Between late 2007 and early 2009, the Federal Reserve Board created  more than a dozen new emergency programs to stabilize financial  markets and provided financial assistance to avert the failures of a few  individual institutions. FRBNY implemented most of  these emergency activities under authorization from the Federal Reserve  Board. In a few cases, the Federal Reserve Board authorized FRBNY to  lend to a limited liability corporation (LLC) to finance the purchase of  assets from a single institution. In  2009, FRBNY, at the direction of the FOMC, began large-scale purchases  of mortgage-backed securities (MBS) issued by the housing government- sponsored enterprises, Fannie Mae and Freddie Mac, or guaranteed by  Ginnie Mae. The independent financial  statement audits and other reviews did not identify significant accounting  or financial reporting internal control issues concerning the emergency  programs. Reserve Banks Would Benefit From Strengthening Guidance for Noncompetitive Contracts Awarded in Exigent Circumstances

		Reserve Banks Relied Extensively on Vendors to Establish and Operate the Emergency Programs, Particularly Those Designed to Assist Single Institutions

From 2008 through 2010, vendors were paid $659.4 million across 103  contracts to help establish and operate the Reserve Banks’ emergency  programs. Reserve Banks Awarded Largest Contracts Noncompetitvely and Would Benefit From Additional Guidance on Seeking Competition

Most of the contracts, including 8 of the 10 highest-value contracts, were  awarded noncompetitively, primarily due to exigent circumstances. FRBNY’s policy did not  provide additional guidance on the use of competition exceptions, such as  seeking as much competition as practicable and limiting the duration of  noncompetitive contracts to the exigency period. For a significant portion of the fees, program  recipients reimbursed the Reserve Banks or the fees were paid from  program income. Opportunities Exist to Strengthen Conflict Policies for Employees, Directors, and Program Vendors

During the crisis, FRBNY took steps to manage conflicts of interest  related to emergency programs for its employees, program vendors, and  members of its Board of Directors, but opportunities exist to strengthen its  conflicts policies. During the crisis, FRBNY expanded its guidance and  monitoring for employee conflicts. During our review, Federal Reserve Board and  FRBNY staff told us that the Federal Reserve System plans to review and  update the Reserve Banks’ Codes of Conduct as needed given the Federal  Reserve System’s recently expanded role in regulating systemically  significant financial institutions. In light of this ongoing effort, we  recommended that the Federal Reserve System consider how potential  conflicts from emergency lending could inform any changes. FRBNY Primarily Used Contract Protections to Manage Risks Related to Vendor Conflicts, and the Lack of a Comprehensive Policy Created Certain Limitations

FRBNY managed risks related to vendor conflicts of interest primarily  through contract protections and oversight of vendor compliance with  these contracts, but these efforts have certain limitations. In May 2010, FRBNY implemented a new vendor management  policy but had not yet finalized more comprehensive guidance on vendor  conflict issues. Opportunities Exist to Strengthen Risk Management Policies and Practices for Future Emergency Programs

The Federal Reserve Board approved key program terms and conditions  that served to mitigate risk of losses and delegated responsibility to one or  more Reserve Banks for executing each emergency lending program and  managing its risk of losses. The Federal Reserve Board’s early broad- based lending programs—Term Auction Facility, Term Securities Lending  Facility, and Primary Dealer Credit Facility—required borrowers to pledge  collateral in excess of the loan amount as well as other features intended to  mitigate risk of losses. Also, for the assistance to specific  institutions, the Reserve Banks negotiated loss protections with the  institutions and hired vendors to help oversee the portfolios collateralizing  loans. While the Federal Reserve Board Took Steps to Promote Consistent Treatment of Participants, It Lacked Guidance and Documentation for Some Access Decisions

The Federal Reserve Board and the Reserve Banks took steps to  promote consistent treatment of eligible program participants and  generally offered assistance on the same terms and conditions to eligible  institutions in the broad-based emergency programs. The Federal Reserve Board Generally Has Not Provided Documented Guidance to Reserve Banks on Types of Program Decisions That Require Consultation with the Federal Reserve Board

