 First, I want to welcome our two witnesses and they'll be introduced a little bit later. Once again, I apologize to everybody for the inconvenience. I apologize to myself because nobody likes to be inconvenienced. But it looks like we have a system set up here that we can pursue with our hearings. And without objection, all members opening statements will be made part of the record. The chair notes that some members may have additional questions for this panel which they may wish to submit in writing. Without objection, the hearing records will remain open for 30 days for members to submit written questions to these witnesses and to place their responses in the record. Also, I would like to emphasize at this time that this hearing deals with a very complex matter and it's a large amount of material. And therefore written questions I'm sure will be followed up so I ask for as much cooperation as you can give us because there are times when questions are sent in and they sort of get lost. But because there's so much and it's complicated and now our time looks like it's going to be shortened, we may have to depend a whole lot on our written question. So we ask for your cooperation there. But I will go ahead with an opening statement and offer time for anybody else who wants to have an opening statement for me. Yeah, I'll give them time. Yeah, we haven't done that yet. But I want to emphasize that these hearings I consider very, very important, they've come about because of many things that's happened over the last few years. There's been a lot of movement in the country for more transparency in general as well as with the Federal Reserve system and I think my position on this is fairly well known. But also there's been legislation passed. The Dodd-Frankville has stipulations about more information coming to us by that legislation passed last year. There's also been the court cases that has required under the Freedom of Information Act and we'll be dealing with a lot of that today. And also the provisions in the law that was language that was put in by basically Senator Sanders that has required some additional information. But what is referred to today so often on hearings and the materials that came out of the Freedom of Information Act is called the dump. And I find that rather interesting to call it that because it sounds like a lot of material was dumped. And when you think of 29,000 pages of technical information, it is very large and a lot of people have been studying it. Our staffs have been working very hard and quite frankly it isn't all that easy to figure out. You know it reminds me of a story that was told and supposedly a true story that an individual was being audited by the Federal Reserve. And they came to him and they said we went five years of everything that you've ever done and every receipt you've ever had. And of course that made him very unhappy. So he put them all together in a bushel basket and he dumped them. And I'll tell you what it didn't go over very well and he got into a lot of trouble. I'm not suggesting this is similar but it's a story that reminds me when I look and try to figure out really what we have. It's a lot of material and to sort this out is not easy. The one argument and I understand the argument very clearly on the hesitancy of the Federal Reserve not to give out too much information too early with the idea that it might be proprietary, it might set the stage for concerns in the market. You know I think of this in contrast to what the purpose of the SEC is. The SEC has a purpose to investigate the man reports and get the information out immediately and that's their responsibility. And if a company doesn't let us know exactly what they're doing and what their accounting procedures are they get into a lot of difficulty. But the argument seems to be different for the Federal Reserve that oh if we have information about a bank that might be in difficulty you know in a market situation that information should be available to us so I take the position that information shouldn't be that detrimental to us and the more we can get the better and I am hopeful that today we will be able to ask some pertinent questions to get more information that members can follow up with more questions later on and that there will be more transparency without ever injuring anybody. That certainly would be my goal. So I would like now to yield five minutes to Mr. Clay. Thank you Mr. Chairman and thank you so much for holding this hearing to examine information disclosed by the Federal Reserve in compliance with the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Freedom of Information Act. Also I want to thank the witnesses for appearing today. Due to the U.S. financial crisis the Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. This legislation was crafted as a response to the financial crisis which has cost nearly 10 million American jobs and over 10 trillion dollars in household wealth. Nearly 4 million families have lost their homes to foreclosure and an additional 4.5 million have slipped into the foreclosure process or are seriously behind on their market payment. According to the Financial Crisis Enquirer report a combination of excessive borrowing, risky investments and the lack of transparency put the financial system on a collision course of self-destruction. In the years leading up to the crisis too many financial institutions as well as too many households borrowed too much leaving them vulnerable to financial distress if the value of the investments declined even modestly. For example as of 2007 the five major investment banks were operating with extraordinarily thin capital by one measure their leverage ratios were as high as 40 to 1 meaning for every 40 dollars in assets there was only one dollar in capital to cover losses less than a 3% drop in asset value could wipe out a company. Leverage was often hidden in off balance sheet entities and derivatives positions and through window dressing of financial reports available to the investing public. Within the financial system the danger of this debt was increased because transparency was not required or desired. Undercovered corporate dealings assisted in the financial meltdown which still plagues us today. In order for democracy and capitalism to