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Senate passes amendment for one-time audit of Fed

Section: Daily Dispatches

By Victorial McGrane and Michael R. Crittenden
The Wall Street Journal
Tuesday, May 11, 2010

WASHINGTON -- The Senate adopted an amendment Tuesday to the financial-overhaul bill that would boost transparency of the Federal Reserve's emergency lending actions during the financial crisis.

Lawmakers voted 96-0 to incorporate the modified amendment offered by Sen. Bernie Sanders (I., Vt.), who scaled back his original language last week to overcome White House objections.

"This amendment begins the process of lifting the veil of secrecy of perhaps the most powerful federal agency," Mr. Sanders said at a news conference after the vote. Once the audit is completed, Mr. Sanders said he hopes it will unveil so many "back-room deals" that people will push for even more disclosure.

... Dispatch continues below ...


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Directly after the Sanders amendment vote, the Senate rejected, 62-37, an amendment by Sen. David Vitter (R., La.) that contained Mr. Sanders' original language. The Vitter measure went further than the modified Mr. Sanders measure in the audit powers given to the federal government, including allowing for ongoing audits. The new Sanders amendment, for instance, would explicitly bar the Government Accountability Office from auditing day-to-day discount window operations and interest-rate decisions, while the Vitter language didn't.

"It really can't be called a complete audit," if it doesn't look at monetary policy decisions, Sen. Jim DeMint (R., S.C.) said of Mr. Sanders' amendment, urging colleagues to vote for Mr. Vitter's measure as well.

The Sanders measure still would shine new light on the opaque central bank. It calls for a one-time government audit of all of the Fed's emergency lending programs from December 2007 on, including facilities used to help deal with the collapse of Bear Stearns & Co. and the program to stabilize asset-backed securities markets. Under the amendment, the GAO would also have to review the Fed's corporate governance, including whether there are conflicts of interest inherent in the current design of the Federal Reserve system.

Additionally, the Fed would have to make public by Dec. 1 the name of every company or foreign central bank that received aid through its emergency programs over the last three years, the amount of assistance they received and specific details on the terms of the aid.

The audit provision now becomes part of the sweeping revamp of the nation's financial regulations that the Senate is debating.

Once Mr. Sanders agreed to modify his measure late last week, the White House dropped its lobbying campaign against the amendment, as illustrated by Tuesday's strong support. The Fed also grudgingly accepted the compromise, though Mr. Sanders has said he expects central bank officials to fight against its inclusion in the final bill, which House and Senate negotiators will hammer out in conference.

The Vermont senator said he'll do all in his power to ensure the final bill has the "strongest possible language" and won't be watered down further once it's reconciled with the House version.

"With the passage of this amendment, the American people are finally going to learn which large, powerful financial interests received trillions of dollars of zero or near-zero-interest loans," Mr. Sanders said.

The Senate could also vote Tuesday on a politically charged amendment by Sen. John McCain (R., Ariz.) that would set a hard end-date for the government's control of mortgage finance giants Fannie Mae and Freddie Mac, which have been under federal conservatorship since September 2008. It would also eventually end their government-sponsored charter as well as roll back the firms' conforming loan limits, require them to pay state and local taxes, and require them to pay back the government for any benefit the firms received from receiving an implicit guarantee from the government.

The measure has strong support on the Republican side of the aisle. Dealing with Fannie and Freddie is the only way financial legislation can "really end 'too big to fail,'" said Sen. Jon Kyl of Arizona, the No. 2 Senate GOP leader.

Sen. Christopher Dodd (D., Conn.), chairman of the Senate Banking Committee, called Mr. McCain's measure "reckless" because it fails to offer any alternative structure to replace the firms, which currently purchase 97% of all U.S. home mortgages. "There's no reform here," he said.

The Obama administration has said it plans to address the future of the two firms as part of a broader overhaul of the U.S. mortgage finance market. Officials were supposed to offer an initial outline of their plan earlier this year but missed that deadline because of the work on the financial-markets overhaul legislation. Instead, the administration is expected to start working on broader proposals by the end of this year, with legislation unlikely to move through Congress until next year.

A number of Democrats are pushing amendments that, if adopted, would make the legislation much more onerous for Wall Street firms. Of particular concern for many financial institutions is a measure being offered by Sens. Jeff Merkley (D., Ore.) and Carl Levin (D., Mich.) that would put strict new limits on banks' ability to use their own capital to invest in financial markets and would prevent them from sponsoring hedge funds.

"Taxpayers ended up holding the bag when those bets didn't pay off," Mr. Levin said of the role so-called proprietary trading in contributing to the recent financial crisis. Other amendments would broaden areas of the bill dealing with disclosure and government oversight. Sen. Jack Reed (D., R.I.) is pushing a proposal that would require private-equity and venture-capital firms to register with the government, expanding the current requirement that hedge fund advisers provide information to regulators.

"This amendment will shut down loopholes and provide the SEC with long-overdue authority to examine and collect data from this key industry," Mr. Reed said in a statement released Monday by his office.

Meanwhile, Democratic Sens. Daniel Akaka of Hawaii, Bob Menendez of New Jersey and Dick Durbin of Illinois have an amendment that would force broker-dealers to meet the same fiduciary standard that investment advisers are held to, requiring broker-dealers to act in the best interests of their clients and disclose any conflicts of interest when giving investment advice.

Some Wall Street firms oppose changing the broker standard. The financial bill now includes language directing the SEC to study the issue.

In a letter to senators urging support for the broker-dealer amendment, the North American Securities Administrators Association invoked the government's fraud case against Goldman Sachs Group Inc. as evidence of the need for such an amendment.

Recent Senate hearings showed that "Goldman Sachs repeatedly put its own interests and profits ahead of the interests of its clients," wrote Denise Voigt Crawford, the group's president. "In order to earn the confidence of American investors these practices must end."

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