WASHINGTON (MNI) – Federal Reserve Chair Ben Bernanke Tuesday sent
a letter to key congressmen defending the Fed’s emergency lending
activities during the financial crisis, citing “egregious errors and
mistakes” in recent reports about those activities. The following memo
was included and has point-by-point corrections to those reports.

This if the second of two parts:

Although the articles do not stress this point, it is important to
note that nearly all of the emergency assistance has, in fact, been
fully repaid or is on track to be fully repaid. This fact has been
verified both by the Board’s independent auditors and the Government
Accountability Office (GAO).

Importantly, Federal Reserve lending should in no way be compared
with government spending. Federal Reserve lending is repaid, with
interest, and the Federal Reserve has never suffered a credit loss. As
provided in the Dodd-Frank Act, the GAO conducted a review of all of the
emergency lending facilities and confirmed in its report on July 21,
2011, that not only were there no material issues with respect to the
design, implementation and operation of the facilities, but that all
loans to the facilities were fully repaid or expected to be fully
repaid.

Third, the articles make no mention that the emergency loans and
other assistance have generated considerable income for the American
taxpayers. As reported in the Annual Report of the Board of Governors,
alongside the Board’s audited financial statements, the emergency
lending programs have generated an estimated $20 billion in interest
income for the Treasury. Moreover, in 2009 and 2010, the Federal Reserve
returned to the taxpayers over $125 billion in excess earnings on its
operations, including emergency lending. These amounts have been
publicly announced and are reflected in the Office of Management and
Budget’s financial statements for the government and have been verified
by the Federal Reserve’s independent outside auditors. The Federal
Reserve is on track to return a comparable amount to taxpayers this year
as well.

Fourth, the articles discuss the lending made to large banks but
never note that Federal Reserve lending programs went far beyond such
institutions — all in furtherance of supporting the provision of credit
to U.S. households and businesses. Literally hundreds of institutions
borrowed from the Federal Reserve — not just large banks. The TAF had
some 400 borrowers and the discount window some 2,100 borrowers. The
TALF made more than 2,000 loans, while the commercial paper funding
facility provided direct assistance to some 120 American businesses. The
articles also fail to note that the lending directly helped support
American businesses by providing emergency funding so that they could
meet weekly payrolls and on-going expenses. The commercial paper funding
facility, for example, provided support to businesses as diverse as
Harley-Davidson and National Rural Utilities, when the usual market
mechanism for their day-to- day funding completely dried up.

And the articles fail to mention altogether that one facility, the
TALF, supported nearly 3 million auto loans, more than 1 million student
loans, nearly 900,000 loans to small businesses, 150,000 other business
loans, and millions of credit card loans. Auto lenders that funded their
operations in part with asset-backed securities supported by the TALF
told us that the program allowed them to provide more credit to
consumers and at lower rates than they would have been able to do
otherwise. The TALF also facilitated the first issuance of a commercial
mortgage-backed security following a year-and-a-half drought, a security
that provided an important benchmark for pricing and helped establish
the higher credit standards now seen in the market. Fifth, the articles
misleadingly depict financial institutions receiving liquidity
assistance as insolvent and in “deep trouble.” During a financial panic,
otherwise solvent banks and other financial institutions can be forced
to sell assets at fire-sale prices in order to meet the demands of
depositors and other sources of funding. Central bank liquidity lending
is designed to stem the panic by giving financial institutions a source
of financing that permits them to refrain from selling assets during the
panic. Again, unmentioned in these articles–but a central point–all
discount window loans extended during the crisis were fully repaid with
interest, indicating that, with rare exceptions, recipients of these
loans generally suffered from temporary liquidity problems rather than
being fundamentally insolvent. In the handful of instances when discount
window loans were extended to troubled institutions, it was in
consultation with the Federal Deposit Insurance Corporation to
facilitate a least-cost resolution; in these instances also, the Federal
Reserve was fully repaid.

Finally, one article incorrectly asserted that banks “reaped an
estimated $13 billion of income by taking advantage of the Fed’s
below-market rates.” Most of the Federal Reserve’s lending facilities
were priced at a penalty over normal market rates so that borrowers had
economic incentives to exit the facilities as market conditions
normalized, and the rates that the Federal Reserve charged on its
lending programs did not provide a subsidy to borrowers.

-end part 2 of 2-

** Market News International Washington Bureau: 202-371-2121 **

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