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AUDIT THE FED: DODD-FRANK, QE3, 

AND FEDERAL RESERVE TRANSPARENCY 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

DOMESTIC MONETARY POLICY 

AND TECHNOLOGY 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

OCTOBER 4, 2011 

Printed for the use of the Committee on Financial Services 

Serial No. 112–67 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO R. CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

LARRY C. LAVENDER, Chief of Staff 

(III) 

SUBCOMMITTEE ON DOMESTIC MONETARY POLICY AND TECHNOLOGY

RON PAUL, Texas, Chairman 

WALTER B. JONES, North Carolina, Vice 

Chairman 

FRANK D. LUCAS, Oklahoma 

PATRICK T. MCHENRY, North Carolina 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

NAN A. S. HAYWORTH, New York 

DAVID SCHWEIKERT, Arizona 

WM. LACY CLAY, Missouri, Ranking 

Member 

CAROLYN B. MALONEY, New York 

GREGORY W. MEEKS, New York 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GARY C. PETERS, Michigan 

(IV) 

C O N T E N T S 

Page 

Hearing held on: 

October 4, 2011 ................................................................................................. 1 

Appendix: 

October 4, 2011 ................................................................................................. 29 

WITNESSES 

TUESDAY, OCTOBER 4, 2011 

Auerbach, Robert D., Professor of Public Affairs, Lyndon B. Johnson School 

of Public Affairs, University of Texas at Austin ................................................ 14 

Brown, Orice Williams, Managing Director, Financial Markets and Community Investment, U.S. Government Accountability Office ................................. 3 

Calabria, Mark A., Ph.D., Director, Financial Regulation Studies, Cato Institute ........................................................................................................................ 16

APPENDIX 

Prepared statements: 

Paul, Hon. Ron .................................................................................................. 30 

Auerbach, Robert D. ......................................................................................... 33 

Brown, Orice Williams ..................................................................................... 43 

Calabria, Mark A. ............................................................................................. 70 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Brown, Orice Williams: 

Addendum to three responses provided during the hearing ......................... 77 

(1) 

AUDIT THE FED: DODD-FRANK, QE3, 

AND FEDERAL RESERVE TRANSPARENCY 

Tuesday, October 4, 2011 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON DOMESTIC MONETARY

POLICY AND TECHNOLOGY, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:05 a.m., in room 

2128, Rayburn House Office Building, Hon. Ron Paul [chairman of 

the subcommittee] presiding. 

Members present: Representatives Paul, Luetkemeyer, Huizenga, 

Hayworth, Schweikert; and Peters. 

Chairman PAUL. This hearing will come to order. 

Without objection, all members’ opening statements will be made 

a part of the record. 

This morning, we are holding a hearing entitled, ‘‘Audit the Fed: 

Dodd-Frank, QE3, and Federal Reserve Transparency.’’ I will yield 

myself 5 minutes for opening remarks. 

Transparency of the Federal Reserve has been an issue that I 

have been working on for many years, and I consider it very, very 

important, and we have been making some progress on this. Back 

in the 1970s, there was a major effort made to get more transparency of the Fed, but unfortunately it actually backfired and 

gave more protection to the Fed from any inquiries made by the 

Congress. 

One thing I would like to make clear is my efforts to have more 

transparency of the Fed aren’t equated to that of wanting Congress 

to manage day-to-day operations of the monetary policy. Quite 

frankly, I think managing of the monetary policy should be more 

involved with a free market, free market of interest rates, rather 

than anybody believing they can manage that from a day-to-day 

viewpoint. 

Frequently, it is said that the independence of the Fed must be 

protected at all costs. I usually think once there is an emphasis on 

independence of the Fed, it usually means the secrecy of the Fed, 

and it is quite a bit of a difference, but the Fed hides behind this 

independence so there is no political influence. 

But I think more people now are starting to realize that the Fed 

isn’t truly independent from political influence because indirectly, 

and sometimes more directly, it is involved in political decisions or 

at least private and secret decisions made to serve some political 

interest. 

2 

The Constitution is rather clear on if anybody is to have any 

oversight, it would be the Congress rather than the Executive 

Branch. The ability to do this, of course, has been hindered. The 

Congress created the Federal Reserve with the Federal Reserve Act 

of 1913, and therefore, obviously the Congress has something to 

say about it. Not only did they create the Fed, but they have 

changed the rules. Congress has passed laws giving instructions to 

the Federal Reserve, so clearly, Congress has the responsibility of 

oversight of the Federal Reserve. 

I think it is very interesting that one of the arguments for independence is that we can’t allow the people to know what is going 

on with the banks; that if all of the sudden, we knew that a bank 

was having a problem, this would be bad information for the people 

to know. And then that is used as an excuse to prop up certain 

banks and make sure bailouts occur and that there is a lender of 

last resort, and there is no confusion or, otherwise, no correction 

that might be necessary. 

But in many ways, the Fed performs a function exactly opposite 

of what the SEC is supposed to do. The SEC is a regulator that 

is supposed to go in and look at the books and throw out some 

rules so that people know what is going on and get information out. 

It seems to me at least, that the Federal Reserve does exactly the 

opposite. 

The significance of monetary policy is really the overriding issue 

about the Federal Reserve, and what has happened since 1913 and 

actually what is happening today, because we are in the midst of 

a major crisis, and there are many of us who have come to the conclusion that the business cycle is very much related to monetary 

policy. So, if the business cycle is related to monetary policy, this 

should be of vital interest to all of us. If we connect the two, the 

Federal Reserve and the business cycle, then we see that recessions 

and depressions are a result of the business cycle. First, you have 

the boom and you have to have the correction, so you have to have 

the bust. 

The other important relationship of the Federal Reserve to what 

Congress does, and for too long, it has actually been symbiotic, the 

Congress has been negligent in oversight, but they have been very 

complacent about deficits being accommodated. If the Fed was not 

so accommodative and always buy the debt and keep interest rates 

artificially low, there would be a lot more restraints on the Congress. But as long as Congress wants to spend money and they 

don’t want to raise taxes—that is not popular—and borrowing becomes difficult, then there is a better way from their viewpoint to 

do it, and that is just to allow the Fed to create money out of thin 

air, which for those of us who believe in less government is better 

than more government, whether it is warfare or welfare, we see 

that the Federal Reserve has a strong influence in allowing our 

government to grow. 

So I am very pleased to chair this hearing today, and I am very 

pleased to know that we are making progress. We didn’t get a full 

audit last year, but we did get an audit coming out of the DoddFrank Act. We did get a lot more information, and today we are 

going to receive more information, as well as the court cases that 

have come about. So compared to even 4 years ago, a lot of 

3 

progress has been made in the right direction, but from my viewpoint, we have a long way to go. 

I have concluded my opening statement. 

Do any other members wish to make an opening statement? 

Okay. We will then go ahead and start with our first panel. Our 

first panel consists of Ms. Orice Williams Brown, who has spent 

her 21-year career in civil service at the GAO office. She is currently the Managing Director of GAO’s Financial Markets and 

Community Investment team. Her portfolio of work includes banking, securities futures, and insurance issues. Most recently, she has 

been responsible for leading much of GAO’s work on the financial 

crisis, Treasury’s Troubled Asset Relief Program, the Federal Reserve System and its emergency lending programs, and regulatory 

reform. Ms. Brown received her MBA with a concentration in finance from Virginia Tech. I now recognize Ms. Brown for her testimony. 

STATEMENT OF ORICE WILLIAMS BROWN, MANAGING DIRECTOR, FINANCIAL MARKETS AND COMMUNITY INVESTMENT, 

U.S. GOVERNMENT ACCOUNTABILITY OFFICE 

Ms. BROWN. Thank you. Chairman Paul, members of the subcommittee, I am pleased to be here today to discuss our recent report on the Federal Reserve’s emergency programs. 

As you well know, the study was required by the Dodd-Frank 

Wall Street Reform and Consumer Protection Act. It is the first 

comprehensive assessment of the Federal Reserve’s use of emergency authority under section 13(3) of the Federal Reserve Act in 

response to the recent financial crisis. It also covers a number of 

programs that were carried out under sections 10(b) and 14 of the 

Federal Reserve Act. 

This morning, I would like to briefly highlight a few of our findings. 

First, we found that the Federal Reserve and its emergency programs were subject to a number of internal and external audits. 

None of these audits found material weaknesses, and when issues 

were uncovered, the reserve banks generally addressed the deficiency in a timely manner. However, we did find that some operational audits had not been completed until the emergency programs had been operational for over a year. 

Second, the New York Fed was the primary player in executing 

most of the emergency programs authorized by the Board of Governors and the Open Market Committee. However, one program, 

the Term Auction Facility, was executed across all 12 Federal Reserve Banks through their discount window operations. To implement and operate the various programs, the New York Fed used 

over 100 vendors to provide a variety of services, ranging from 

legal services to asset management. We found that most of the contracts were awarded noncompetitively and they were not recompeted after the period of exigency had passed. For a significant portion of vendor fees, Reserve Banks were reimbursed by program recipients or fees were paid from program income. 

