March 17, 2008
The case of the missing Federal Reserve Board members
The Board of Governors is supposed to have seven members. It currently has only five. The Senate has been sitting on two nominations, of Elizabeth Duke and Larry Klane.
On Thursday February 7, 2008 President Bush complained about the failure of the Senate to proceed with the confirmation of three nominees - the two still waiting for Godot and Randall Kroszner, who has since been confirmed (Kroszner first took office on March 1, 2006, to fill an unexpired term ending January 31, 2008.). The nominations of Duke and Klane were sent to the Senate on 16 May 2007. It is a scandal that the Senate has not been able or willing to find the time to hold confirmation hearings for these two new Board members. The main guilty parties are the US Senate Committee on Banking, Housing, and Urban Affairs and its Democratic Chairman, Christopher Dodd.
It is quite irresponsible to let these two positions remain vacant for this long. We are not talking about a couple of dog catchers in Willimantic, Connecticut, but about two out of seven members of the Board of Governors and two out of twelve voting members of the FOMC, the policy making body of the most important central bank in the world. Is Dodd playing silly politics? Does he hope to drag the nomination process out for another year, so a Democratic President can make different nominations? Duke has a banking background and Klane is a senior executive at Capital One Financial Corp. Both nominees therefore have experience and knowledge that would actually be useful in the current crisis. Even Dodd must have noticed by now that there is a financial crisis on.
The failure of the Senate to confirm the two nominees for the Board is directly relevant to the question of whether the Board acted properly (in a legal, technical sense) when it authorised the indirect collateralised loan to Bear Stearns, through the intermediary of J P Morgan (which has since bought Bear Stearns). As I pointed out in an earlier blog, Bear Stearns, which was not a deposit-taking institution but an investment bank, could not access the Fed’s discount window, unless the Board of Governors of the Federal Reserve System determined that there were “unusual and exigent circumstances” and at least five (out of seven) governors voted to authorize lending under Section 13(3) of the Federal Reserve Act.
We know only four Governors of the Fed were present when the decision to lend to Bear Stearns was taken. The fifth Governor was abroad and unavailable. The vote of the four available Governors was unanimous, but clearly, four ain’t five. Also, the Fed’s public statement said nothing about “unusual and exigent circumstances”.
I interpreted this as meaning that the Board had not declared that “unusual and exigent circumstances” prevailed, and that the decision to channel the loan through JP Morgan was a subterfuge to get around the problem that, because “unusual and exigent circumstances” had not been declared to exist, Bear Stearns could not borrow from the Fed directly.
I have since been informed by several commentators on that earlier blog, that the Fed may in fact have declared “unusual and exigent circumstances”, although I have not yet seen a public official statement by the Fed to that effect. David Cahagnes’s comment deserves citing in full:
“Section 13(3) of the Federal Reserve Act (which contains the basic precondition of a determination of unusual and exigent circumstances) should be read in conjunction with section 11(r)(2)(A) of the same Act which provides that:
“[a]ny action that the Board is otherwise authorized to take under section 13(3) may be taken upon the unanimous vote of all available members then in office, if—
(i) at least 2 members are available and all available members participate in the action;
(ii) the available members unanimously determine that—
(I) unusual and exigent circumstances exist and the borrower is unable to secure adequate credit accommodations from other sources;
(II) action on the matter is necessary to prevent, correct, or mitigate serious harm to the economy or the stability of the financial system of the United States;
(III) despite the use of all means available (including all available telephonic, telegraphic, and other electronic means), the other members of the Board have not been able to be contacted on the matter; and
(IV) action on the matter is required before the number of Board members otherwise required to vote on the matter can be contacted through any available means (including all available telephonic, telegraphic, and other electronic means); and
(iii) any credit extended by a Federal reserve bank pursuant to such action is payable upon demand of the Board.” (italics added).
