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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Ron Paul on Financial Regulations and Fed

Texas Congressman Ron Paul on CNBC Squawk Box, on financial regulations and the Federal Reserve audit.

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Paul: Audit the Fed Bill Totally "Gutted"

by Mel Watt (D, NC). What a surprise.

Federal Reserve Policy Audit Legislation ‘Gutted,’ Paul Says
(Bob Ivry, 10/30/09 Bloomberg) [emphasis is mine]

"Oct. 30 (Bloomberg) -- Representative Ron Paul, the Texas Republican who has called for an end to the Federal Reserve, said legislation he introduced to audit monetary policy has been “gutted” while moving toward a possible vote in the Democratic-controlled House.

"The bill, with 308 co-sponsors, has been stripped of provisions that would remove Fed exemptions from audits of transactions with foreign central banks, monetary policy deliberations, transactions made under the direction of the Federal Open Market Committee and communications between the Board, the reserve banks and staff, Paul said today.

"“There’s nothing left, it’s been gutted,” he said in a telephone interview. “This is not a partisan issue. People all over the country want to know what the Fed is up to, and this legislation was supposed to help them do that.” "

"Paul, a member of the House Financial Services Committee, said Mel Watt, a Democrat from North Carolina, has eliminated “just about everything” while preparing the legislation for formal consideration. Watt is chairman of the panel’s domestic monetary policy and technology subcommittee."

"Paul said he intends to introduce an amendment to the bill when it comes to the House floor for a vote restoring the legislation’s original language."

Mr. Watt's district includes Charlotte, NC, where Bank of America, the largest lender in the U.S., is headquartered, as noted by the article.

If you are in Mr. Watt's district, or Chairman Frank's district and want to know what on earth the Federal Reserve has been doing with your money and a whole lot of others, PLEASE write to them and tell them they must restore the original bill as introduced by Ron Paul.

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Entire Hearing on H.R. 1207 in House Finance Committee

on September 25, 2009. Historic, as Barney Frank says.

Here's the link to yesterday's entire full-committee hearing of H.R. 1207 in House Financial Services Committee.

http://www.house.gov/apps/list/hearing/financialsvcs_dem/fchr_092509.shtml

I was impressed with the disciplined way that Chairman Barney Frank ran his committee when I was watching part of the hearing, but I now have some respect for him (which it hardly existed in me before) after hearing his opening remark. I missed it yesterday, as I caught only the last hour or so of the hearing.

Barney Frank started off by saying "This is a historic hearing." He noted that Ron Paul first filed this bill for the first time in 1983, and 12 years that the Republican Party control the agenda of the Committee they found no time for the hearing . He was pleased, in the show of bipartisanship, to be the one to give this important piece of legislation its first hearing ever.

Frank went on to state that the openness and transparency issue with the Federal Reserve was a bipartisan issue, and was not new; in fact, under Chairman Gonzales in 1983, the Committee succeeded in making the Federal Reserve more open. At that time, the meetings of FOMC were kept secret. The Federal Reserve denied even the existence of the minutes of the meetings, which happened to be found later in a drawer, Frank remarked.

Also (and that's where he gained my respect), he said in 2003 Ron Paul had been slated to be the chairman of the Domestic Monetary Policy Subcommittee, and that subcommittee immediately disappeared. It was merged into the International Monetary Policy Subcommittee. "There were people who wanted to shield the Federal Reserve from Mr. Paul's influence," Frank said.

Before he yielded to Ron Paul for his opening remarks, Frank expressed his concerns in proceeding with the legislation, which he had already expressed previously; that he didn't want to make the disclosure of the audit results interfere with the market in any way, and wouldn't want to allow any party from profiting from the Fed's moves (buying and selling in the financial market).

Well, many think that's been happening already anyway for quite a long time. He doesn't need to worry about that aspect, because that's what many large, influential financial institutions have already been successful in anticipating the Fed's moves and profiting from it, with or without insider knowledge.

I would love to know (on top of my head, for no particular order):

• Where did the money go and how much, and how was it used, in foreign currency swaps;
• Fed's relationship with primary dealers in stock, bond, and commodity markets
• Detailed accounting for the TARP money that the Fed administered
• What exactly is in the Maiden Lane portfolio and how they are valued
• Physical gold audit (why is it priced at $42, anyway?)
• Mark to market value of its assets (agency bonds, MBS, and all the "assets" that the Fed got in exchange for the various loans)
• What are the "Other assets" on their balance sheet
• Why they stopped disclosing M3
• Detailed accounting of the ownership of the Fed (who exactly are the shareholders?)

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Audit the Fed Hearing Note (2)

(Latest at the top)

Hearing over. But Mr. Woods, that microphone is still live.

Rep. Royce: We're compounding the boom-bust cycle.

Mr. Woods: The Federal Reserve creates "moral hazard" because it can create money as much as they want. Why equity ratio is so low in the financial industry? Because they have the lender of last resort [the Federal Reserve].

Rep. Royce is citing the Richmond Fed's study that 40% of bad assets is backed by the Fed (?), and mentions "moral hazard".

Rep. Brad Sherman is asking about the loans that the Fed has extended and which the Fed hasn't disclosed the detail of the loans. Handing out risky loans on the concessionary term and tell the public "don't worry" doesn't seem like a good way.

Rep. Michele Bachmann is for tightening the scope of the Fed operation.

Someone was showing a U.S. dollar bill right behind Mr. Woods, and Rep. Watt and Chairman Frank told him to stop.

Chairman Frank is asking if the [audit] information should be made public instantaneously.

Rep. Ron Paul again.

Rep. Melvin Watt is insisting if Mr. Woods distinguish between the policy audit and the audit (opening the book), and saying the discussion is not of any substance.

Thomas Woods: we don't support any watered-down version of the bill. It would be the dignified way for the Fed if they simply accept the audit. Otherwise, people would increasingly wonder what the Fed may be hiding.

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Audit the Fed Hearing Note (1)

(Latest at the top)

Thomas Woods of Ludwig von Mises Institute is the other witness.

Mr. Alvarez is done. The other witness is taking the seat.

Rep. Donald Manzullo is asking whether the Fed is monetizing money for helping companies like AIG.

Rep. Adam Putnam is listing off the items NOT disclosed about the Fed's operations and asking why.

Oh my goodness. This Californian Congressman (Rep. Edward Royce) cites Ludwig von Mises! [First I ever heard anyone other than Ron Paul cite von Mises.] The general counsel was saved by the Chairman Frank from answering the questions and embarrassing himself.

Rep. Alan Grayson made Mr. Alvarez, general counsel of the Board of Governors of the Fed, squirm, insisting to know whether the Fed has been manipulating the stock market and who specifically has been doing it.

Rep. Ron Paul asked about the potential Fed's manipulation in the gold market, and currency swaps with foreign central banks.

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Audit the Fed

Ron Paul's H.R. 1207 is being heard in the House Committee on Financial Services, thanks to Barney Frank. It's a historical day, regardless of whether the bill will pass. 96 years after the Federal Reserve System came into being, Congress is finally debating whether to audit the institution that wields enormous power over the nation's financial and economic policies. It's about time.

You can watch the hearings on the Committee's website.

(By the way, the member of the Federal Reserve Board, who wrote the op-ed piece for Wall Street Journal to coincide with this occasion, was a member of the Working Group on Financial Markets , aka the Plunge Protection Team.)

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