Third, we found that while the Federal Reserve took steps to 

manage conflicts of interest, opportunities exist to strengthen its 

policies for employees, directors, and vendors. During the crisis, the 

4 

New York Fed expanded its guidance and monitoring for employee 

conflicts. However, while the crisis highlighted the potential for Reserve Banks to provide emergency assistance to a broad range of 

institutions, the New York Fed had not yet revised its conflict policies and procedures to more fully reflect potential conflicts that 

could arise with this new, expanded role. 

Fourth, we looked at the Federal Reserve’s risk management 

practices. We found that it took steps to mitigate the risk of loss, 

such as requiring collateral amounts beyond the loan exposure for 

the early programs, and accepting only highly rated assets as collateral for some of the latter, more novel, programs. For actions to 

assist individual institutions, it negotiated specific protections. 

Over time, the New York Fed expanded its risk management capabilities and strengthened its management of risks across all programs. However, we found that neither the Reserve Bank nor the 

Board of Governors tracked total potential loss exposures across all 

emergency programs. 

Finally, we found that while the Board of Governors took steps 

to promote consistent treatment of participants, it lacked guidance 

and documentation for some decisions. For example, Reserve Banks 

lacked documented procedures to guide decisions about restricting 

or denying access to the programs. We made seven recommendations to the Board of Governors to strengthen policies for managing 

noncompetitive vendor selections, conflicts of interests, risks related to emergency lending, and documentation of emergency program decisions. In response, the Reserve Board indicated that it 

recognized the benefits of our recommendations and would strongly 

consider how best to respond. 

In closing, I would also note that many of these programs were 

established at the height of the financial crisis, and little public information was provided initially. Over time, the Board of Governors 

and the New York Fed increased the amount of information provided to the public, and going forward, the Dodd-Frank Act requires even greater transparency and accountability for any future 

actions. 

Mr. Chairman and members of the subcommittee, this concludes 

my oral statement, and I will be happy to answer any questions at 

this time. Thank you. 

[The prepared statement of Ms. Williams Brown can be found on 

page 43 of the appendix.] 

Chairman PAUL. Thank you very much. 

I will yield 5 minutes to myself for questions. 

Overall, having done this audit and been involved, was there any 

one thing that you were more frustrated with? Was there any obstacle or misunderstanding or the law was confusing? Or was this 

a pretty clear-cut responsibility and there weren’t that many problems? How do you look at it in general? 

Ms. BROWN. In general, I would say that the Act laid out a pretty 

clear level of expectation for us in terms of what was expected, the 

programs that we were to cover, and exactly what aspects of the 

program and the operations of the programs that we were supposed 

to cover. So I would say it was fairly straightforward. 

Chairman PAUL. Okay. And this was a 1-year audit; you just 

have to perform this one time? 

5 

Ms. BROWN. Correct. 

Chairman PAUL. Would there be much of a problem if we were 

doing this every year as far as accomplishing what you have done? 

What kind of a task is this? 

Ms. BROWN. This particular audit, while it was fairly straightforward, was an enormous undertaking given the number of emergency programs involved. Going forward, if—one, we would have to 

keep in mind the current structure that we have around the future 

ability to perform perform audits. And Dodd-Frank includes in section 1102 some additional authority for us to look at any future 

credit facilities that the Fed may establish and also certain open 

market or monetary policy activities that are delineated in the 

Dodd-Frank Act. So if we were asked to audit those, we would look 

at any particular request in turn, and approach it very much the 

way we approach this. 

Chairman PAUL. And from your own experience, you have not 

had to look into the Federal Reserve in the way you did this time? 

Is this something rather unique for your experience? 

Ms. BROWN. Yes. 

Chairman PAUL. Many say that it is unnecessary to audit the 

Fed because they are already audited annually by an independent 

auditor. These audits are of the Fed’s financial statements and became a legal requirement in the late 1990s. 

Can you describe to us the difference between these financial audits that they would like to say, well, they are all inclusive and we 

know everything, versus an audit conducted by the GAO—could 

you describe the difference between the two? 

Ms. BROWN. Yes. GAO actually also does financial audits and we 

do performance evaluations, and the audit that we did and issued 

in July of 2011 falls under the program evaluation performance 

audit arena, and the biggest difference is that we in this were 

asked to look at specific operational issues. We were asked to look 

at the operational integrity issues like internal controls over the 

operations of the programs. We were also asked to look at how the 

programs were implemented and stood up. 

Financial audits tend to focus on if—whether or not the financial 

statements are being fairly and accurately presented and the controls around the financial reporting. So it tends to be much broader 

and also more in-depth. 

Chairman PAUL. Along that line, I want to follow up with a similar question. The Dodd-Frank GAO audit has been described as a 

procedural audit. It seems that most of the analysis was looking at 

the protocol and guidelines in place for the various emergency lending facilities. What do we know about individual transactions? How 

were they conducted, how was collateral evaluated, and who all 

had knowledge and access to the facilities and those things in general? Are they included in the GAO’s audit or were they not part 

of the directives given by the Dodd-Frank Act, especially on the individual transactions, and who knew about them and why they occurred? 

Ms. BROWN. We were specifically asked to look at the operational 

aspects of the program, but that includes looking at certain individual transactions, specifically when it came to assistance to individual institutions. But in terms of looking at the broad-based proVerDate Nov 24 2008 16:55 Mar 09, 2012 Jkt 072608 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\72608.TXT TERRIE
6 

grams, we did look at eligibility requirements. We looked at who 

the largest users were of the particular programs, and we also 

looked at how the decision was made from the perspective of who 

approved the particular emergency program—was it the Board of 

Governors, was it the Open Market Committee—and then how the 

particular Reserve Bank implemented the action that had been authorized by the Board of Governors or the FOMC. 

Chairman PAUL. Thank you. My 5 minutes has expired. So we 

will move on to the next member, the gentleman from Missouri, 

Blaine Luetkemeyer, for 5 minutes. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. One of the things 

that is concerning to me is the fact that all banks, credit unions, 

thrifts, what have you, they have some entity that provides oversight over them. And yet the Fed, which is the central bank basically, I guess you would say, of our country, has very little if any 

oversight over it, you know. And some of the things that you say 

here are the things that were not—because of the prohibitions— 

you were not able to go into. I think it is kind of interesting. Where 

do you think we need to draw the line on this? 

Ms. BROWN. GAO’s position is that this is a policy decision, and 

wherever the line is drawn and the bar is set for us to do whatever 

action, we will do what Congress asks us to do. 

Mr. LUETKEMEYER. Okay. Along that line, with regard to the 

emergency loans that were done during the height of the situation 

we had in this country, you say in here that the Federal Reserve 

banks required borrowers in several programs to post collateral in 

excess of the loan amount, programs that do not require pledge assets with high ratings, etc., etc. Did you see in the way that they 

handled the loans, was it, in normal banking terms—in other 

words, did they have the normal set of requirements for collateral 

excess over the loan they made, normal repayment terms, or what 

did you see there? 

Ms. BROWN. We did look at the security and collateral procedures 

around loans that were made and we evaluated the processes they 

had in place. And we found that they did have controls around 

those, that they did have requirements that certain loans be 

overcollateralized. And in other cases, there was a requirement 

that the collateral posted be highly rated. So there were certain 

controls that were built around the loans that were being made. 

Mr. LUETKEMEYER. Did you see anything there that was of concern to you? 

Ms. BROWN. We didn’t see anything that raised a major concern. 

We did point out that some of the internal audits that had been 

done had raised some questions around increasing the controls 

around the collateral, and we did look at the extent to which those 

had been addressed, and we found that at some point when an 

issue was raised, the bank would take steps to improve the controls 

that were in place. 

Mr. LUETKEMEYER. Have all of those loans been paid back? 

Ms. BROWN. For many of the broad programs, they have been. 

There are outstanding loans for the three Maiden Lane LLCs related to the assistance to Bear Stearns and AIG. 

Mr. LUETKEMEYER. Okay. The point I am going to try and get to 

here, though, is they haven’t all been paid back? 

7 

Ms. BROWN. Correct. 

Mr. LUETKEMEYER. Your audit authority is over with; is that correct? 

Ms. BROWN. Correct. 

Mr. LUETKEMEYER. Therefore, at this point, there is no audit authority on those loans that have been paid subsequent to your 

audit or those that are yet to be paid; is that correct? 

Ms. BROWN. In all cases except for any that involve assistance 

to individual institutions. 

Mr. LUETKEMEYER. Do you think it would be a good idea if we 

went back and had a requirement to audit those whenever they are 

all paid off to see if everything is done according to sound financial 

tenets? 

Ms. BROWN. It is something that if we were asked to do, we 

would definitely do. 

Mr. LUETKEMEYER. That is a policy decision, right? 

Ms. BROWN. Yes. 