exist correctly transparency must be at the court and trust and transparency and the rule of law are fundamental to this nation's success and business depends in some way on trust. A trusted business produces good products and a trusted business will deliver good services. Democracy depends in some way on trust. Transparency promotes government accountability free and fair election competition and free markets and the rule of law are critical to it. The Dodd-Frank Wall Street Reform and Consumer Protection Act addresses these issues by reforming the Federal Reserve. One, it limits the Federal Reserve's 13-3 emergency lending authority by prohibiting emergency lending to an individual entity. The Secretary of Treasury must approve any lending program and the program must be broad based and loans cannot be made to insolving firms. Collateral must be sufficient to protect taxpayers from losses. And two, it requires the Federal Reserve to disclose counterparties and information about amounts, terms and conditions of 13-3 and discount window lending and open market transactions on an ongoing basis with specified time delays. And these are just a few examples of the importance of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Thank you, Mr. Chairman. I look forward to the witnesses' comments. I thank the gentleman. Mr. Lukimer, do you care for an opening statement? Okay. No more opening statements, so we'll go on and introduce our witnesses. First, we have Mr. Scott Alvarez as General Counsel at the Board of Governors. A post he has held since 2004 has been with the Board for 30 years. And also, Mr. Thomas Baxter Jr. has been General Counsel and Executive Vice President of the Legal Group at the Federal Reserve Bank of New York since 1995. He also serves as Deputy General Counsel of the FOMC. Mr. Baxter has been with the New York Fed for more than 30 years. Without objection, your written statements will be made a part of the record. It has been agreed upon by the witnesses, Ranking Member Clay and myself and Mr. Alvarez will deliver the oral remarks with a joint written testimony of Mr. Alvarez and Mr. Baxter. This testimony may run longer than the customary five minutes. And I yield now to Mr. Alvarez. Chairman Paul, Ranking Member Clay, members of the subcommittee. Thomas Baxter, the General Counsel of the Federal Reserve Bank of New York, and I appreciate the opportunity to discuss the ways the Federal Reserve informs the Congress and the American people about its policies and actions. Central Bank lending facilitates the implementation of monetary policy and allows the Central Bank to address short-term liquidity pressures in the banking system. This role of lender of last resort is a critical one long filled by central banks around the world, especially during times of economic crisis when discount window lending can mitigate strains in financial markets that could otherwise escalate and lead to sharp declines in output and employment. In the United States, all discount window loans are fully secured and the Federal Reserve has not suffered a loss to date on its discount window lending. The Federal Reserve regularly releases significant detailed information about its operations in order to promote the understanding of how the Federal Reserve fosters financial stability and economic stability and to facilitate an evaluation of our actions while preserving the ability to effectively fulfill the responsibilities that Congress has given the Federal Reserve. Since 1914, the Federal Reserve has published its balance sheet every week. We also publish full financial statements annually that are audited by an independent public accounting firm, which for the last four years has been Deloitte and Touche. These audits cover Maiden Lane, Maiden Lane 2, and Maiden Lane 3, as well as the transactions conducted through the discount window and with foreign central banks. The Federal Reserve also publishes a special monthly report to Congress hosted on our website that details the Federal Reserve's emergency lending programs, including providing information on the amount of lending under each program, the type and level of collateral associated with those loans, and information about the borrowers under those facilities. In addition, the Federal Reserve Bank of New York maintains a website that includes schedules of purchases and sales of securities as part of open market operations, with QCIP information describing the securities involved. The Federal Reserve is fully cooperating with the GAO in an extensive review of each of the special lending facilities developed during the crisis. This review will assess operational integrity, internal controls, security and collateral policies, policies governing third party contractors, and the existence of any conflicts of interest or inappropriate favoritism in the establishment or operation of the facilities. As provided by the Dodd-Frank Act on December 1, 2010, the Board published detailed information on its website about the Federal Reserve's actions during the financial crisis. This release includes the names of borrowers, the amount borrowed, the date credit was extended, the interest rate charged, information about collateral, and a description of the credit terms under each facility. Similar information was provided for the draws of foreign central banks on their dollar liquidity swap lines with the Federal Reserve. For agency MBS transactions, details included the name of the counterparty, the security purchased or sold, and the date, amount, and price of the transaction. On March 31, 2011, the Federal Reserve released documents related to the discount window in response to requests filed under the Freedom of Information Act. The March 31 release included documents containing information related to borrowers at the discount window between August 8, 2007, and March 1, 2010 that was not required to be disclosed under the Dodd-Frank Act. Going forward, the Dodd-Frank Act provides for the release of information on any broad-based emergency lending facility one year after the termination of the facility, as well as a GAO audit of the facility. The Act also provides for the release of information regarding discount window lending and open market operations conducted after July 21, 2010 with a two-year