Saturday, December 04, 2010

Federal Reserve May Be `Central Bank of the World' After UBS, Barclays Aid

Federal Reserve May Be `Central Bank of the World' After UBS, Barclays Aid; Bloomberg

Do you think we need some real oversight in Congress yet?
Federal Reserve data showing UBS AG and Barclays Plc ranked among the top users of $3.3 trillion from emergency programs is stoking debate on whether U.S. regulators bear responsibility for aiding other nations’ banks. 

UBS was the biggest borrower under the Commercial Paper Funding Facility, with $74.5 billion overall, more than twice as much as Citigroup Inc., the top U.S. bank recipient, according to the data released yesterday. London-based Barclays Plc took the biggest single amount under another program that made overnight loans, when it got $47.9 billion on Sept. 18, 2008. 

“We’re talking about huge sums of money going to bail out large foreign banks,” said Senator Bernard Sanders, the Vermont independent who wrote the provision in the Dodd-Frank Act that required the Fed disclosures. “Has the Federal Reserve become the central bank of the world? I think that is a question that needs to be examined.” 

The first detailed accounting of U.S. efforts to spare European banks may add to scrutiny of the central bank, already at its most intense in three decades. The Fed, which released data on 21,000 transactions, said in a statement that its 11 emergency programs helped stabilize markets and support economic recovery. The Fed said there have been no credit losses on rescue programs that have been closed.
The growth of the U.S. mortgage-backed securities market and the dollar’s status as the world’s reserve currency enticed overseas banks such as Zurich-based UBS to buy assets in the country before 2008. They paid for the holdings with U.S. dollars, and when funding seized up, the Federal Reserve refused to take the risk that European firms would unload the assets and further depress markets for housing-related investments. 

‘Much Worse’ 

“Things would have been worse if they hadn’t lent to foreigners,” said Perry Mehrling, senior fellow at the Morin Center for Banking and Financial Law at Boston University and author of “The New Lombard Street: How the Fed became the Dealer of Last Resort.” “We’re finally getting to understand the role of the Fed in the world.” 

Fed spreadsheets showed the central bank became the world’s lender of last resort as dollars flowed to European banks as well as Bank of America Corp. and Wells Fargo & Co., among top borrowers from the Term Auction Facility at $45 billion each. 

Goldman Sachs Group Inc., which posted record profit last year, borrowed more than $24 billion from another program. Milwaukee-based Harley-Davidson Inc. and Fairfield, Connecticut- based General Electric Co. sold commercial paper, a form of short-term debt, to the Fed under a program that lent as much as $348.2 billion at its peak. 

Sanders, the Vermont senator, said yesterday he plans to investigate whether banks profited by borrowing from the Fed and investing the funds in Treasuries, benefiting from the difference in interest rates. 

Read the rest here.

Comment: It's the Christmas shopping season where Americans rack up huge credit card debt, but it's been that way in Congress since 1913 when the 17th Amendment was enacted. So I'll ask again, do you think it's time for some real oversight or in other terms, a restoration of checks and balances?

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