Mr. LUETKEMEYER. Okay. With regard to the open market operations of the Fed, one of the things it says here is that they are 

not required to disclose their operations until 2 years after they 

take place. How do you get ahold of information that is pertinent, 

that is time-sensitive, that we can actually get a good job of seeing 

everything that is going on here? If we can’t do it within a 2-year 

timeframe, that seems almost beyond the ability to implement any 

sort of controls or corrections. 

Ms. BROWN. We would note that in the audit that we did that 

was issued in July, it was done in many cases less than a 2-year 

time period. 

Mr. LUETKEMEYER. And one more quick question: With regard to 

the swap lines of things that they have with foreign banks, were 

you able to do anything at all with oversight of that? Were you able 

to look into any of the activities along those lines? 

Ms. BROWN. That was one of the specific programs listed under 

our authority in Dodd-Frank. 

Mr. LUETKEMEYER. What did you find? 

Ms. BROWN. We basically looked at how they were structured. 

We found that the Fed had engaged in a number of swap line 

transactions with foreign central banks, and the biggest takeaway 

was that once the Fed engaged in the swap with the foreign central 

bank, any activity of the central bank—the foreign central bank 

was really, from the Fed’s perspective, that was the central bank’s 

responsibility, and the foreign central bank assumed any credit 

risk from the activities that it engaged in. 

Mr. LUETKEMEYER. If the chairman will bear with me, just one 

more question. Do you see any risk to the Fed with the way it is 

structured right now? 

Ms. BROWN. That is one program that remains open, and the authority for that program is open through August of 2012. It was 

one of the programs that had been extended, and as with swaps, 

there is currency risk associated with currency swap-type of transactions. 

Mr. LUETKEMEYER. Okay. I see my time is up. Thank you, Mr. 

Chairman, for your indulgence. 

8 

Chairman PAUL. Thank you. I now yield 5 minutes to Congresswoman Hayworth from New York. 

Dr. HAYWORTH. Thank you, Mr. Chairman, and thank you for 

conducting this hearing. Thank you, Ms. Williams Brown, for being 

with us. 

There is a notable statement in the GAO report that some Federal Reserve Board decisions to extend credit to certain borrowers 

were not fully documented. And I was wondering if you could 

elaborate on that. What sort of documentation would you like to 

have seen? Was there an explanation as to why the documentation 

was lacking? 

Ms. BROWN. In the area of documentation prior to Dodd-Frank, 

there wasn’t an explicit requirement for the Fed to document its 

decisions. From an audit perspective, that often presents a challenge in determining exactly what happened. So that requires us 

to have a number of conversations with the relevant players. 

But what we noted is, with the programs, there were generally 

broad eligibility requirements, and institutions that were generally 

considered to be in good financial condition were able to participate 

in a particular program. But to the extent that there were exceptions that didn’t necessarily appear to coincide with the particular 

process in place, we had to have conversations to find out why 

things happened. 

One example is with the commercial paper lending facility. An 

AIG subsidiary was allowed to continue to participate in the facility, even though they no longer met the new requirements—and 

that is, that they had been an active participant in the commercial 

paper market—but they were still allowed to participate in the facility. 

Dr. HAYWORTH. Is there further work ongoing to determine why 

that was allowed to occur or— 

Ms. BROWN. No. 

Dr. HAYWORTH. So that now lies with us, I guess, here to— 

Ms. BROWN. And we did make a recommendation to the Fed, 

going forward, that if they were to engage in credit facilities or any 

emergency lending in the future, that it is important to document 

decisions, and the Dodd-Frank Act now has a reporting requirement. So we pointed out that in order to fulfill that reporting requirement in the future, there is documentation that has to go 

along with the decision-making. 

Dr. HAYWORTH. In order to encourage— 

Ms. BROWN. Report it. 

Dr. HAYWORTH. And presumably to encourage sound decisionmaking— 

Ms. BROWN. Yes. 

Dr. HAYWORTH. —so that we are not doing things that don’t 

make sense fiscally. 

Ms. BROWN. Yes, that. And to be able to then report to the Congress what was being done and why. 

Dr. HAYWORTH. Thank you, Ms. Williams Brown, I appreciate 

that. Mr. Chairman, I yield back the remainder of my time. 

Chairman PAUL. I now yield 5 minutes to the Congressman from 

Arizona, Mr. Schweikert. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. 

9 

Ms. Williams Brown, part of this is actually—and my good friend 

from New York was almost touching on parts of this. First of all, 

on the emergency facilities, were you able to take a look at how 

well documented the requests were, the systemization of the decision-making? And part of where I am leading on this is just your 

opinion, when you are playing auditor, if we were to have another 

hiccup, do they have mechanical rules and steps that are consistent? What did you see? 

Ms. BROWN. In the retrospective audit, there weren’t requirements for them to document specific decision points. So from that 

perspective, it required us to go back and attempt to reconstruct 

how decisions were made. Going forward, there are new requirements in terms of being able to report out that should help provide 

some additional structure around it, and that is one of the things 

that we also spoke to in some of our recommendations. 

Mr. SCHWEIKERT. I heard some discussions about—even before— 

some of the new requirements. But do they seem to now have been 

adopted in the—if you and I were to lay out a flowchart and say, 

here is our decision-making process, with you and I also understanding this may be a process that sometimes has to be done very 

quickly. 

Ms. BROWN. Correct. 

Mr. SCHWEIKERT. But it also helps to know what checkboxes you 

are going through saying, okay, we have this, we have this, we 

have this. And from what you are seeing, have those documentation requirements, the new ones, been built into the system? 

Ms. BROWN. I will say that since July, we haven’t gone back to 

update the status of the recommendations that we made. So I can’t 

say if they have addressed the recommendations that we made, for 

example, for a better documentation process. That is not something 

I am in a position today to say that they have or have not done 

those types of things. 

Mr. SCHWEIKERT. Okay. Mr. Chairman, Ms. Williams Brown, 

with that—because where I am sort of hunting is, how did they 

document what assets were being pledged future forward, what 

was being swapped, and how well that was locked in, saying, yes, 

you are pledging this, and once you have pledged it, you can’t go 

and touch it anywhere else, and we also have the proper mechanics 

telling us any exposure, like are there any sort of—where these assets may have also lent out their value to other pledges? I am 

just—I am trying to understand the decision tree, but also the 

quality of the documentation on assets pledged. 

Ms. BROWN. In terms of pledging collateral and tracking that, we 

did look at the control process around the collateral process, and 

we did specific drilldowns on two of the facilities that the borrowers 

were able to pledge a wide variety of collateral for a single loan. 

And we did a drilldown to look at the collateral that was pledged, 

and we also did some independent evaluation and testing to make 

sure that those controls around those were operational. So there 

was a process around that. 

Mr. SCHWEIKERT. When you were looking at some of that, did 

you find some of the assets didn’t really—ultimately, the market 

value—add up to what they were put into the pledge? 

10 

Ms. BROWN. We looked at the pricing of the collateral, and we 

found in a small percent of cases, somewhere around 2 percent, 

that there was some discrepancy in the price of the particular collateral that we tracked versus what was included in the data that 

we had gotten from the Federal Reserve. But we did not find any 

type of systematic bias one way or the other in terms of how that 

collateral had been priced. 

Mr. SCHWEIKERT. But only about 2 percent? 

Ms. BROWN. It was a fairly small percentage. 

Mr. SCHWEIKERT. I am surprised. And would some of that have 

been MBS, mortgage-backed securities, because of the way you 

would price it? 

Ms. BROWN. Right. I think it cut across a variety of other types 

of collateral that had been posted. 

Mr. SCHWEIKERT. Last one, and I am partially doing this from 

writing, and seeing if I can find it in my notes, and this one may 

be asking more of an opinion. 

The Inspector General for the Fed, I think, has also been given 

additional duties for the Consumer Financial Protection Bureau; almost wearing two hats, even though they are now separated. Any 

opinion on whether that works? 

Ms. BROWN. That is not something we have specifically looked at, 

so I am not in a position to offer an opinion. 

Mr. SCHWEIKERT. Gosh darn on that one. Mr. Chairman, I yield 

back my time. Thank you. 

Chairman PAUL. I thank the gentleman. I yield 5 minutes to the 

gentleman from Michigan, Mr. Huizenga. 

Mr. HUIZENGA. Thank you, Mr. Chairman, and I just want to express my appreciation for you holding this hearing. I think this is 

very important. I appreciate your time coming in as well, and I 

won’t plan on using this full 5 minutes. 

But I am struck by the theme that we are hearing of a need for 

oversight, and I don’t want to put words in your mouth, but that 

certainly is the tone that I am catching, that this is a good thing 

that we should—or that has happened. I think it is up to us, then, 

to decide whether this is something we should continue. It seems 

to me that we should. 

I am curious a bit about if you could talk—and I apologize if you 

had—I had to step out for a phone call, but maybe you touched on 

this. I am wondering if you could talk a little bit about what some 

of the lending facilities were used by branches and subsidiaries of 

foreign banks, and were you really able to determine why several 

of those emergency lending facilities were primarily used by foreign 

institutions? I wonder if you could talk a little bit about that. 