lag. For lending facilities, including both emergency lending facilities and the discount window, and for open market operations, the Federal Reserve will publish information disclosing the identity of the borrower or counterparty, transaction amount, interest rate, or discount paid, and the collateral pledge. The Federal Reserve believes the lags provided by the Dodd-Frank Act for the release of transaction level information establish an important balance between the public's interest in information about participants in transactions with the Federal Reserve and the need to ensure that the system can effectively use its congressionally authorized power to maintain the stability of the financial system and implement monetary policy. We will carefully monitor developments in the use of the discount window and other Federal Reserve facilities and keep the Congress informed about their effectiveness. The Federal Reserve has worked and will continue to work with the Congress to ensure that our operations promote the highest standards of accountability, stewardship, and policy effectiveness consistent with meeting our statutory responsibilities. We appreciate the opportunity to describe the Federal Reserve's efforts on this important subject and are happy to answer any questions you may have, and we will be responsive to any written questions you may submit as well. Thank you very much, Mr. Chairman. I thank the gentleman. I will yield myself five minutes but announce that we will likely be able to have repeat questioning. I think the time will permit that, but I will start off with these five minutes. I first want to ask unanimous consent to admit an article for the record from Bloomberg called, Bed Gave Banks, Prices Gains on $80 Billion Secretive Loans Without Objection. I want to refer to one document and this little document from the material that we got from the Federal Reserve is called a Chart Pack of Market Monitoring Metrics for Fed Facilities. I'm sure you know all 29,000 pages and you probably know exactly what I'm talking about, but it tells you about the problem that we have in trying to find out information. This particular document has 327 pages to it, but in this particular document it had some interesting material that I did not know about and I want to ask about it. It reveals that there was a previously undisclosed Fed lending program known as the Single-Trench Open Market Operations and it's referred to as STOMO. This is something new and it allows to give 0.01% that is free money to companies like Goldman Sachs and was essentially a free loan to these well-connected businesses. But also the problem that we had in analyzing this to find out information that we're looking for is it turns out that just in this particular area, 81% of the contents has been redacted. So we end up with a lot of pages and then we end up with 19% actually has information that we have to sort out. The question is, why were these details not mentioned? Is it that everything has to be done in secret? We'd like to know, people would like to know, but we didn't see any evidence until this was dug out of here and maybe it was mistakenly not redacted or something like that. It makes us wonder why we don't know about this and that of course is one of my big beeps with the Federal Reserve is that the Central Bank wields so much power, so much financial power. You literally can have transactions greater than what we can do with our own budget and that's why it's a deep concern to me but to many other people as well. But why was this not published and are these and other programs that have yet to be disclosed, are there others? Why were so many pages redacted? Can you really claim this to be in compliance with FOIA, the Freedom of Information Act, when we don't know what's been excluded? And I would like to get your reaction from this and talk specifically about this one program and what's been going on with it. So Mr. Chairman, the program you refer to, the single-chance OMO program was not a secret program. It was actually publicly announced by the Federal Reserve on March 7th, 2008, when the program began. It was a short-term program that ended in January of 2009 and transactions that were conducted under that program as part of our open market operations were reported along with other open market operations on the New York Federal Reserve Bank website very quickly after the transactions occurred. The documents you have before you are from the response for the Freedom of Information Act request. And so that itself should explain why there are redactions. The way the Freedom of Information Act works, it is a request for certain types of information in documents. So redactions are made. First, the agency collects all documents that may have any information that relates to the request. Then information that is not requested is taken out of the documents, redacted from the documents, simply because it's not responsive to the request. So it's not a desire to keep things secret. It's instead a desire to be responsive to the request. They're often, when a requester asks for documents, there often is information that is extraneous or not the kind of information that was requested, not relevant to the request. And that's taken out of the documentation. And that's why you see so much redaction in the documents before you. These documents were reviewed by the court and released by the court in accordance with the Freedom of Information Act. Does that mean if somebody would follow up and broaden that request that all that material could become available, would they have to just change the Freedom of Information Act request? So if another request were made for broader range of information, we would review that information, determine what is confidential and what could be released, and a decision then would be made on that request. Could it be made so broad that just turn over everything? I'm not sure there are enough people in the world to look at everything we have to turn over everything, but we would do the best we could. My five minutes is up and I now yield to Mr. Clay. Thank you, Chairman. Thank you, Mr. Alvarez. Just one question. Has the dramatic and I believe welcome increase in transparency, including your own initiatives and those called for in the