The White House's steadfast opposition to Bernie Sanders' audit the fed amendment (included in the House version of the bill as a Grayson amendment) is a little baffling from a political point of view.
It is believed that the Fed loaned major financial institutions upwards of $2 trillion during the financial crisis. Sanders' legislation would require the Government Accountability Office to conduct a comprehensive audit of the central bank, and force it to make public which companies received that money, and under what terms. Chairman Ben Bernanke opposes the latter on the grounds that exposing the institutions that required dramatic assistance would be counterproductive to the goal of restabilizing the financial system.
It's likely, in fact, that the Obama administration will be under intense pressure to veto the entire financial reform bill if "audit the fed" survives.
That's why, according to the Wall Street Journal they'll "fight to stop it at all costs." The White House is hoping to cut off "audit the Fed" in the Senate, so that they'll have a stronger hand when House and Senate negotiators meet to iron out the differences between their regulatory reform bills. If the Senate bill does not include Sanders' amendment, then the House will be in a weak position vis-a-vis the Senate and White House and the provision could be easily stripped.
The impetus for having the GAO audit where that $2 trillion went is clear, and demonstrated really well today in an examination of one case study by Yves Smith and Tom Adams at Naked Capitalism. They look at the case of the Red Roof hotel chain, which just had a bunch of foreclosures. The hotel chain financed itself by selling debt, secured by the hotels themselves. That debt normally would have been securitized, chopped up into little pieces by an investment bank and then sold to investors. In this case, the investment bank holding the debt was Bear Stearns, and before Bear could chop up the debt, Bear collapsed.
Then Bear was sold immediately to JP Morgan, and in return for being willing to buy Bear, JP got the Fed to take the worst crap on Bear's balance sheet. This included the Red Roof Inn debt, which is now held on in a Fed-owned special purpose vehicle called Maiden Lane I. After immense political pressure, the Fed disclosed what was in Maiden Lane I, which is how Smith and Adams were able to ferret out the problems in this case.
The smoking gun that Smith and Adams discovered is that the the Fed is probably marking prices as if these hotel chains are paying their debt, when they are not. It is deeply unethical and probably dishonest. In addition, this very well could apply across the board to all commercial real estate on the Fed's books. The Fed is just not supposed to lose money, and it has been claiming in Section 129 reports that it will not lose money on its purchases. How much of this does the Fed own? We don't know, but it looks like they own a bunch of it. But this is why TARP isn't doing badly, it's because the bad stuff was moved onto the Fed balance sheet, and the Fed is probably lying. From their post:
The Fed, aided and abetted by BlackRock, has long been publishing rosy valuations of the assets of the various Maiden Lane vehicles. Accuracy of valuation matters for a host of reasons. First, the public has a right to know how large the various government subsidies to the banking industry are, irrespective of Fed and Treasury efforts to camouflage them. Second, losses on the Fed’s accumulation of dreck may well rise to the level that it will require Treasury (meaning taxpayer) recapitalization of the Fed (the central bank can in theory “print” its way out of any shortfall, but as former central banker, now Citigroup chief economist Willem Buiter has pointed out, the Fed’s anti inflation mandate puts limits on how far it can go down that path). Third, this willingness to bend facts reveals troublingly cavalier attitude from a bank regulator. If the Fed thinks fudging its own marks is OK, it is likely to be unduly tolerant of truth-bending by the institutions it supervises....
The Fed seems awfully keen to steer clear of the fate that befell Lehman. Lehman was grossly and verifiably misvaluing some investments, namely Archstone and SunCal, that confirmed doubts about the veracity of its accounting. If you can’t check any particular valuations, it’s a lot harder to ask difficult questions. And unlike Lehman, the Fed can continue to account to no one.
The Fed is engaging in same practices that caused the crisis: failure to make timely disclosures, obfuscation, use of off balance sheet vehicles to distance itself from losses. This posture alone should disqualify the central bank from assuming a greater regulatory role.
Sander's amendment is picking up a lot of steam, with the potential of as many as 69 votes, unless the administration has been successful in peeling previous supporters away. This puts the White House in a potentially ugly political situation, ceding a key argument on what is supposed to be a hallmark of this presidency--transparency--to the Republicans.