Ms. BROWN. We did look at the largest users across the facilities, 

and we did find that there are certain facilities that tended to be 

used by the branches and agencies of foreign banks. And in conversations and following up with the Federal Reserve about the 

reason for that, we found that usually the largest lenders of facilities were driven by the composition of the market. So if it is a market that there were major foreign banks that had branches and 

agencies in the United States, they would have been as likely as 

a U.S. bank to tap a particular facility. 

11 

Mr. HUIZENGA. And so that wasn’t necessarily a region when you 

are saying that could be a product line or— 

Ms. BROWN. Product line or a particular market that they were 

active in, because many of the broad-based programs were aimed 

at a particular disruption that was going on in a particular market. 

Commercial paper, some of the money market mutual funds had 

also experienced problems. 

Mr. HUIZENGA. Thank you. And could you characterize the ratio 

of domestic versus the foreign? 

Ms. BROWN. It really varies by program, and I would be more 

than happy to provide a breakdown for each facility for the record. 

Mr. HUIZENGA. That would be great. How many facilities, as you 

are using the term ‘‘facility,’’ how many facilities are there? How 

many breakdowns do you think that would be? 

Ms. BROWN. There were—I think it was somewhere in the 10 to 

12 range. 

Mr. HUIZENGA. Okay. I would appreciate the follow-up on that. 

So thank you. Thank you, Mr. Chairman. I appreciate that and I 

yield back. 

Chairman PAUL. Thank you. And I now yield additional time to 

the gentleman from Missouri, Mr. Luetkemeyer, for a follow-up 

question. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. I would like to 

follow up just a little bit more on the swap line discussion we had 

a little bit ago. Can you tell me how many times the line has been 

used, or is it just beyond this—number of times per day—or has 

it just been only 3 or 4 times in the last 6 or 8 months? 

Ms. BROWN. I am not sure that we tracked it by the number of 

times used, but we focused on the number of foreign central banks 

that were permitted to participate in the swap line. And there, 

would have been through the July timeframe. 

Mr. LUETKEMEYER. Do you have an idea of how many times that 

was? We had the Chairman in here not too long ago, and he indicated that there was almost zero activity. 

Ms. BROWN. I will say that when we issued our report, as of the 

end of June, the balance on the swap lines was zero at that time. 

So it may have been used and repaid. 

Mr. LUETKEMEYER. Okay. Looking at those transactions, did you 

see anything in there that would pose a risk to the Fed or, therefore, our taxpayers? 

Ms. BROWN. I think the potential for—because the Fed would be 

swapping dollars for foreign currency, with an agreement that the 

foreign central bank would reverse the swap at the same rate that 

the other—to the extent that rates move, there is a potential risk 

built into. 

Mr. LUETKEMEYER. Did you see where it is a pass-through from 

other existing banks over in Europe through the central bank 

there, or was it just a direct swap through the European Central 

Bank? 

Ms. BROWN. It was—once the swap happened with the particular 

central bank that the Fed engaged in swap activity with, the Federal Reserve didn’t track what happened to those dollars once they 

were in the hands of the foreign central bank. 

12 

Mr. LUETKEMEYER. Okay. So basically there is a firewall, then, 

between the transaction and wherever else those moneys would go 

to, those other dollars would go to? 

Ms. BROWN. Correct. 

Mr. LUETKEMEYER. Is that a fair statement? 

Ms. BROWN. I guess I am pausing on the firewall, but there is 

definitely a separation, yes. 

Mr. LUETKEMEYER. Okay. There is no tangible liability exposure 

to us from one of the other banks in Europe that is going to be 

passed through the European Central Bank? I guess that is a better way to put it. 

Ms. BROWN. The Central Bank would assume that risk. 

Mr. LUETKEMEYER. Okay. So basically, then, there is no other 

risk that the Fed has assumed from those activities. 

Ms. BROWN. Right, beyond the swap. 

Mr. LUETKEMEYER. Okay. And the only risk that you see there 

is just the normal currency activity or the daily ups-and-downs of 

the value of the currency itself? All those other things in the transaction— 

Ms. BROWN. There could potentially be others, but that was the 

one that immediately comes to mind. 

Mr. LUETKEMEYER. Has the biggest risk? 

Ms. BROWN. I would say that is the one that immediately comes 

to mind to me, and I do have a total on the number of transactions; 

569, that is how many transactions there were. 

Mr. LUETKEMEYER. During what time period? 

Ms. BROWN. This would have been from the beginning of the program through June 29, 2011. 

Mr. LUETKEMEYER. Really? Okay. One more quick question. In 

your report, you indicate that there is—the GAO found that conflict-of-interest policies could be strengthened. Can you give me an 

example of where there is a conflict of interest that you found, that 

there is a problem or exposure or concern? 

Ms. BROWN. We found a number that raised issues. They raised 

an appearance of a conflict, and one had to do with senior Federal 

Reserve Bank of New York officials. They held stock in some of the 

institutions that had received assistance. AIG was one example. 

Mr. LUETKEMEYER. Did you see a pattern with individuals or 

with particular companies, particular entities, like through AIG or 

other companies or other entities that were out there, that they 

were trying to work with? 

Ms. BROWN. I wouldn’t say we observed any type of pattern. We 

observed with the vendors that there were situations that the Federal Reserve Bank of New York, for example, could have taken additional steps to strengthen their management of conflicts of interest that may have existed within vendors, and done additional 

oversight of what the vendors were actually doing to make sure 

that they weren’t exposed to conflicts. 

Mr. LUETKEMEYER. Okay. Very good. Thank you, Mr. Chairman. 

I appreciate the second round. 

Chairman PAUL. Thank you. And I now yield for follow-up question to Mr. Schweikert from Arizona. 

Mr. SCHWEIKERT. And forgive me, I just want to make sure I was 

listening carefully to Congressman Luetkemeyer. On facilities that 

13 

were with foreign central banks, was there a currency risk when 

the assets were moved back? 

Ms. BROWN. That issue really comes up on the dollar swap lines, 

because that is actually a swap of U.S. dollars for foreign currency, 

with the agreement to reverse the swap. 

Mr. SCHWEIKERT. It would be an unusual instrument to unwind 

it back to the value of the previous swap if there had been movement in the currency? That sort of defeats the purpose a bit. 

Ms. BROWN. It is the nature of the swap, that you agree to exchange the currency and reverse it at a particular price, at a particular date in the future. 

Mr. SCHWEIKERT. Okay. So there was—from what you were seeing, there was always a pledge on the value at the end— 

Ms. BROWN. For the dollar swap line only. 

Mr. SCHWEIKERT. Yes, that is the only one I was interested in. 

Second of all, and I know this is a little on the annoying side, 

but if you would have one of your staff reach out to our office sometime in a couple of weeks, we would love to be able to chase down 

in writing—as you were saying, it was 2 percent that you saw 

that—of pledged assets that you thought may have been outliers. 

And this is one of those occasions I have to go through my file cabinet and find an article from a couple of months ago that I think 

was talking about specifically private label MBS that may have 

been pledged, that may have been much further in the dispute of 

what its true value was. And I am just trying to get my head 

around having read one thing and now in testimony making sure 

I am using the same definitions today. 

Ms. BROWN. It is not only an issue of the same definitions, but 

this is something that could vary from facility to facility. And my 

comment was specific to two credit facilities; but this could actually 

be the case in one of the others. 

Mr. SCHWEIKERT. It absolutely would be that way. It would absolutely be that way. There were five hundred and some different 

ones, as I think I just heard you say— 

Ms. BROWN. For the transactions for the dollar swap lines, yes. 

Mr. SCHWEIKERT. Okay. Last one is: Also, as long as we are asking to throw something into note, so that Inspector General comment before—I know this really isn’t your area—but I would love 

someone, if there is a policy statement somewhere in the agency in 

regard to whether this really works to have one Inspector General 

doing both the Consumer Financial Protection Bureau and the Fed, 

even though they now wear very separate hats. And with that, Mr. 

Chairman, I yield back, and I thank you. 

Chairman PAUL. I thank you. Does anybody else have any followup questions? If not, I want to thank the witness for appearing. 

And also, without objection, your written statement will be made 

a part of the record, and you are now dismissed and the second 

panel may come to the table. 

Ms. BROWN. Thank you. 

Chairman PAUL. We will now receive testimony from our second 

panel. 

Our first panelist, Dr. Robert Auerbach, is Professor of Public Affairs at the LBJ School of Public Affairs at the University of Texas 

in Austin. He was an economist with the House of Representatives’ 

14 

Committee on Financial Services, formerly the Committee on 

Banking, Finance, and Urban Affairs, for 11 years. He assisted 

Chairman Henry Reuss in the 1970s and the 1980s and Chairman 

Henry Gonzalez in the 1990s with oversight of the Fed, spanning 

four Fed Chairmen: Burns; Miller; Volcker; and Greenspan. He is 

the author of the book, ‘‘Deception and Abuse at the Fed: Henry B. 