Wall Street Reform Act of 2010, had any adverse or troubling consequences either for policy making at the Fed or for the financial institutions that you regulate and interact with? So we think the increases in transparency particularly around monetary policy that we've taken in the last few years have been very helpful and responsive and have improved the understanding of the Federal Reserve and the actions, policy actions we're trying to take. We've provided a lot of detailed information about credit transactions we engaged in during the crisis. There have been, you know, Congress we think struck a very important balance between the need for access to that information and providing a delay so that participants in the transaction don't experience stigma that often occurs when there's an immediate release of information, allowing therefore an explanation for why institutions are participated in the facilities. We're monitoring whether there'll be any effect. We of course won't know until we see how these facilities operate in the future. We will keep the Congress informed on the effectiveness if there is any bad effect we'll let you know. So you will inform the Congress as to if there needs to be changes in the law. Absolutely. Okay, thank you for your response. At this time, Mr. Chairman, I'd like to yield a balance in my favor to the gentleman of the yard. I thank the gentleman for yielding and I thank the chairman for holding this important hearing and I welcome both of our witnesses. And I think we all have to remember that we were really on the verge of collapse. That this was a, we had the great recession instead of a great depression because of the monetary policy in many of the steps that we took. One of those steps that we've taken to stabilize our markets and move forward is the Dodd-Frank bill. And in that we required the GAO to conduct an audit of the Federal Reserve. And we also required the Fed to make information about the transactions through emergency lending facilities from December 2008 to March 2010 available to the public. In addition, Dodd-Frank required that the Fed disclose information about the entities that used the discount window or under, I believe it was, Section 133 lending facilities. But in addition to what we required in Dodd-Frank, the Federal Reserve is also already subject to robust congressional oversight. And I'd like to ask our two witnesses, can you give the committee some examples of the types of congressional oversight that you are already required to do, even before Dodd-Frank? The two of the most important types of oversight are the Chairman of the Federal Reserve, the Chairman of the FOMC, provides testimony on the economy twice each year on the call of the House and the Senate. And that is an important check on our monetary policy and the state of the economy. Another important method is this hearing and hearings like this that we're going through. The staff and the governors and the Chairman of the Federal Reserve, the presidents of the Reserve Bank have often been called to Congress to report on every aspect of our duties and how we implement various policies. And you use those as oversight to us and we explain the positions that we've taken. So I think it's the interaction between the Congress and the Federal Reserve in testimonies in particular that have been an effective form of oversight. Okay, my time is about to expire, but as you know there's a GAO audit authority now. Was there anything that is excluded from the GAO audit authority? So the GAO is authorized to audit a full range of the Federal Reserve's responsibilities. That includes all of the emergency transactions, the discount window, our supervisory authority, our consumer authority, all the various aspects of authority. An area that Congress has reserved to the Federal Reserve is the implementation of monetary policy, the actual policy making decision process. The GAO does look at how we implement the policy in the form of making sure the transactions actually occur as appropriate, that they are accounted for properly on the balance sheet, that they're fully disclosed. But the decision making process for monetary policy is the one thing outside the GAO scope of the part. Mr. Chairman, may I follow up with one brief question on why that? What are the arguments for excluding it? Why was that excluded? What is the argument for it? Mr. Alvarez, the importance of allowing the Federal Reserve and the FOMC to conduct monetary policy independently has been demonstrated throughout the world in both actions by other central banks and in a variety of studies of monetary policy. The point I think is that the Congress wanted to reserve to the FOMC the ability to have discussions that are full and free and frank and to explore all the possible alternatives for monetary policy to reach the best monetary policy decision. Moreover, if GAO doesn't do audits in the sense of a technical audit like a financial auditor might do, but does performance reviews and policy reviews. So that would mean that the GAO would review the alternatives considered for monetary policy, how the decisions were made, whether the decisions were actually appropriate. That would cause second guessing of the FOMC, cast into doubt whether the FOMC was actually making the policy decision or whether the GAO was making policy decisions in monetary policy and make it more difficult for the monetary policy to be done effectively by the Federal Reserve. Thank you. Thank you, Chairman. Thank you. Now I yield to the Vice Chairman, Mr. Jones from North Carolina. Mr. Chairman, thank you very much and I appreciate you holding these hearings as others have said. You know, I want to take a little bit different approach. I represent the third district of Eastern North Carolina. It's a great district to represent the home of Count Lejeune Marine Base, Cherry Point Marine Air Station, and the out of banks. And the frustration of the average business person down in my district is very deep and severe. And we have had numerous inquiries from the third district, the citizens of the third district, about the Federal Reserve and how decisions are made. You cannot go into some of the back room negotiations at the Reserve. I'm not even asking that. But how do you say to the small business