Matt Stoller, who worked on Capitol Hill from 2009-10, writes that the Dodd-Frank Act made no structural changes to the banking system, and that his main focus, the audit the Fed amendment, merely allowed “for the beginning of a real debate over our monetary system.” We don’t really have real debates on much of anything in America anymore, so it’s worth questioning whether this will be the effect. But for what it’s worth, Bernie Sanders’ office has released the major investigation coming out of that amendment – a GAO audit of the emergency lending programs carried out by the Fed in the wake of the financial crisis. These programs – not TARP, which mostly put the Congress on the hook for the bailout politically – represented the bulk of the federal government’s support for the banking sector. And they were carried out largely in secret. This GAO audit provides a window into just what the Fed did.

GAO found that the emergency loans peaked in late 2008, when the Fed had over $1 trillion loaned out to financial firms, mostly at near-zero interest rates. Over the course of all the emergency lending programs, the Fed loaned over $16 trillion. Many of these loans went to foreign banks, which our Federal Reserve saw fit to prop up under a shroud of secrecy.

The NY Fed, then under the direction of Timothy Geithner, handled the majority of these activities, including the large-scale purchase of mortgage-backed securities. They then contracted out most of the work, to the tune of $659 million, and GAO found that “Most of the contracts, including 8 of the 10 highest-value contracts, were awarded noncompetitively, primarily due to exigent
circumstances.” Many of the contractors, including JPMorgan Chase, Morgan Stanley, and Wells Fargo, also got low-interest emergency loans from the same programs. One of GAO’s seven recommendations is to limit noncompetitive bidding and open up the process.

GAO also found conflicts of interest at the NY Fed, which is obvious, since some of the top bankers being bailed out at the time sat on its board. JPMorgan was one of the clearing banks for the emergency lending program while also being a recipient. Neil Irwin gets at more of this in a WaPo article.

For instance, William C. Dudley, the president of the Federal Reserve Bank of New York who was a senior official there in 2008, owned stock of American International Group before the Fed bailed out the giant insurance firm. The GAO report did not mention him by name, but Sen. Bernie Sanders (I-Vt.), who spearheaded the audit, identified Dudley as the unnamed official described in the report.

Lawyers at the New York Fed allowed Dudley to continue owning the shares while working on issues relating to the bailout. They concluded that for him to sell the shares immediately after the central bank bailed out the firm would be more ethically problematic than simply holding onto them and selling at a later date.

The report also found that lines of authority between the Fed’s Board of Governors in Washington and the 12 regional Fed banks around the country were sometimes muddled during the crisis. For example, it was not always clear where authority resided on questions of what collateral would be adequate for an emergency loan.

Sanders’ statement includes the following: “As a result of this audit, we now know that the Federal Reserve provided more than $16 trillion in total financial assistance to some of the largest financial institutions and corporations in the United States and throughout the world. This is a clear case of socialism for the rich and rugged, you’re-on-your-own individualism for everyone else.” He wants to remedy the conflict of interest situation by banning anyone who works for a firm receiving direct financial assistance from the Federal Reserve to be employed by them, a simple enough fix.

GAO will conduct a more wide-ranging investigation by October 18, but just from this one, we have a sense of how incestuous Wall Street and the nation’s central bank are.