Gonzalez Battles Alan Greenspan’s Bank.’’ He received two master’s degrees in economics, one from the University of Chicago and 

one from Roosevelt University under Abba Lerner. He received his 

Ph.D. in economics from the University of Chicago where he studied under Milton Friedman. 

Our second panelist is Dr. Mark Calabria who is the Director of 

Financial Regulation Studies at the CATO Institute. Prior to joining CATO in 2009, he spent 7 years as a member of the senior professional staff of the Senate Committee on Banking, Housing, & 

Urban Affairs, where he handled issues related to housing, mortgage finance, economics, banking, and insurance. Dr. Calabria has 

served as Deputy Assistant Secretary for Regulatory Affairs at the 

Department of Housing and Urban Development and has been a 

research associate with the U.S. Census Bureau’s Center for Economic Studies. He is a frequent contributor to the New York Post, 

National Review, and Investors Business Daily, and frequently appears on CNBC, Bloomberg, Fox Business, BBC, and BNN. He received his Ph.D. in economics from George Mason University. 

I would like to now recognize the second panel and also, under 

unanimous consent, your written testimony will be made a part of 

the record. 

So I recognize Dr. Auerbach. 

STATEMENT OF ROBERT D. AUERBACH, PROFESSOR OF PUBLIC AFFAIRS, LYNDON B. JOHNSON SCHOOL OF PUBLIC AFFAIRS, UNIVERSITY OF TEXAS AT AUSTIN 

Mr. AUERBACH. Thank you very much, Chairman Paul and members of the subcommittee. I am honored to come back here where 

I worked for 11 years. One thing you left out: I also worked in the 

Reagan Administration, saying the same things, in between the periods I worked at the Treasury Department. 

I want to talk about transparency at the Fed. The Fed is the 

powerful central bank of the United States that controls the money 

supply, regulates the banking system, and since 1962 makes loans 

to foreign banks without congressional authorization. The historical 

record of Federal Reserve officials blocking transparency and individual accountability, including destroying source records of its policymaking committee since 1995, is clear. 

I want to especially thank Chairman Ron Paul and Senator Bernie Sanders for finally getting some kind of an audit at the Federal 

Reserve in the Dodd-Frank Act. 

In 1976, when I was here, I assisted Henry Reuss in putting up 

an audit bill of the Fed. The Fed immediately mounted a huge lobbying campaign using the bankers that it regulates to come to 

Washington and go into all the offices here and stop the audit. 

Chairman Reuss went to the Floor of the House later when we got 

direct evidence of how the Fed used their offices and their facilities 

15 

to organize the bankers they regulate to come to the Congress and 

lobby. 

Finally, the bill was passed in 1978 down the hall at the Government Operations Committee with two glaring no-audit parts of the 

bill. One is anything to do with monetary policy or international 

transactions at the Fed. 

Let me just talk one moment about those two areas. In the monetary policy area, there are tremendous opportunities to make billions of dollars on inside information from the many leaks of Fed 

monetary policy which I helped the committee investigate for many 

years. Let me just give you one little taste of it. 

First of all, then-Chairman Greenspan said after a number of 

leaks, when the newspapers were publishing what they had said 

the previous day in their secret meetings, that we are beginning to 

look like a bunch of buffoons. They had at those secret meetings 

at the Kansas City Fed, where I used to work, central bankers 

from Bulgaria, China, the Czech Republic, Hungary, Poland, Romania, and Russia attending and listening to interest rate information 

that they would not give the Congress at that time. 

Finally, the Federal Reserve decided that they would not like to 

have any more public minutes of their central policymaking committee. That was Arthur Burns in 1976 from a law then that was 

being passed, Government in the Sunshine Act, and a suit from a 

student at a university in Washington, D.C. So the Fed voted then 

in 1976, a 10–1 vote, that they would no longer have any transcripts of their central policymaking committee, and it was a 10– 

1 vote and the 17-year lie began. 

Finally, in 1992 I came back for the second time, and I spoke 

with the great Henry B., as we called him in his district in San 

Antonio: How could it be that the most powerful central bank in 

the world had no transcripts of its meetings that they used to send 

out? What happened to them? So, Mr. Gonzalez had all the Fed 

Presidents come. All but two showed up. Chairman Greenspan sat 

in the middle, right where I am sitting, Members of the Board of 

Governors on each side, and they misled the Congress. 

We put a lot of heat on them because they were Federal witnesses, and a few days later the Cleveland Fed broke and said, 

well, they had had a meeting 4 days earlier where they just decided how they would mislead the Congress. One person at that 

meeting, a staff person, a very good staff person who used to work 

with me at the Kansas City Fed, but he was assisting Greenspan, 

said, ‘‘the Chairman is not highlighting these transcripts. We are 

not waving red flags.’’ And when Congressman Maurice Hinchey 

had asked him at the hearing right here, ‘‘Do you have any 

records?’’ Greenspan replied, ‘‘just some notes we keep.’’ 

After that, Greenspan sent a letter over here and said, this is 17 

years later, we have those transcripts. I took a group of Republican 

and Democratic staffers over to the Board of Governors and found 

them right around the corner from Greenspan’s office neatly typed. 

So they decided then that they would start issuing the transcripts 

again after a 5-year lag, much too long for timely accountability. 

After I left the committee, and went down to Texas, I read that 

they had decided in 1995 to shred the records of the Federal Open 

Market Committee. Those transcripts had been kept and sent to 

16 

the National Archives, but they decided to destroy them. So I wrote 

a letter to Alan Greenspan asking why they were doing that, and 

his Vice Chairman, a very good person inside the Fed—these are 

good people; they just have bad policies—Donald Kohn, who 

worked there for many years and became Vice Chairman, started 

at the Kansas City Fed, he wrote to me saying yes, we decided to 

destroy the transcripts of the meetings, but we think it is legal. 

I just want to go through a few other things on the audits so you 

can get an idea of how bad the audits have been of the Fed, just 

two little points. One is the Los Angeles branch of the Kansas City 

Fed. You can ask me questions about it, when we found out that 

the auditing system there was corrupt. I took an excellent GAO 

team. Zoliason went in there and found that the system was completely corrupt. Greenspan admitted in a letter to the committee 

that they knew that the employees of the Fed had stolen at least 

$500,000 in the previous 10 years from the vault system of the 12 

banks. 

One other thing, and then I will quit. The airplane fleet of the 

Fed, 50-plus airplanes, the audit there was a joke. There was no 

audit. The people running the fleet in Boston used to laugh about 

it. And they appeared here. Mr. Castle allowed them to come, and 

they were very courageous, and they talked about it right in the 

committee room here. Carolyn Maloney, Congresswoman Maloney, 

helped in investigating them. That was a completely corrupted 

thing. It was typified by their backup plane that the Fed paid for 

in Teterboro airport that didn’t exist most of the time. That is all 

I am going to say about that. 

I have two other points. One is about paying off all the economists throughout academia on investigation of Henry B. Gonzalez; 

and what I consider malpractice, the present monetary policy of the 

Fed that was begun in October 2008 that has caused a lot of unemployment in the United States. 

[The prepared statement of Dr. Auerbach can be found on page 

33 of the appendix.] 

Chairman PAUL. Thank you. 

We will go to Dr. Calabria now. 

STATEMENT OF MARK A. CALABRIA, PH.D., DIRECTOR OF 

FINANCIAL REGULATION STUDIES, CATO INSTITUTE 

Mr. CALABRIA. Chairman Paul, distinguished members of the 

subcommittee, I thank you for the invitation to appear at today’s 

important hearing. 

As the subcommittee is well aware, the events of 2008 witnessed 

not only unprecedented disruptions to our financial markets, but 

also extraordinary responses on the part of our financial regulators 

and central bank. No entity was more deeply involved than the 

Federal Reserve System, particularly the New York Federal Reserve. Yet the Fed has consistently and repeatedly resisted efforts 

to bring accountability and transparency to its actions. 

Congress and the public repeatedly warned that if details of the 

Fed’s actions became public, further panic would ensue in our financial markets. Yet when that information, such as AIG’s derivatives counterparties, finally did become public, disruptions were 

minimal or nonexistent. 

17 

Despite some notable attempts by the Fed to increase its communications with the public, I believe, given its track record, the public cannot rely on the Fed to voluntarily provide us with sufficient 

information to monitor its activities and judge the effectiveness of 

its actions. While the requirements of the Dodd-Frank Act in relation to auditing the Fed’s activities are an important advance, they 

fall far too short of providing sufficient oversight of the Federal Reserve. 

What auditing has been conducted so far has been focused on the 

Fed’s response to the crisis. Accordingly, much of the audit requirements in Dodd-Frank have something of an historical feel about 

them. However, it is not enough just to get history right, although 

we are lucky if we do that, but also to ensure that future mistakes 

are avoided. I can think of few areas requiring as much mistake 

avoidance as monetary policy. 