owner that, you know, in this crisis situation, we seem to find ways to help foreign banks, foreign entities. And I'm looking here at the note that my staff prepared for me that Carly Davidson, McDonald's, GE, Verizon, Toyota. And yet I've got people in my district saying that I go to the local banks and I can't get any loans and my credit has always been good. Why and how does the Federal Reserve seem to be able to find the way to help these entities that are gigantic? And through greed and manipulation, they cheated. And yet they get bailed out. They get the help when the average business person down in eastern North Carolina and probably across America, they can't even go to a bank they've been banking with for 15 or 20 years and get a loan. And yet here we are at the Federal Reserve looking at those foreign banks who might need some help or these corporations that might need some help. It really is, that's why this hearing is very important. The transparency, the trust, that's a big word to me, trust, is just not there with the average citizen when it comes to the Federal Reserve. And yet if it had not been for the push by, I won't name all the entities that pushed to tell you to show the bottom line, to show what was in the closet of decisions, who was being helped, we never would have known it. And yet I know you gentlemen are attorneys and you're probably not at the position where the person ought to be here that ought to be put hand on a Bible to tell the truth to the American people. That's my concern is how do we build the compass of the American people when we see what has happened at the Federal Reserve? So Congressman, we understand that and feel that same frustration. The programs that were designed and implemented by the Federal Reserve during the financial crisis were not designed to aid big companies for the sake of aiding big companies. The programs that we designed, for example, the TALF program that we designed was designed to pass money and credit and liquidity onto the American people. So for example, the TALF resulted in three million more auto loans during the crisis than would have occurred, a million more student loans, almost a million small business loans. The programs you're talking about that aided Harley Davidson and Toyota and other companies were the commercial paper facility which provided short term funding to those companies so they could continue to keep employment up and manufacturing up in the United States so they could continue to provide jobs and provide opportunities in the United States. Our efforts were all designed to try to keep the economy moving in order to help individuals and small businesses, not for the sake of helping the larger institutions. And I understand that there's a different perception, part of that perception I think comes from the fact that most of the financial tools that were given are designed to work through banks or work through large markets. And it's working through, so we use the tools the best we can in order to have the funding aid the broadest range of people possible. Well, I guess, Mr. Chairman, I know my time is about up, but I guess in a way that if it had not been for these Bloomberg and Wall Street Journal and all these raising the question is doing the investigation, I don't know if we'd be having this hearing today. I don't know. Thank you, gentlemen. I yield five minutes to Ms. Milani from New York. I thank the chairman for yielding, and as he is well aware on Friday, the jobs numbers come out and the economy has been improving not as fast as we would all like, but we are digging our way out of that hole. And now that we have the benefit of hindsight and we are slowly recovering from the financial crisis of 2008, I know that some have taken the position, a position that I do not agree with, but they've taken the position that the Fed's lending during this time actually helped contribute to the crisis. And some have argued that the Fed didn't need to take the actions that it took because the situation would have stabilized on its own. But I'd like to ask our panelists today, isn't it true that without the actions that the Fed took, that by not setting up the facilities it did, by not giving institutions access to the discount window to provide additional liquidity to our economy, that the crisis would have been far worse? So your comments of these, Mr. Alvarez and Mr. Haster, Baxter. Thank you, Congresswoman. We do believe that the facilities that we established at the Federal Reserve established did ease the crisis and they certainly were designed to do that. The studies that are beginning to come forward now are starting to show that they actually were successful in unfreezing various markets, the commercial paper market, the asset-backed securities market, providing liquidity to the financial system that was important for the financial system to continue to operate. The funding that we provided was provided without any losses to the taxpayer. Indeed, the emergency lending facilities resulted in $9 billion worth of interest and fees that were passed on to the Treasury. As I was explaining to Congressman Jones, the facilities were designed to provide real relief to American consumers and small businesses in the form of student loans, in the form of auto loans, small business loans, credit card loans, as well as allowing the operation of companies that relied on the commercial paper market, which had frozen up, to continue to find a source of funding to keep their operations going. So we think that the facilities were successful and were a good use of the taxpayer funds. I would say that there is an impression, and I hear it, I think other members of Congress hear it, that it's out there that all of the actions that Fed took during the crisis served only to help financial institutions. But I want to make clear the point, and I want to make sure that people understand, that all of these actions were in the form of loans, and in fact over $125 billion has been returned to the Treasury over and above what was loaned out. That's what I read, I want to know if that's true, is that true? So we have in the last two years provided about $127 billion in earnings to the Treasury. That's correct. But can you bring this down to Main Street? Can you give the committee