Brown Urges Greater Transparency in Oversight of Wall Street

Brown Raises Concerns Over Big Banks Transferring Risky Derivatives to their Federally-Insured Affiliates – Leaving Taxpayers on the Hook. When Brown Raised Red Flag Over Practice, Regulators Stonewalled Requests for More Information, Citing Confidentiality Concerns

WASHINGTON, D.C. – U.S. Sen. Sherrod Brown (D-OH), Chairman of the Senate Banking Subcommittee on Financial Institutions and Consumer Protection, today called on the federal banking agencies to improve their disclosure to Congress and the American public, in the interest of protecting financial stability.

“For too long, Wall Street has been permitted to operate in the dark, putting our economy at risk and leaving taxpayers on the hook,” Brown said. “Transparency makes markets work and helps improve oversight.  We need a financial system that benefits all Americans – not just the companies that want to enjoy private profits and bonuses, and make taxpayers cover their losses.”

Brown’s call follows repeated stonewalling by federal regulators after Brown raised a red flag over a risky new practice employed by Bank of America and five of the six of our nation’s largest bank holding companies. In October, Brown was joined by U.S. Rep. Brad Miller (NC-13) in questioning the decision by the Federal Reserve and other regulators to allow these institutions to transfer their risky derivatives operations into bank affiliates insured by the federal safety net.  Section 23A of the Federal Reserve Act restricts transactions between banks and their nonbank affiliates, placing limits on the amount of each transaction relative to a bank’s capital and prohibiting purchases of certain “low-quality” assets. 

Last week, Bloomberg Markets magazine reported that 190 institutions made $13 billion in profits on $1.2 trillion in secret, below-market rate loans.  Previously, Bloomberg reported that the Federal Reserve also relaxed its standards for acceptable collateral, accepting “junk” bonds and stocks against its loans.

In August, Brown wrote a letter to the Federal Reserve questioning a $5 billion purchase by Berkshire Hathaway of 50,000 shares of preferred stock in Bank of America, with annual dividend payments of $300 million.  Last week, the Fed responded, refusing to answer whether Bank of America will be required to submit new plans to raise equity as a result of this arrangement, which the Fed would then approve, stating that the answer constitutes “confidential supervisory information.” The Fed’s proposed rules for capital planning focus on institutions’ levels of Tier 1 common capital, which excludes perpetual preferred stock.  Inconsistent capital planning has plagued bank regulators in the past.  A recent audit by the Special Inspector General for TARP (SIGTARP) found that regulators established an equity raise plan for banks exiting the TARP Capital Purchase Program, which they then abandoned after lobbying from banks and the Treasury Department.

When the Federal Reserve announced the results of the second round of “stress tests” and their decision to allow the 19 largest banks to issue dividends, Brown called on the Federal Reserve and the Treasury Department to make the results public, and to ensure that banks are adequately capitalized to prevent another financial crisis.  These letters and their responses can be viewed here, here, here, and here.  The Federal Reserve recently announced that it would make public results of annual trading shock stress tests at the six largest banks.

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