According to the Wall Street Journal, Fed officials have indicated that four “available” Fed governors did in fact determine unanimously that there existed “unusual and exigent circumstances” – and that the fifth governor was abroad and unavailable. CNBC has reported that the latter claim – and the legality of the loan to Bear – has been contested by the Inner City Press Community on the Move, a “housing and fair lending activist group” in a complaint filed with the Fed on Saturday.”
If the Board in fact determined that “unusual and exigent circumstances” existed with only four members voting, this would only be a proper decision according to the Act, if the fifth member, abroad and unavailable, could not “..be contacted through any available means (including all available telephonic, telegraphic, and other electronic means)”. Possible, but not likely in this age of cell phones, Blackberries, e-mail, instant messaging and all the traditional methods of communication from fixed-line phones, satellite phones, telegraph, radio, tv and postal pigeon.
It beats me how a Governor could simply not be contactable, unless he (all five current Governors are men) were dead, injured and in hospital or in a ditch somewhere, suffering from amnesia or doing a Spitzer or engaging in some other undercover activity and did not want to be found. It also is hard to understand how a Governor could decide to go abroad to a place where he would be hard/impossible to reach, when massive stresses were building up in Wall street and the need for a Board quorum was no longer a theoretical curiosum. And why did his colleagues not point out the error of his ways to him before he disappeared?
Whichever way this plays out, it was not the finest our of Senator Dodd or the existing Board members.
Willem,
Inner City Press/Community on the Move has now published the complaint it filed with the Fed (http://www.innercitypress.org/jpmchase.html). It includes a request for information under the Freedom of Information Act.
Where, then, was the Unavailable Governor (Mishkin) on Friday, March 14th? Interestingly, he also did not take part in the FOMC meeting earlier last week, where the committee authorized the new USD 200bn securities lending facility. As Bloomberg reported on March 11th: “Policy makers held a 90-minute conference call last night, where the Federal Open Market Committee authorized the new liquidity measure along with increases in swap lines with European central banks by a vote of 9-0, Fed spokeswoman Michelle Smith said. Fed Governor Frederic Mishkin didn’t vote because he was traveling, she said.”
Regards,
David
Posted by: Cahagnes | March 17th, 2008 at 10:03 am | Report this commentI have read elsewhere that there is a major standoff between Bush and the Senate regarding a number of appointees awaiting confirmation. Recently Bush is said to have torpedoed a compromise that would have filled some seats. Bush is demanding that his Office of Legal Counsel in the DoJ be confirmed, but the Senate fears the nominee is pro-torture. If he is not confirmed, Bush is willing to leave other agencies with empty chairs. So I am not so sure Dodd deserves all the blame.
See http://tpmmuckraker.talkingpointsmemo.com/2008/02/white_house_insists_on_confirm.php
Posted by: Jerry | March 17th, 2008 at 7:23 pm | Report this commentJerry, why not take it one nomination/nominee at a time? If the Senate believes the nominee for the DoJ is pro-torture, the Senate should turn down that nomination and turn to the next one. I don’t understand the one-for-all and all-for-one feature you appear to attribute to this clutch of waiting appointees. Surely that is not part of the confirmation procedure?
Posted by: Willem Buiter | March 17th, 2008 at 7:48 pm | Report this commentIs one nominee at a time possible, or were these nominations withdrawn when the DOJ nominee was not confirmed? If they were, we know where the blame lies.
Posted by: lpv | March 18th, 2008 at 12:18 am | Report this commentIt is indeed part of the confirmation procedure in practice. The minority Republicans have pretty much tied the Senate in knots by refusing to allow debate whenever possible. A filibuster (or threat of one) can do wonders for the minority.
We also have two vacancies on the Federal Election Commission. The FEC must have members from both parties. Democrats dislike the Republican nominee and want to vote on the nominees separately. If there is a vote, the Republican nominee will fail. So Republican Senators are insisting that the two vacanciess be filled simultaneously on a single vote. They can filibuster if the Senate attempts to take up the nominees one at a time. So nothing is being done.
In the link I recommended above you see a similar story regarding the torture guy. Apparently the Republicans are willing to tolerate many vacancies as a way to bring pressure on Democrats to move on his confirmation.
