May 12, 2010 / 4:51 AM / 9 years ago

U.S. Senate OKs Fed audit as part of bank overhaul

WASHINGTON (Reuters) - The U.S. Senate on Tuesday challenged the Federal Reserve’s tradition of secrecy but postponed an overhaul of mortgage finance giants Fannie Mae and Freddie Mac under a massive reform of banking regulations.

The Federal Reserve building is seen with the Washington Monument and U.S. Capitol in the background in Washington November 24, 2009. REUTERS/Yuri Gripas

Tuesday’s votes on two amendments on the broad Senate reform bill highlighted the scope of the legislation, as well as widespread public frustration with the government’s unprecedented Wall Street bailouts during the worst financial crisis since the Great Depression.

President Barack Obama has pressed lawmakers to come up with broad reforms to make capital markets less prone to crises, and the future profitability, risk capacity and growth potential of financial firms hang in the balance.

The Senate unanimously voted to expose the details of the Fed’s emergency lending during the crisis, when it pumped hundreds of billions of dollars into financial markets to stabilise the banking sector and economies worldwide. The proposal would mark a first in putting the U.S. central bank under congressional scrutiny, but is a much softer measure than had first been proposed.

The Senate defeated a proposal that would have ended government control of Fannie Mae FNM.N and Freddie Mac FRE.N. The troubled housing finance giants were seized by the Bush administration at the height of the crisis in 2008 and put into what was described then as temporary conservatorship.

More than a year and a half later, the companies’ status is unchanged and the Obama administration has not settled on a course of action, despite the two firms’ centrality to the financial system.

Fannie and Freddie, which guarantee about half of all U.S. residential mortgages, have already received a total of about $145 billion (97.5 billion pounds) in government aid, and the two firms in the last week both said they need billions more.

Republican backers like Senator John McCain said the financial reform bill would be incomplete if it did not deal with the two firms.

Democrats said the proposal could upend the housing market just as it is stabilizing. They will address the issue next year. McCain’s measure failed by a vote of 43 to 56.

In a unanimous voice vote, the Senate specified that money recovered from bailed-out banks should go towards paying down the ballooning budget deficit, rather than job-creation efforts or other new spending.

A final vote on the financial-regulation bill, with nearly 200 other amendments still vying for attention, looked unlikely until next week.

So far, the Senate has settled on a method to unwind troubled financial giants and set up wide-ranging consumer protections. But the chamber still has yet to determine how to ensure that speculative trading activity does not again put the financial system as a whole at risk.

Later this week, the Senate could vote to toughen a measure that would bar banks from high-risk speculative trading and require nonbank financial institutions to set aside more capital for speculative activity.

Lawmakers were also in talks that could soften a proposal that would prevent banks from participating in the lucrative swaps market, though no deal appeared imminent.

FEDERAL RESERVE UNDER SCRUTINY

The Federal Reserve’s role in the run-up and the response to the crisis has come under particular scrutiny, with some lawmakers accusing the Fed of regulatory lapses and some questioning its rescue actions.

Under a measure approved by a vote of 96 to 0, the investigative arm of Congress would conduct a one-time audit of the central bank’s emergency lending since December 2007.

In addition, the Fed would be required to publicly disclose by December 1 of this year detailed information about which financial institutions it assisted with its lending.

The Fed had warned that earlier proposals could compromise its independence and make monetary policy vulnerable to political meddling.

But at least one Fed policy-maker on Tuesday said a one-time audit of the Fed’s emergency measures would be acceptable.

“I’m comfortable with the modified Sanders amendment,” Jeffrey Lacker, president of the Richmond Federal Reserve Bank, told reporters.

The U.S. House of Representatives approved its own reform bill in December that would extend congressional audits to monetary policy, which was strenuously opposed by the Fed.

The Senate rejected a measure that would have echoed the House language, but the 37 to 62 vote was closer than analysts expected, reflecting persistent dissatisfaction among lawmakers.

Sanders’ measure as originally written would have opened the Fed to repeated audits, but he pared it back to win broader support.

If the Senate bill is approved, it will have to be merged with the House bill before a package could go to Obama to be signed into law. Analysts expect the Sanders amendment will survive that process, while the House-passed amendment will not.

If approved, the Wall Street reform bill would give Democrats a major legislative victory ahead of November’s elections. Republicans have worked for months to weaken and delay it, along with financial industry lobbyists.

Additional reporting by Kristina Cooke in Greensboro, North Carolina; Editing by Andrew Hay

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