GAO Audit Finds Fed Loaned Trillions Secretly to Banks

An audit on the Federal Reserve conducted by the Government Accountability Office (GAO) found secret loans made to large banks and companies around the world and conflicts of interest within the central banking system.

The GAO report says the Federal Reserve issued $16 trillion worth of loans to large private institutions such as JP Morgan Chase, Wells Fargo, and General Electric during the financial crisis.

The mandatory evaluation was part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was passed one year ago. The report said that all federal emergency bailout money went to large banks and companies around the world instead of to smaller local banks and businesses. Notably, it loaned tax dollars to foreign banks and to large companies outside the United States "from South Korea to Scotland, "according to the GAO report.

The Fed made its 2008 emergency loan decisions without input from Congress and citizens.

"This is a clear case of socialism for the rich and rugged, you’re-on-your-own individualism for everyone else,” said Sanders in his statement. The senator proposed an amendment to the Dodd-Frank Act that required an audit of the Federal Reserve. Sanders, who is an Independent and strong critic of policies favoring corporations at the expense of ordinary citizens, said "the Federal Reserve must be reformed to serve the needs of working families, not just CEOs on Wall Street."

A significant example of conflict of interest applied to the current head of the Federal Reserve. The GAO found that William Dudley was issued a waiver in 2008 to keep his shares in companies including those that received federal assistance, such as American International Group Inc. (AIG), while he was still the executive vice president of the New York Fed Markets Group.

Although New York Fed spokesman Jack Gutt said Dudley gave up his AIG shares shortly after succeeding Timothy Geithner as president of the New York Fed, the Fed has not made rules to eliminate potential conflicts of interest.

"No one who works for a firm receiving direct financial assistance from the Fed should be allowed to sit on the Fed’s board of directors or be employed by the Fed," said Sanders regarding the issue.

The GAO recommends that the institution should “strengthen policies for managing noncompetitive vendor selections, conflicts of interest, risks related to emergency lending, and documentation of emergency program decisions.”

Scott Alvarez, general counsel of the New York Fed, responded in a letter to GAO saying that the Fed will “give each recommendation serious attention” and that he believes “the process will further enhance the Federal Reserve’s capability to respond effectively in future crises.”

The GAO will conduct another investigation centering on conflicts of interest in the Fed on Oct 18.