nature and function of a central bank.

Differences exist between the accounting principles and practices in the FAM and
generally accepted accounting principles in the United States ("GAAP"), primarily due to the unique nature of the Reserve Banks’ powers and responsibilities as part of the nation’s central bank.

In my personal opinion, Ron Paul's bill should have first demanded that the independent third party do the accounting and produce the balance sheet, income statement, and all the supplemental statements just like they are required for banks and corporations, then do the audit based on that information.

If you are so inclined, here's the list of the Committee members to contact.

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