members and the general public some examples of how that lending helped not only stabilize the economy and keep our financial institutions in place, but literally help Main Street and working men and women? So I'd like to return to the TALF program, which was one specifically designed to make sure that loans were made in the United States to help students obtain education loans for college, to help small businesses have SBA loans, credit card loans to provide auto lending, to provide equipment leasing, and a variety of other kinds of loans that were not being made during the financial crisis because of liquidity shortages. That program was extraordinarily successful. Is this still operating? It has closed, but there are still about $14 billion in loans outstanding. There were $70 billion of credits extended through the program, through its life. Much of it has been repaid. I'd like to ask about a number of programs that the Fed engages in, including holding gold for foreign companies, for countries, account services, liquidity programs. In your experience, are these common activities for central banks? Yes, Congresswoman, they are common for central banks. It is common for central banks around the world to hold reserves. As you know, the dollar is the principal reserve currency. At the Federal Reserve in New York, we hold over $3 trillion on behalf of foreign central banks and countries. It is very important to hold those sizable reserves because those sizable reserves are principally invested in Treasury securities, which helps to finance the debt of the United States. Holding dollar reserves is a very important function of the Federal Reserve, and we do that at the New York Fed. It is similar to functions that other foreign central banks perform around the world. My time has expired. Thank you, Mr. Chairman. Thank you, and I yield five minutes to Mr. Green from Texas. Thank you, Mr. Chairman. Thank the witnesses for appearing as well. And I'm interested in the central banks of other countries as compared to our country and this disclosure that they engage in compared to our country. And I know that the systems are not going to be the same, but with reference to disclosure, can you give some indication so that we can have some sort of comparison? So the practices of disclosure vary quite a bit across the world, but I believe the Federal Reserve is one of the, if not the most transparent central banks. Many central banks in developed countries do not, for example, announce their policy decision or the votes that are taken. The Federal Reserve does both of those. They do not announce or provide minutes for their meetings. The Federal Reserve does provide minutes three weeks after each meeting. Many foreign central banks do not publish at all the transcripts of their meetings, and the Federal Reserve publishes the transcript five years after each meeting. On the discount window lending, that is a common feature, a common power that each, that foreign central banks have, but they are much less transparent in that area as well. Indeed, you may recall that in, at the start of the crisis, it was a leak about a discount window loan made by the Bank of England to Northern Rock that resulted in a run on Northern Rock there. So the foreign countries tend to be more circumspect about the information they disclose about their discount window lending operation. Yes, with respect to the incident that Mr. Alvarez described, the British Parliament has written a report which is titled The Run on the Rock, and it has a section that describes how that run began, and that was triggered by public reports about a discount window lending operation by Northern Rock at the Bank of England. And with the permission of the chair, we could submit that report for the benefit of the subcommittee. Thank you. One of the questions, Chairman, if I may. I know that you've probably gone through this, but explain to those who are viewing why it's important to have disclosure and why you try to achieve this balance that you have with reference to disclosure. For example, why not just have a CPA come in or someone come in and just audit everything all the time, every day? What is the downside? So we do have CPA come in, Deloitte and Touche currently, to do an audit of our financial statements, including all of our transactions, our discount window lending and our open market transactions. The thought on disclosure is that disclosing the names of borrowers and the amount they've borrowed provides the American people with more information to make sure that the Federal Reserve is acting in a responsible way in its lending facilities. The balance on the other side is that the discount window is a very important tool both in good times and in bad times, in good times for providing short-term liquidity to institutions when they need it, and also as a monetary policy tool to help reduce the volatility of interest rates. And in emergency times, to provide liquidity to institutions that are generally healthy, but where panic has caused asset values to be out of whack, as it were, so that the institution can't fund itself in an appropriate way. So the discount window is a very important tool. The concern is that because it's often used by both healthy and troubled institutions, the public will be confused if it sees the names of a borrower at the discount window and not be certain if that institution is healthy or not. And if a healthy institution is wrongly thought to be troubled because it's accessed the discount window, then that could cause problems for that institution. That causes institutions to back away from using the discount window, and that makes it a much less effective tool both in good times and in bad times for addressing liquidity crisis. So it's important to have a balance in the disclosure. That's why we think the lag time, the two-year period between the actual loan and the announcement of the borrower is important. That leaves the institution some period of time to explain itself, to demonstrate its health, and to not be tied to troubled transaction at a difficult time. I think my time is up. Thank you, Mr. Chairman. Thank you. I would like to direct this question to Mr. Baxter, and I want to follow up on Mr. Jones's question about how some of these decisions