The Fed’s role in helping to create the crisis via its easy money 

policies in the aftermath of the dot.com bubble and the events of 

9/11 remain largely uninvestigated by Congress. If we truly wish 

to end financial crises, then I believe it is absolutely essential that 

Congress receive a full and objective evaluation of the Fed’s role in 

fostering the housing bubble, particularly as it relates to monetary 

policy decisions between 2002 and 2005. 

Disagreement as to the appropriate stance of current monetary 

policy I think also demonstrates Congress’ need for objective, independent analysis of monetary policy. 

Some might object that a GAO audit of the Fed subjects the Fed 

to political pressure. I think that such an objection ignores the simple fact that the GAO is not a political organization. 

As mentioned, I served as staff on the Banking Committee for a 

number of years. I can say through all of my interactions with 

GAO, they are independent, they are unbiased, they are nonpolitical. I have not always agreed with the conclusions of GAO, 

but I have never felt that any of those disagreements were the result of politics or bias. 

I think the subcommittee should also keep in mind that GAO exists for a very simple reason: that no Member of Congress or their 

staff are fully knowledgeable about the functioning of all the various government agencies. GAO simply exists to inform. 

I would argue that there are few areas less understood than 

monetary policy and macroeconomics. Hence, I would argue there 

are few areas more in need of an audit than monetary policy and 

macroeconomics. Again, the purpose of GAO here is to try to provide some information so that Members can more actively engage, 

I think, and more effectively engage in oversight of the Federal Reserve. 

Another objection to a GAO audit of the Fed is that such an 

audit would compromise the Fed’s independence and subject it to 

political influence. I think such an objection confuses the very nature of Fed independence. The Fed’s authority to regulate the value 

of money is one that is delegated from Congress. As Congress can 

and has legislated changes to the Fed, it should be beyond a doubt 

that the Fed is not independent of Congress; it is quite the opposite. It is a creature of Congress, and Congress has every right in 

that avenue to interject and regulate the activities of the Fed itself. 

18 

Setting aside the debate of the desirability and legitimacy of socalled independent agencies, it should be clear that their independence in any operational sense is supposed to be from the Executive 

Branch, not from Congress. It should also be clear, however, that 

in recent years, the Federal Reserve has coordinated its actions 

quite closely with the Treasury Department, in my opinion eroding 

any independence from the Treasury. The revolving door, both at 

the political and career levels, between the Federal Reserve and 

the Treasury Department further undermines the Fed’s operational 

independence. I believe a GAO audit would help shine light on this 

relationship, actually helping to insulate the Federal Reserve from 

continued interference by the Treasury Department. 

Again, the Dodd-Frank Act has made important advances in 

bringing transparency and accountability to the Federal Reserve. 

Unfortunately, it falls short in allowing Congress and the public to 

truly gauge the effectiveness of the Federal Reserve. 

In order to improve Federal Reserve transparency, I would suggest that Congress mandate a regular audit of all Federal Reserve 

activities, including monetary policy. Such audits could be performed in a manner so as to minimize the disruptions to any ongoing deliberations of the Federal Open Market Committee. For instance, these audits could be kept confidential for a short amount 

of time, 6 months, a year. That is certainly something that could 

be done not to try to unduly influence ongoing activities, but again, 

this audit should be made public at some point. 

I think it is also important to emphasize that evaluating the effectiveness of any government agency is made all the more difficult 

when that agency faces a variety of competing and sometimes conflicting objectives. If the Federal Reserve feels it is free to abandon 

price stability in order to achieve other objectives, such as rescue 

the financial industry or misguided attempts to influence the labor 

market, then I believe the value of an audit may potentially be 

very limited. 

At a minimum, Congress should consider restricting the Federal 

Reserve to a single goal, that of price stability. Congress should 

also restrict the ability of the Fed to have discretion implementing 

that goal. On a very basic level, a central bank that is free to define price stability or define its own objective is a central bank 

without any meaningful constraints. 

With that, again, I thank the chairman, I thank the subcommittee, and I look forward to your questions. 

Chairman PAUL. Thank you very much. 

[The prepared statement of Dr. Calabria can be found on page 

70 of the appendix.] 

Chairman PAUL. I yield myself 5 minutes for questioning. 

My first question is for Dr. Calabria. I want you to follow up— 

I know you have talked about it in your statement—on this relationship of the Fed and the Treasury. You indicate that if there is 

to be any oversight or connection, it is more with the Congress 

than with the Executive Branch and the Treasury. Could you talk 

a little bit more about that, and exactly what you mean? And what 

has happened in the past that might suggest that we should be 

looking into the relationship of Treasury and the Fed and how that 

could be a negative, or why some people think it is a positive? 

19 

Mr. CALABRIA. There are a variety of different things. I will most 

directly touch on first the negotiation, implementation of DoddFrank. Treasury was the point person in negotiating Dodd-Frank 

for the Administration, yet several of the senior advisors at Treasury representing the Administration were staff on loan from the 

Federal Reserve. So again, I think many of us remember there was 

about a whole 5 minutes during the Dodd-Frank negotiations 

where maybe there really were going to be serious constraints on 

the Federal Reserve, where there would be a serious examination 

of the bank supervision and regulatory powers. Again, I think the 

Congress and GAO should take a look at whether the Fed should 

be supervising banks in general, and whether that conflicts and 

provides any conflict of interest with the monetary policy decisions. 

But, having essentially Federal Reserve staff at Treasury negotiating on behalf of the Administration certainly, in my opinion, 

meant that there was going to be no chance that Congress was actually going to be able to peel back any of the powers of the Federal Reserve. So, again, the Treasury relies very heavily on Federal 

Reserve expertise and legislative decisionmaking. 

Most importantly, however, and it is important to keep in mind 

that Fed independence really came out of this Treasury-Fed accord 

where, prior to the 1960s, the Federal Reserve supported Treasury 

prices essentially and tried to maintain the price of long-term 

Treasurys in order so that the Treasury Department could more 

easily and more cheaply fund its activities. And again, if you have 

this relationship—and you see this particularly with the second 

round of quantitative easing where the amount that the Fed was 

purchasing on a monthly basis was coincidentally very close to the 

amount that was being issued by the Treasury. And so the extent 

that we go down that road of potentially ‘‘monetarizing’’ the debt, 

which I think is the ultimate concern, that you have the Treasury 

market supported by the Federal Reserve, which, of course, reduces 

discipline on not only the Treasury, but reduces discipline on Congress to get its fiscal house in order. 

So again, we rely on the markets to send us signals, and the 

Treasury market should be sending us a signal that we are headed 

towards a financial train wreck, but it is, of course, not, because 

the Federal Reserve is intervening in that market to reduce the 

price cycle that we would be receiving. 

So that is an important part of the debt market. I think it is ultimately one of the more important aspects of this, but, again, you 

also see it in financial regulation. 

I want to emphasize again the nature of independence is supposed to be not from Congress, but from the Executive Branch. 

There is a variety of literature, for instance, in economics that 

talks about a political business cycle where you would see the Federal Reserve try to loosen monetary policy in expectation of Presidential elections. 

Again, I would say that the empirical results in this literature 

are mixed, but, again, the emphasis is on the Administration. We 

know that in terms of any President’s reelection, it is going to be 

far more important what the Fed does compared to what any Member of Congress wants. So again, there are far different interests 

20 

and far different incentives in Congress, where you have a unified 

incentive in the Executive Branch. 

So, I would emphasize again the importance is to draw some 

independence from the Executive Branch and the Federal Reserve 

rather than from Congress. 

Chairman PAUL. So just in summary, the way I understand that 

is when they talk about independence, they are really not talking 

about independence, they want to eliminate the role of the Congress, which you are arguing has a responsibility. So they want to 

be excluded from that supervision, but they don’t want to be independent from the Treasury. 

What about political or private interest influence? When the bailouts came, there had to have been some special interests and political interests. Would that—could that be said to be not independent 

either, but influenced by not only the Treasury, but outside interests? Do you think there is much—should there be concern about 

that? 

Mr. CALABRIA. I think there should absolutely be strong concern 

about that on several levels. One could just look at monetary policy 

where monetary policy is conducted in partnership with the Federal Reserve’s primary dealers in which it buys and sells Treasury 

securities with to conduct its monetary policy. Of course, if you are 

doing bank supervision, you have a financial crisis, and these primary dealers find themselves in trouble, the Federal Reserve has 

an incentive to try to essentially make sure that those primary 

dealers survive. And, of course, it doesn’t want to make any of that 

public. I am sure you could ask any of the largest firms that were 

assisted. Whether it was Goldman or whether it was Societe 

Generale, they have not welcomed the attention that they have gotten when all of this information has come out. 

We heard a little bit earlier about the GAO report. One of the 

things that struck me is that if you look through the tables and you 

look through the information in the GAO report, regardless of the 

program, it is the same companies that keep repeatedly coming up. 

