Tucked into the recent recovery bill was a provision granting the Federal Reserve the right to set up a $450 billion bailout plan without following key provisions of the federal open meetings law, including announcing its meetings or keeping most records about them, according to a POLITICO review of the legislation.
The provision further calls into question the transparency and oversight for the biggest bailout law ever passed by Congress. President Donald Trump has indicated he does not plan to comply with another part of the new law intended to boost Congress’ oversight powers of the bailout funds. And earlier this week, Trump dismissed the government official chosen as the chief watchdog for the stimulus package.
The changes at the central bank – which appear to have been inserted into the 880-page bill by sympathetic senators during the scramble to get it approved -- would address a complaint that the Fed faced during the 2008 financial crisis, when board members couldn’t easily hold group conversations to address the fast-moving economic turmoil.
The provision dispenses with a longstanding accountability rule that the board has to give at least one day’s notice before holding a meeting. Experts say the change could lead to key information about the $450 billion bailout fund, such as which firms might benefit from the program, remaining inaccessible long after the bailout is over.
The new law would absolve the board of the requirement to keep minutes to closed-door meetings as it deliberates on how to set up the $450 billion loan program. That would severely limit the amount of information potentially available to the public on what influenced the board’s decision-making. The board would only have to keep a record of its votes, though they wouldn’t have to be made public during the coronavirus crisis.
A Fed spokesperson did not comment on the changes in the law or whether the Fed would continue keeping records of its meetings.
The spokesperson said, however, that the central bank still intends to give notice for regularly scheduled meetings and doesn’t plan to vote on major decisions in less formal settings.
With such a vast amount of money at stake, the Fed’s decision-making is bound to prompt lawsuits and complaints. Following its response to the 2008 financial crisis – which involved less money – the central bank faced numerous legal challenges, including from watchdog groups and journalists seeking to establish whether special influence was exerted behind the scenes.
“We may never know what terms are being given to banks, what collateral is being offered, what repayment methods and duties banks and other financial institutions may have,” said Charles Glasser, a media attorney who represented Bloomberg News in a public records lawsuit of the Federal Reserve in the wake of the 2008 financial crisis. “And these are important questions.”
Even granting the board’s interest in moving quickly, Glasser said of the new provision, “This is written too broadly and allows the Federal Reserve to avoid its responsibilities of public disclosure as the courts have described them,” Glasser said.
Congress steered the $450 billion in bailout money to the Fed in part because lawmakers trust the central bank, a nonpartisan institution whose members outlast an individual administration. Amid more than a year of attacks from Trump over interest rates, Fed Chairman Jerome Powell refused to enter the political fray, emphasizing that the institution is set up to consider the long-term interests of the economy, not short-term political considerations.
But it is possibly the most critical body trying to steer the country through the economic downturn. Since the beginning of the crisis, the central bank has launched a stunning array of initiatives designed to boost lending to households and businesses, as well as to keep financial markets functioning until the coronavirus pandemic is under control.
While Treasury Secretary Steven Mnuchin will dole out roughly $50 million in bailout funds help certain sectors of the economy such as the airline industry, the biggest pool of funding in the recovery bill — $450 billion — to rescue businesses and municipalities will be managed by the Fed.
The central bank has announced it will directly purchase debt from large companies under its emergency powers, though for now, only companies whose debt is seemed safe by credit ratings firms will have access to those loans.
The Fed, in partnership with the Treasury Department, is also designing a "Main Street" lending facility, which will facilitate bank loans to businesses with more than 500 employees that are too small to qualify for the other corporate credit programs.
Because the Fed isn’t set up to take on the risk of companies defaulting, the $450 billion given by Congress to Treasury will be used to cover losses from the Fed's emergency lending programs — which should be enough money to facilitate trillions of dollars in lending.
Former Fed board members told POLITICO that the changes in the law will help avoid a pitfall that hindered them as they tried to rescue the economy during the last economic crisis. Any time there were more than three out of the then-five members of the Fed's governing board in a room, it was considered a meeting, and thus had to be publicly announced and subject to record keeping. The central bank, which currently has five board members, has a process for announcing meetings one day in advance, but no less.
Thus, any time members wanted to talk on short notice, they had to do so in small groups. At times, some members of the board had to leave a conversation in order for others to join so they could avoid the meeting requirement, recalled Donald Kohn, vice chairman of the Fed during the last financial crisis.
“We were handicapped going through the 2007-09 crisis because we couldn’t have more than three members of the board in the room at one time without announcing a meeting,” Kohn said in an email. “A crisis evolves rapidly and in unexpected ways, with the need for freewheeling discussion before a proposal is brought to the board for decision.”
“This will allow Chair Powell to utilize his board members more fully and effectively,” Kohn added.
And the mere announcement of a meeting of the Federal Reserve board could provoke anxiety among people in the finance world, said economist Frederic Mishkin, who served on the Federal Reserve board of governors between 2006 and 2008.
"If a meeting is announced people might think, 'Oh, something’s really bad is happening,'" Mishkin said. "It hurt the ability to have a free flow of information at the board. If things were happening really fast you couldn’t have the full board participating."
But critics say the the Fed’s need to move at a rapid pace didn’t have to come at the expense of record-keeping and providing information to the public about its work to protect the economy.
"As long as it’s not going to move markets, we should know why they’re meeting. They have so much money under their authority right now, they should be working to be more transparent, not less transparent," said Tim Stretton, a policy analyst at the watchdog group Project on Government Oversight.
In the past, there have been lawsuits to gain access to information about the Fed's actions, such as after the 2008 financial crisis when Bloomberg News, represented by Glasser, successfully sued for records that uncovered that the Fed had lent $1.2 trillion in loan to banks during the financial crisis, far more than was publicly known. With the option to keep fewer records, there may be less recorded information to seek out after this economic crisis has passed.
"Accountability and transparency cannot be sacrificed at the altar of economic rapidity," Glasser said.
In addition, critics note that Congress did not have to waive an entire section of the open meetings law to allow the Fed to have more impromptu meetings.
“Congress could have just waived the notice requirement without waiving requirements of meetings, or transcripts or other things,” said Adam Marshall, a staff attorney at the Reporters Committee for Freedom of the Press, which regularly files public records lawsuits against federal agencies. “There are a lot of decisions that are going to be made here, and the public’s understanding of those decisions that are made could be impacted in a negative way.”
Spokespeople for Sens. Mike Crapo (R-Idaho) and Sherrod Brown (D-Ohio), the chairman and ranking member on the Senate Banking committee, declined to comment on how the change was added to the recovery bill or who requested it.
A Brown aide said in a statement that the change “is intended to allow the Federal Reserve Board to continue to take decisive action during this pandemic.”
“The Federal Reserve remains accountable to Congress and the American people,” the statement continued, “and it is still required to responsibly communicate the need and justification for its actions to the public in a transparent way.”
CORRECTION: An earlier version of this story said the existence of the provision in the recovery bill had not been previously reported. On March 25, before final passage of the bill, the news site Law & Crime reported it.