are made and how sometimes the big guys seem to benefit, and the little people lose their mortgages and lose their homes and they lose their jobs. And quite frankly, it's very difficult times in this country because it seems like people are too little to save. People are too big to forget about them, too big to let them fail. But I want to direct the question about the foreign, the foreign loans. And it seems to me from the figures I look at that nearly one-third of all the loans during this period of time went to foreign banks at one time at the peak of this, 88% of these overall discount window loans went to foreign banks. But at the New York Fed, I think practically essentially 100% of the loans were going to foreign banks. And the answer I get is that there are foreign banks but they have subsidiaries and they qualify under the rules, I wouldn't say the law, but under the rules that they can go to the discount window. But it just seems to be way out of proportion when you think of that tremendous amount of loaning that went to these foreign banks. And this is not easy for the average American citizen to understand. Could you enlighten us on why it seems to be disproportionate? I'm sure they don't represent that percentage of the financial problems that existed. A third of the problems didn't deal with foreign banks, surely. What is the explanation for that? Yes, Chairman Paul, thank you for that question. First, the starting point is federal statutory law in Section 13, paragraph 14 of the Federal Reserve Act says to the Federal Reserve that with respected discount window borrowing, we are to treat the branch or the agency of a foreign bank just like we treat our own U.S. chartered depository institutions. So there's this principle of national treatment that we start with and it's a principle that is embedded in the Federal Reserve Act itself. And so we must treat the branch and agency of a foreign bank in the same manner we treat our own. So that's the starting point. Second is New York is the money center of the United States. And with respect to foreign banks that intend to come to our country and invest in our people and form branches and agencies in the United States, many of those foreign banking organizations look to form those organizations in the money center, which is in New York. So the short answer to your question, Chairman Paul, is the law requires us to lend to branches and agencies. And with respect to New York in particular, that tends to be the place where foreign banking organizations enter our country. Okay, fortunately it still seems to be out of whack. But when the system invites foreign banks, you know, they're making most of their money that will just open up a subsidiary in New York and therefore they get the line of credit and the protection of the bank and it's sort of almost like free insurance for them. And do you think this is a good idea that a foreign bank, all they have to do is open up and get these bailouts? I mean, it just doesn't seem fair at all. Well, these were loans, Chairman Paul, they weren't gifts in any way and the foreign banks have to repay just like everyone else, principle and interest. Second, if a foreign bank and some do decide that they would prefer not to form a branch or an agency but to start a subsidiary bank in the United States, that is their option and some foreign banks do just that. And of course, the subsidiary bank, which would have a U.S. charter, that has access to the discount window as well. So I had one more thing. There is a limit on the amount that they can borrow. They're limited by the amount of collateral that they have that they can post at the discount window. So that's dollar collateral in the United States. That doesn't allow the foreign central bank, I mean, the foreign bank to borrow to the full extent of its assets worldwide. It borrows in order to support its dollar activities and those dollar activities are largely, though not exclusively, you have a point there, but largely in the United States. Could the argument be made that maybe the banks in Greece should have had a lot more subsidiaries in New York and maybe then Greece wouldn't be in so much trouble if that would have bailed them out too? No, they're still, their assets are in Greece and they're Greek assets and they would go to the Greek central bank to borrow there, not the United States. Mr. Green, do you care for another series? Okay. Mr. Jones for five minutes. Mr. Chairman, thank you again. I, you know, looking through a lot of these reports and I want to go to Libya and see if you can help me understand the rationale by the Treasury and the Reserve. I'll just read one paragraph, Arab Banking Corporation, the lender, part-owned by the central bank of Libya using New York branch to get 73 loans from the U.S. Federal Reserve in the 18 months after Lehman Brothers' holdings collapsed. Help me understand so that I can explain to people back in my district that here we are an underclad war. I mean, anytime, I thank God we haven't lost any American military at this point, but we certainly have fired a bunch of missiles. And we're spending millions and millions of dollars, probably billions by now, and we're helping other countries. What is the protection if Libya is Qaddafi and Qaddafi is Libya? At least it has been for a period of time. And we have made these loans to the affiliate or to Libya banks, their relationships. What happens in a wartime situation where we're trying to drive Qaddafi out of business and we have made these loans to him or to Libya? How do you explain that to that person that each and every one of us both side of the political aisle have talked about today that can't get the loans? How do you explain this to Walter Jones, who happens to be a member of Congress, so he can explain it to his people back home? So Arab Bank Incorporation is a bank that is located in Bahrain. It's not located in Libya. It was, at the time that it borrowed from the Federal Reserve, it was not... The Libyans bought a substantial part of that bank after all the loans that were extended by the Federal Reserve were repaid. We work with the Treasury Department and the State Department, which the Treasury and State Department have responsibility for identifying banks that the United States should