Congress begins chipping at Fed's secrecy

Fed's Role in AIG May Be First Target of GAO Audit

By Scott Lanman
Bloomberg News
Tuesday, June 2, 2009

WASHINGTON -- Congressional auditors may soon examine the Federal Reserve's role in the U.S. bailout of American International Group Inc. after gaining authority to review Fed documents under a law that took force last week, Acting U.S. Comptroller General Gene Dodaro said.

"We're in the process now of developing our future work plans and certainly we'll use our authorities," Dodaro, head of the Government Accountability Office, said in his first interview on the topic since President Barack Obama signed the Fed audit powers into law on May 20. "In terms of exercising the newest authority, AIG will be the first entity."

Audits by the congressional watchdog are part of intensified scrutiny by lawmakers concerned about costs to taxpayers from the Fed's unprecedented expansion of credit to nonbank financial firms. The central bank, seeking to revive lending and end the worst recession in half a century, has invoked emergency powers and doubled its assets the past year.

The GAO's first report using the new powers may come within a few months, Dodaro said. "We can report any time we find something significant," he said.

The Senate voted 95-1 on May 6 to add the Fed clause to a bill that revamps a federal mortgage-aid program and helps the Federal Deposit Insurance Corp. rebuild its insurance fund at a faster pace. The law gives the GAO power to examine Fed emergency aid to specific companies, such as AIG, Bank of America Corp., and Citigroup Inc.

In congressional hearings in March, Dodaro called for a "carefully crafted" and possible temporary rollback of limits on GAO audits of the Fed so the agency could examine the AIG rescue and other programs.

The new law doesn't remove limits from a 1978 law that prohibits the GAO from peering into Fed activities involving monetary policy or discount-window loans to banks. The GAO produces about 20 reports a year that touch on other Fed activities, such as bank regulation.

"We needed to have this authority to comply with our responsibilities under the Economic Stabilization Act," which in October authorized the Troubled Asset Relief Program, Dodaro said. AIG is getting as much as $70 billion of the $700 billion Congress approved for TARP, while the Fed has separately extended $85 billion in credit in connection with the bailout.

The new law is designed to give the GAO access to records and people at the Fed's Board of Governors in Washington as well as the 12 district banks, such as the New York Fed, which has been the government's lead day-to-day supervisor of AIG.

The GAO has been examining the Fed and government's approach to AIG. In a March report, the agency said the U.S. Treasury should demand that the company seek concessions from employees, creditors and derivatives counterparties as a condition of its aid.

"We've covered these things all to a certain degree," Dodaro said. "Now we have the ability to cover them more in depth."

"We remain vigilant to determine whether we need additional authority," he said.

The new Fed audit law differs from more intrusive legislation introduced in the House by Ron Paul, a Texas Republican, and in the Senate by Bernie Sanders, a Vermont independent. Those bills, which haven't made it past the initial stage of being introduced in Congress, would remove limits on GAO audits of the Fed and direct the agency to issue a report on the central bank by the end of next year.

Lawmakers from both political parties have called in recent months for stronger congressional oversight of the Fed, which has used Depression-era powers to expand its balance sheet while bailing out AIG and Bear Stearns Cos.

Fed Chairman Ben S. Bernanke indicated in testimony May 5 that he wouldn't object to GAO audits of the central bank as long as there was no examination of monetary policy. Fed officials are wary of political interference into their ability to tighten credit and contain inflation.

"If Congress needs more information about the operations that we are doing, exactly how we manage our collateral, how we manage our lending, those sorts of things, I think we can talk to you about providing more information about that and, if necessary, working with the GAO," Bernanke said at a Joint Economic Committee hearing at the time.

"I certainly would resist any attempt to dictate to the Federal Reserve how to make monetary policy," Bernanke added.

Sen. Charles Grassley, the Iowa Republican who sponsored the amendment allowing the Fed audits, said May 6 that while the authority was narrower than he would have liked, "it is a reasonable step in the right direction, and it does not threaten monetary policy independence."