In authorizing the Reserve Banks to operate its emergency programs, the  Federal Reserve Board has not provided documented guidance on the  types of program policy decisions—including allowing atypical uses of  broad-based assistance—that should be reviewed by the Federal  Reserve Board. 3). 4). In  its comments on our report, the Federal Reserve Board agreed to give  our recommendations serious attention and to strongly consider how to  respond to them.
Why GAO Did This Study

The Dodd-Frank Wall Street Reform and Consumer Protection Act directed GAO to conduct a one-time audit of the emergency loan programs and other assistance authorized by the Board of Governors of the Federal Reserve System (Federal Reserve Board) during the recent financial crisis. This testimony summarizes the results of GAO's July 2011 report (GAO-11-696) examining the emergency actions taken by the Federal Reserve Board from December 1, 2007, through July 21, 2010. For these actions, where relevant, this statement addresses (1) accounting and financial reporting internal controls; (2) the use, selection, and payment of vendors; (3) management of conflicts of interest; (4) policies in place to secure loan repayment; and (5) the treatment of program participants. To meet these objectives, GAO reviewed program documentation, analyzed program data, and interviewed officials from the Federal Reserve Board and Reserve Banks (Federal Reserve System).

What GAO Found

On numerous occasions in 2008 and 2009, the Federal Reserve Board invoked emergency authority under the Federal Reserve Act of 1913 to authorize new broad-based programs and financial assistance to individual institutions to stabilize financial markets. Loans outstanding for the emergency programs peaked at more than $1 trillion in late 2008. The Federal Reserve Board directed the Federal Reserve Bank of New York (FRBNY) to implement most of these emergency actions. In a few cases, the Federal Reserve Board authorized a Reserve Bank to lend to a limited liability corporation (LLC) to finance the purchase of assets from a single institution. In 2009 and 2010, FRBNY also executed large-scale purchases of agency mortgage-backed securities to support the housing market. The Reserve Banks, primarily FRBNY, awarded 103 contracts worth $659.4 million from 2008 through 2010 to help carry out their emergency activities. A few contracts accounted for most of the spending on vendor services. For a significant portion of the fees, program recipients reimbursed the Reserve Banks or the fees were paid from program income. The Reserve Banks relied more extensively on vendors for programs that assisted a single institution than for broad-based programs. Most of the contracts, including 8 of the 10 highest-value contracts, were awarded noncompetitively, primarily due to exigent circumstances. These contract awards were consistent with FRBNY's acquisition policies, but the policies could be improved by providing additional guidance on the use of competition exceptions, such as seeking as much competition as practicable and limiting the duration of noncompetitive contracts to the exigency period. FRBNY took steps to manage conflicts of interest for its employees, directors, and program vendors, but opportunities exist to strengthen its conflict policies. In particular, FRBNY expanded its guidance and monitoring for employee conflicts, but new roles assumed by FRBNY and its employees during the crisis gave rise to potential conflicts that were not specifically addressed in the Code of Conduct or other FRBNY policies. As the Federal Reserve System considers revising its conflict policies given its new authority to regulate certain nonbank institutions, GAO recommended it consider how potential conflicts from emergency lending could inform any changes. FRBNY managed vendor conflict issues through contract protections and actions to help ensure compliance with relevant contract provisions, but these efforts had limitations. While the Federal Reserve System took steps to mitigate risk of losses on its emergency loans, opportunities exist to strengthen risk management practices for future crisis lending. The Federal Reserve Board approved program terms and conditions designed to mitigate risk of losses and one or more Reserve Banks were responsible for managing such risk for each program. Reserve Banks required borrowers under several programs to post collateral in excess of the loan amount. For programs that did not have this requirement, Reserve Banks required borrowers to pledge assets with high credit ratings as collateral. For loans to specific institutions, Reserve Banks negotiated loss protections with the private sector and hired vendors to help oversee the portfolios that collateralized loans. While the Federal Reserve System took steps to promote consistent treatment of eligible program participants, it did not always document processes and decisions related to restricting access for some institutions. GAO made seven recommendations to the Federal Reserve Board to strengthen policies for managing noncompetitive vendor selections, conflicts of interest, risks related to emergency lending, and documentation of emergency program decisions. The Federal Reserve Board agreed that GAO's recommendations would benefit its response to future crises and agreed to strongly consider how best to respond to them.