I don’t understand it all myself. I’m just a blog reader living in the middle of Iowa. But I wouldn’t blame Senator Dodd for the vacancies at the Federal Reserve.
Posted by: Jerry | March 18th, 2008 at 2:38 am | Report this commentIt looks as if there is a lot of blame to share on all sides. Still, issue linkage (or nomination linkage) is a political choice, not a legal requirement, it seems. It would therefore be possible for Dodd’s Senate Committee on Banking, Housing, and Urban Affairs to proceed with the confirmation of the two nominees for the Fed Board, if the Democratic majority so decided. The fact that the Republicans play silly buggers with filibusters in other areas does not change that.
Posted by: Willem Buiter | March 18th, 2008 at 8:22 am | Report this commentTo further Willem’s point: As Chairman, Dodd has almost complete control over the agenda of his committee (filibusters and cloture votes only apply to debates of the full Senate). And that’s precisely why the nominations won’t go any farther - right now, Dodd is in complete control.
Both parties play games with the confirmation process, and it’s nothing new. What is relatively new is our age of 24/7 news. Consider a simple (political) risk analysis of Dodd’s 2 choices re these nominations:
Option 1 - Do nothing.
The greatest downside risk potential here is that Dodd gets blamed if the financial situation devolves into a full-blown economic crisis. For that to happen, not only would the public have to connect the economic situation with the missing Fed governors, but they would also need to blame Dodd for the empty seats. All the Republicans need to do in order to pull this off is find a skilled orator, who is viewed as both credible and trustworthy, and put him in on TV to make a simple and coherent case that connects the dots for average Americans. (I’m convinced that such an individual exists, but he or she is being held in reserve as a secret weapon of last resort. Any day now, he’ll appear and change the face of U.S. political debate, not only making complex issues understandable to unwashed masses, but also making them care about the issues in the first place…Any time now, you’ll see…he’s on his way….maybe he’s stuck at the airport…)
The upside potential of option 1 is that almost no one understands what the Fed does and why it matters to them. In the absence of such knowledge, they don’t care about vacancies on the board of governors, and they certainly aren’t going to worry themselves about something as arcane as questions of legality that turn on a point of order.
Option 2 - Hold confirmation hearings.
Posted by: Tim Eager | March 18th, 2008 at 10:11 pm | Report this commentBy proceeding to committee hearings, Dodd would risk a media spotlight on his prior inaction and on any inflammatory statements(taken in- or out-of-context) made during the hearing that stir opinion against his position. Imagine the awkward questions that might be asked if the economy tanks in the middle of his hearings. All things being equal, the media will pursue “low-hanging fruit” stories, especially in the scramble of a crisis. Active hearings related to the Fed are much more visible than ancient nominations that have never been acted on.
Furthermore, with regards to Steve Bradbury (DoJ), the Bush Administration is not demanding that he be confirmed - they’re demanding hearings and, ultimately, a vote on his nomination.
Democrats don’t want the hearings, because they want to avoid giving sound bytes that will be used to paint them as soft on terrorists. To avoid taking a stand on the record (not to mention the possibility that he could be confirmed if given a vote), the Democrats are choosing to ignore his nomination entirely.
Besides, look at it from purely the political gamesmanship point of view: Assume we’re negotiating a contract, and I ask you for over 100 changes. You respond that you will happily agree to 84 of my requests, and all I have to do is give up 1 item. Even if I thought the item was unimportant, I would be suspicious that it meant so much to you; at a minimum, I would want to study the change further before giving my answer.
Now assume that the item I must forego is also one of my highest priorities. Not only would I be suspicious of your offer, I would likely value this change even more just based on your lopsided offer.
Posted by: Tim Eager | March 18th, 2008 at 10:39 pm | Report this commentWell, here’s another case of stalled nominations–with Republicans quietly (anonymously) doing the stalling.
See
http://thinkprogress.org/2008/03/22/leahy-hold-nominee/
Posted by: Jerry | March 23rd, 2008 at 12:59 am | Report this comment