not deal with for foreign policy reasons. The responsibility for designating those banks rests with Treasury and the State Department. We consult with them to make sure that we don't lend to institutions that they have determined we should not be lending to. By the time our credits were extended, Arab Bank Incorporation was not identified by Treasury or State Department as a bank that was of concern. It was a foreign bank that had an operation in the United States that was well rated in all of the respects like another foreign bank from a foreign country. Mr. Chairman, I tell you, knowing that you for many years have picked up more and more support for your bill of legislation to audit the Federal Reserve. I mean, I wish, truthfully, it has nothing to do with you gentlemen here today, but I'm telling you that the distrust out here by the American people is as deep and severe as I've ever seen. And it does not only Congress itself, not only the administration, but the Federal Reserve is just at this point at a very low ebb as it relates to trust. And I'm not talking about you personally. You're too men of high integrity. I know that. But right now, the Federal Reserve is not held in high esteem by many people in this country. I'll yield that. I think, gentlemen, I have a few short questions and then we'll jump. One thing is on a follow up on what Mr. Jones says is the confidence is very low. But when you speak of independence, and I understand your terms and I disagree with the need for that, but I understand it. But what people hear when you say independence, they hear secrecy. You know, you're going to keep it from us. And like the point I made at the beginning, the SEC is to pressure companies to reveal information where the Federal Reserve does the opposite. They want, no, we can't tell anything because it might disturb the markets. I do have one question. During the crisis or any time that you're aware of has the Federal Reserve or Treasury participated in any gold swaps arrangements? We don't, the Federal Reserve does not own any gold at all. We have not owned gold since 1934. So we have not engaged in any gold swaps. But it appears on your balance sheet that you hold gold. What appears on our balance sheet is gold certificates. When we turned in the four 1934, we did the Federal Reserve did own gold. We turned that over by law to the Treasury and received in return for that gold certificate. If the Treasury entered into, because under the exchange stabilization fund, I would assume they probably have the legal authority to do it. They wouldn't be able to do it then because you have the securities for essentially all the gold? No, we have no interest in the gold that is owned by the Treasury. We have simply an accounting document that is called gold certificates that represents the value at a statutory rate and still that we gave to the Treasury in 1934. And still measured at $42 an ounce, which makes no sense whatsoever. But the conventional wisdom today says that gold is really not money. We don't want it to be money. I mean, if you're for the gold standard, there's something wrong with you. And yet we hold the gold. And there have been suggestions made and I sort of encourage the suggestion. You know, if gold is not money and it's an asset and you don't even use it because it's on your balance sheets and you don't even use it at the real value, would you have a position on this? Why shouldn't the Treasury just sell the gold? Give it back to the people. The people had it at one time. Would you have any objection to that? Would you advise us and say, no, that's not good. We ought to hold the gold. Do you think holding the gold is a good idea or a bad idea? Well, I have no position on that at all. That's clearly the Treasury. It's a matter for the Treasury. It's not within the purview of the Treasury. Mr. Baxter, would you have an opinion? My opinion is I agree with Mr. Alfraz. No position. Well, it's amazing because I've asked questions at the Federal Reserve, you know, the members of the board for years. And where there's been Mr. Greenspan, I can't recall exactly where I've asked Mr. Bernanke, but he's always, well, no, we have to hold on to these assets. But if it's not money and we don't need it, we're not going on the gold standard, I mean, I would think that they shouldn't be holding it. The reason I ask that is the truth is, is gold is money and people don't throw it away and people do cling to it. But I would be, really, there's a lot of people who suspect because of this lack of transparency that there's been a tremendous amount of gold swaps and loans made and central banks sold a lot of gold after these, you know, the last 10 years. A lot of the gold has left the West and has gone to the East. And the central banks that now have positive trade balances, they buy up the gold. There has to be a message in there and a significance even for those who don't want to have restraints of gold. It has to be a message out there that we should look at because we're in a financial mess and it has to do with our monetary system and it's being reflected today in rising prices and a weak economy and just printing all this money isn't doing any good. All this stuff that's been done for three years and you look at the economic statistics now, they're horrible. And these people who lost their jobs, they're still unemployed. The people who bought stocks in the year 2000, if they held on, they probably haven't even broken even. They probably lost purchasing power. So, eventually, I think, I know this is off the subject a little bit, but it is reflected only in that we don't know exactly what goes on and people, when they don't know, then they get suspicious and they say, well, it's kept secret from us. Why aren't we allowed to know? And we just march on and the type of dollars we're talking about and when we hear about this money going to central banks and banks that Gaddafi was a part owner in, I mean, this stuff really stirs up the emotions of a lot of people. But I do appreciate you being here and I know that there will be a lot of questions. There will be written questions submitted and we'd appreciate your cooperation and send us our answers back. And I thank you. Thank you very much. Thank you, Chairman. This hearing is adjourned.