Repeatedly we see Citi, repeatedly we see Bank of America, repeatedly we see Morgan Stanley. Regardless of the program, it seems 

to be that the concentration of the benefits of these programs are 

with a handful of corporations. And, of course, those corporations, 

I think, do not want the public attention that they have repeatedly 

received incredible assistance from the Federal Reserve or credible 

assistance that has been off budget. 

So again, that relationship and that revolving door, we have seen 

it. And again, this is something that was talked about in DoddFrank, some of the governance issues. We all remember very much 

the role of Goldman essentially being the Chair of the Board at the 

New York Fed and some of the conflict of interest there. And certainly those were saying that the current president of New York 

Fed is a former Goldman employee. So not only am I concerned 

about the revolving door between Treasury and the Fed, I am also 

very concerned about the revolving door between Wall Street and 

the Fed. 

Chairman PAUL. Thank you. 

I yield 5 minutes to Mr. Luetkemeyer from Missouri. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

21 

Dr. Auerbach, in your testimony you mentioned two or three 

things; the L.A. Fed whenever there was some corruption exposed, 

and some folks stole some money, the Federal airplane—the Federal Reserve airplane fleet. The audits that are being performed or 

should be performed, would they have caught these abuses? 

Mr. AUERBACH. Did the audits have abuses? 

Mr. LUETKEMEYER. Would the audits that are being proposed— 

in other words, right now we have the Inspector General folks, or 

GAO, they are now doing the audit on the emergency loan program 

that was administered. 

Mr. AUERBACH. Right. They don’t touch any of these. 

Mr. LUETKEMEYER. You are saying we should expand— 

Mr. AUERBACH. Definitely. 

Mr. LUETKEMEYER. —audit procedures because existing auditing 

procedures are not catching these things? 

Mr. AUERBACH. Definitely. There are tremendous problems inside 

the Fed, and the in-house audits were no good at the Boston Fed. 

The courageous people there who testified right here about it said 

that someone came from upstairs at the Boston Fed near the harbor. Officials of the Fed are at the top; the people who run the airplane fleet were down below. Someone came down asking, is everything all right here? That was about the extent of the in-house 

audit. 

There were all kinds of corruptions, and so many corruptions 

that Henry Gonzalez, the Chairman, asked me to call the Janet 

Reno Justice Department, which I did, and they didn’t want to get 

into it. Nobody likes to attack the Fed in Washington. So they said, 

call the Inspector General at the Fed, which I did, a very nice man, 

Brent Bowen, and he said, ‘‘I don’t know if I have jurisdiction up 

in Boston.’’ 

And that is one of the major problems of the Fed and this new 

consumer protection agency that is located inside the Fed. The IG 

of the Federal Reserve is appointed by the head of the Federal Reserve, so how can they investigate these things? Chairman 

Bernanke cannot be investigated, and his officials are the people 

they appoint. This should be a Presidential appointment and an 

independent IG at the Fed, if you want to start cleaning up this 

mess. 

Mr. LUETKEMEYER. Do you think there is anything that should 

be off limits whenever it comes to disclosure of the Fed activities? 

Mr. AUERBACH. That is a very interesting question, because the 

Fed is now shredding their documents. But Arthur Burns, who was 

the head of the Fed back in the 1970s, he died in 1987, and he sent 

his transcripts of the meetings up to the University of Michigan, 

the Ford Library. They had people from the National Archives, professional archivists who took out anything that had to do anything 

with national security, personnel. They were lightly edited. 

So I was able to go up there and get copies of them all. They are 

very different from the kind of thing that the Fed issues. Ask any 

reporter who has received something from the Fed; it is mostly 

blanked out. This was a much better record. 

What should be done now is that the Fed should be told that 

they cannot destroy those records. The records go to the National 

Archives after 30 years. There will be somebody looking at that. 

22 

And also on the FOIA requests, you should get professional archivists who know the rules in cooperation with the Fed instead of 

sending reporters blank pages. 

Mr. LUETKEMEYER. Dr. Calabria, what do you think about that? 

Are there some things that you believe should not be disclosed or 

are off limits, or do you think everything is open to everybody? 

Mr. CALABRIA. I think the way I would look at it is the question 

of when should it be disclosed. Ultimately, any sort of deliberations, any sort of economic forecasts should be disclosed at some 

point. I would be comfortable having some sort of time lag. 

For instance, one of the things that Dodd-Frank does, and I 

think does correctly, despite much of what the bill doesn’t do correctly, is require a disclosure of future discount window lending. 

And so the concern for the Federal Reserve would be if you disclose 

at the time that banks are coming to the discount window, that is 

a signal that such banks are weak, and I think that is a legitimate 

concern to raise. 

But I think if you—and again, in Dodd-Frank it allows up to a 

2-year delay for that disclosure. I would prefer something closer to 

a year, but I do—I would say a 6-month, a year delay on something 

like discount window is legitimate in that it will not scare away 

people from using a discount window. Of course, we could have a 

totally separate discussion of whether this should be a lender of 

last resort in a discount window. But again, if you are going to 

have one, and you want it to be effective, a delay in disclosure in 

that, I think, is reasonable. 

A delay on disclosure on deliberations at the Federal Open Market Committee meetings, I think, is again reasonable. Ultimately, 

in a timely basis, all of this information should be made public, and 

I want to emphasize 5, 10 years is not timely. So again, we need 

to get it out in a reasonable amount of time. 

Mr. LUETKEMEYER. Thank you. I yield back, Mr. Chairman. 

Chairman PAUL. I thank the gentleman, and we will go into a 

second series of questions. 

This question is for Dr. Auerbach, and it has to do with what you 

talked about when you were trying get an audit in the 1970s, and 

you didn’t get too far in the Banking Committee even though it was 

the chairman of the Banking Committee who wanted to do it. Then 

they took it and they sent it over to the Government Operations 

Committee. And then when they gave the authority for the audit, 

it was actually exactly the opposite and closed that. 

I want you to expand on that. And also, why don’t you tell me 

why it is that the individuals either in the Fed or see to it that 

their people get in the Fed, how come they have this much power 

that they are able to control even the Banking Committee chairman and then pass legislation exactly opposite of it? I think it was 

at that time that they really put into it to—seems like where the 

greatest protection is on these foreign operations, I think that is 

where there is a lot of mischief, and even now with our partial 

audit, we hear about it, but we don’t know exactly what transpired. 

Could you expand on that a little bit? 

Mr. AUERBACH. Sure. Let me take the second part first on international operations. You were right about the bill that was finally 

passed where the GAO is not allowed to go into anything that has 

23 

to do with the operations, international operations, or monetary 

policy, trophies that remained on the shelf of the Fed for a long 

time. 

In international operations, when the Fed goes, for instance, and 

notifies brokers all over the world, brokers who are not investigated by anybody in the United States, and tells them, we want 

to buy, say, 5 billion in euros, that information is given to the brokers ahead of time. I am not saying the brokers are dishonest, but 

when there are billions at stake in these markets, they can place 

orders, or people in their office can place orders, long before the 

order is consummated. 

The chairman wrote to Alan Greenspan and asked, ‘‘Why are you 

doing this? Why not just make an announcement that you are 

going in with 5 billion and let everybody in the market get in on 

it at the same time?’’ And he wrote back, ‘‘I think there is only 

about a 10-minute delay between the time we tell them to do it and 

they make these huge purchases. That is ample time to make a lot 

of money in the market. And so, the international operations 

should be audited by the GAO. It is really important, and I think 

when the Fed is going to do something, they should announce it. 

I disagree a little bit with Dr. Calabria. I would not leave these 

decisions for discount rate changes and for anything the Federal 

Open Market Committee does for more than 6 months—even that 

is very long—because there have been so many leaks at the Fed. 

The FBI has been called in, all the rest. It is going to leak out anyway. There are several ways it leaks out. One is when we asked 

how many people at the Fed know about these secret interest rate 

decisions, we got a whole bunch of pages, single-spaced, of hundreds of people all over the country on these conference calls. And 

as Greenspan reported, he was saying he opens the Singapore edition of the Wall Street Journal and found out what the Fed did at 

their meetings before. So you can’t tie up information that is so valuable for months that just benefits inside traders. And those trophies, when they did go over and put them in there, it kept the 

GAO out of a lot of the problems. 

Can I say one other thing that I think is important? We have sitting in the audience Walter Charlton, who has had suits against 

the GAO since 1983 because the GAO has had a policy, alleged policy against older workers. I had excellent GAO people who were at 

the Los Angeles Fed who did the audits. They were excellent. They 

were old-timers at the GAO who knew how a central bank works, 

and knew what to get into and what to look at. 

The suits now in the courts all these years, some of them have 

been adjudicated. The suits allege that they try to get rid of the 

older people. In a recent suit, I gather that after a joint session of 

Congress, 200 were rehired by the GAO. But they try to get rid of 

the older people, people who are 55 or older, around there, and hire 

young people. And I know they hire young people, because I used 

to have lunch with David Walker when he came to the LBJ school 

to get some of our excellent young students, but that lowers the 

amount they have to pay the people by a huge amount. 

But what we need in the GAO are experienced auditors who 

know how central banks work and can get in there and really find 

24 

out what is going on. That takes a lot of training to find out how 

to audit a vault facility. 

The vault facility, since we found that team that was in there 

that I worked with, was excellent. They found out what was missing. It was just awful. The main ledger, the vault on the computer, 

everybody could get in there without a password. What happened 

to those officials when that went public? Nothing has happened 

since then at the Fed. 

I think it is very important to get better GAO auditors—now, 

maybe they have them—who are experienced on how to audit a 

huge, enormous central bank with 20,000 employees. And they 

have vaults all over the country that hold all the money for the 

commercial banks, and the Bureau of Engraving ships it there. All 

the new money is in there also. It is a national security problem, 

and if Greenspan thought that the employees were stealing 

$500,000 in 10 years—we thought that was a tremendous understatement and so did the GAO crew—but I believe shortly thereafter, most of them were no longer at the GAO. 

Chairman PAUL. Thank you. 

I yield 5 minutes to Mr. Luetkemeyer. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

I have a feeling that both of you gentlemen have a lot more to 

say and a lot more suggestions for us, so I think I will just use my 

time a little differently this time. 

Dr. Calabria, you were the Director of Financial Regulatory 

Studies. What one regulation would you suggest would be 

impactful. Audit the full Fed? Is there something else that you see 

that would really protect our monetary system and really make an 

impact? What would be your suggestion? 

Mr. CALABRIA. I think the focus really needs to be on defining 

and limiting the discretion for the Fed on price stability. So, again, 

you can do things like reduce—eliminate the dual mandate, having 

some sort of inflation targeting. 

I would emphasize that ultimately what is going to be a constraint on the Fed is some sort of competition, so obviously encouraging alternative monetary mechanisms is something we should be 

looking at the in the long run, but certainly trying to find a way 

to constrain the Fed. So I would have a full audit. I would get rid 

of the dual mandates. I would put some statutory flesh around 

what exactly price stability means, because again, you can get rid 

of the dual mandate, but if the Fed decides that price stability is 

3 or 4 percent, it doesn’t really matter. You have to take some of 

these definitions back into Congress. 

And again, I want to emphasize one of the reasons I think the 

Federal Reserve has been so effective over the years at thwarting 

Congress is that they come up here and they give you all this gobbledygook about M1, M2, and all this, and they try to confuse you. 

Again, the most important thing is to get information out there so 

that Members of Congress can even start with the very right questions and can push them and basically not let them get around 

that. So the most important thing we can do is educate Congress 

and the public on how exactly monetary policy works. 

Mr. LUETKEMEYER. Very good. I asked for one, and got three. 

Must be D.C. Thank you. 

25 

Dr. Auerbach, with regard to the same question, you have had 

a lot of advice for us in some of your previous comments here. 

What piece of advice or regulation would you suggest? 

Mr. AUERBACH. Price stability is certainly important, but the Fed 

should understand it is the 1949 Employment Act that said they 

have to do full employment also; that price stability helps produce 

full employment. And right now we have quite a bit of inflation. 

Year over year, 1 month it was 4 percent, then 5 percent. Then 

Chairman Bernanke testified that he doesn’t see any inflation. How 

high does it have to go before he sees it? That is year-over-year inflation. 

The other thing that I think that Congress should have something to say about is what I call malpractice at the Fed. In September 2008, when Lehman Brothers collapsed and the markets 

went crazy all over the world, one month later, the Fed decided 

that they would start paying the banks interest in order for them 

to hold their reserves. 

I have that diagram—I wonder if you would put it up—of the 

amount of—there it is. The amount of excess reserve. You will notice that since—this is the Federal Reserve of St. Louis. It is zero. 

All of a sudden in 2010, the banks are intelligent. They say, look, 

we can get a quarter percent interest risk-free from the Fed; why 

should we loan it to businesses? 

So the Fed begins pumping in their monetary base, they pumped in $1.9 trillion. How much of that got out for loans to banks and 

to businesses? $1.7 trillion was parked as excess reserves. It is 

there today. The total today is $1.6 trillion in excess reserves. It 

went through the roof. 

We are in a position today where people inside the Fed, economists inside the Fed, like William Gavin, a great economist at the 

St. Louis Fed, published in their literature for the banks it is a 

much better investment to hold the money as excess reserves, tie 

it up, than to lend it out to people, because they get a quarter percent for sure, and we are in a terrible environment. 

What should be done immediately? I call this malpractice. It has 

certainly increased unemployment in the United States. The Fed 

must stop paying the banks to hold reserves instead of lending it 

to businesses. And if they do that, they have to be very careful that 

the money supply doesn’t balloon out or we will have a huge inflation. They will have to slightly raise their target interest rate to 

about a half percent. They should be doing that. They have been 

at zero long enough, and you can see what good that has done for 

the country. 

Mr. LUETKEMEYER. Thank you very much. I yield back. 

Chairman PAUL. Thank you. 

I have one more question for the two of you. We talk about the 

transparency, and how to get information out, and how dangerous 

it is if someone gets the information, they can make some money 

on it because they anticipate what the market will do. And also, 

there is so often the unintended consequences of manipulating 

what they do, the economic consequences. And we talk and discuss, 

and there was a slight disagreement on exactly when we release 

information, when did the Fed do this, and when do we get a 

record of the history. 

26 

My question is a little bit different. It has actually to do with 

monetary policy per se, not how we tell—how the Fed manages 

monetary policy. My viewpoint, they have had two mandates, full 

employment, and I don’t think either one of you enjoy that. If you 

really look at the old-fashioned way of measuring it, it is probably 

over 20 percent. Dr. Auerbach admitted that price stability, they 

are not doing very well there. But I got the indication from both 

of you that it wasn’t the principle of setting the interest rates, it 

is how they do it, and when it is released, and the details of it. 

But what about the question of whether or not they should be 

messing around with interest rates? Most economists these days, 

ever since the 1970s, they have played down wage and price controls. Wage and price controls aren’t very good as a solution to 

solve the problem of price inflation created by too much money. 

But setting interest rates is a pretty big deal. If interest rates— 

if prices are the signal that tells the businessman what to do and 

the consumer what to do, the supply and demand—and, of course, 

free-market economists predicted that socialism would absolutely 

fail without a pricing structure—why is it that we have accepted 

this idea that the Fed is all-knowing with their record? 

So could you each tell me, do you think it would be bad to have 

a system where the Fed wasn’t involved with setting interest rates, 

and maybe market rates would help? Maybe market rates would 

help savings. Maybe interest rates would go up, and the people 

who tend not to want to gamble in the stock market and the bond 

market, wouldn’t this be a help to the economy? Could both of you 

make a comment about whether or not the Fed should be setting 

interest rates? 

Mr. AUERBACH. I think that is a really good question. In 1979, 

we had a little party right here in this room, and the new Chairman was coming on board. He was a very good Chairman, Chairman Volcker. And at that time, by 1980, the inflation of the United 

States was going over 13 percent. Interest rates went up over 20 

percent. There were mass bankruptcies in the country. And Volcker 

was laughing with us and said to two of us from the University of 

Chicago, you give me a pain in my you know what, and we laughed 

together. But then Volcker decided he wouldn’t control interest 

rates, he would control the money supply and stop printing so 

much money, which he did. He paid a big price, but he stopped the 

country from going into a terrible inflation. I was in the Reagan 

Administration, and we had a double-dip recession, 10 percent unemployed, but then we had a long period of no inflation. So he did 

a great job, but we paid a terrible price. 

But when Alan Greenspan came in, the idea of controlling the 

money supply was considered, oh, that is University of Chicago 

‘‘monetarists,’’ and they don’t know what they are doing. So by the 

end of the 1980s, he decided the Fed would no longer target money. 

He would do what other central banks do: just target the interest 

rates. 

And I think they should do both. They should watch the money 

supply, but they should do what Congressman Paul said: try to let 

the interest rates go to market rates instead of sitting on them. 

Mr. CALABRIA. I would start by saying that I believe there is 

probably no more important price in the economy than the interest 

27 

rate. You really do balance savings investment and you balance 

time preferences. Accordingly, when we get that wrong, we get a 

whole lot wrong, and you can have all sorts of disruptions to the 

economy. So ultimately, the answer should be a very strong ‘‘no,’’ 

we should not have the Fed manipulating what is the most important price in the economy. 

Chairman PAUL. I thank the panel for appearing. The Chair 

notes that some of the members may have additional questions for 

the first and second panel of witnesses which they may wish to 

submit in writing. Without objection, the hearing record will remain open for 30 days for members to submit written questions to 

these witnesses and to place their responses in the record. 

This committee is now adjourned. 

[Whereupon, at 11:40 a.m., the hearing was adjourned.] 

(29) 

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October 4, 2011 

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