http://www.marketwatch.com/story/fed-audit-bill-gets-backing-from-key-lawmaker-2009-09-25 Sept. 25, 2009, 12:12 p.m. EDT Â· Fed audit bill gets backing from key lawmaker Paul's bill, which would examine every aspect of the Fed, has 295 backers By Ronald D. Orol, MarketWatch WASHINGTON (MarketWatch) -- House Financial Services Committee Chairman Barney Frank, D-Mass., on Friday backed a bill to require a broad congressional auditing of how the Federal Reserve carries out its monetary policy, including how much it has lent and will lend to specific banks as part of its bank bailout program. "We are serious about some legislation in this regard," said Frank at a hearing on the bill. "However, some time needs to elapse before certain disclosures take place...we are working together; we want there to be publicity, but we don't want there to be a market effect in the near term." The legislation, introduced by Rep. Ron Paul, R-Texas, requires approval by the House Financial Service Committee and Frank said it would likely be included in broader financial regulatory reform legislation under consideration in the committee. GOP and Democratic lawmakers in the committee expressed support for the bill, which has 295 backers in the House. The legislation would require the Government Accountability Office to complete a policy audit of every aspect of the Fed, including its interest rate policy as well as its wide variety of programs responding to the financial crisis such as its lender-of-last-resort authority. A similar bill is under consideration in the Senate. The conceptual agreement between Frank and Paul would also permit the GAO to identify exactly which institutions borrow from the Fed's discount window. However, the legislation is opposed by the Fed, which argues it would weaken the bank's independence and hamper the central bank's ability to protect the financial system. Specifically, the Fed argues that institutions would be afraid to borrow from the discount window when they need to because they would be stigmatized as troubled firms, and the result would be a more troubled economic situation. "Financial markets likely would see the grant of audit authority to the GAO with respect to monetary policy as undermining the Federal Reserve's independence in this crucial area, particularly because GAO audits or the threat of a GAO audit could be used both to second-guess the Federal Reserve's monetary policy judgments and to try to influence subsequent monetary policy decisions," said Federal Reserve General Counsel Scott Alvarez to lawmakers at the committee. "Authorizing the GAO to audit the discount window and other broad-based lending programs could significantly increase potential borrowers' fears of stigma and adverse reactions," he said. Disclosure, but not right away However, Frank said a time-lag could help alleviate some of these concerns. He also added that information about borrowing should eventually be made public. "If you borrow money and get involved, ultimately it will be published, but you don't publish it in a way that affects the market," Frank said to reporters. "But that is different than saying you can go to Fed, borrow money, and keep it secret for ever." Paul, who first introduced a Fed audit bill in 1983, said he didn't believe the legislation would impact central bank policy. "We're going to make sure this is not going to influence monetary policy," said Paul. "How many audits does the GAO perform in the state department, DOD and other agencies and nobody has ever charged GAO for altering policies." How long of a delay? Paul told MarketWatch that he supported some sort of delay before information about monetary policy and which banks come to the discount window for assistance is released is important. "We don't want to appear like the Congress will be a participant in the Federal Open Market Committee and therefore if we had a lot of say the day afterwards then it sounds like pressure," Paul said. However, he argued that an extended delay would be tantamount to secrecy. "I would ask for three-months delay and accept six months," Paul said, responding to a question from MarketWatch about how long a delay he would accept in various circumstances, such as between when the central bank holds a monetary policy meeting and when the GAO could come in and work on its report. Frank said he and Paul have a conceptual framework but haven't worked out details about how long of a delay they could agree on. "That's a question to be worked out," Frank told reporters. However, Alvarez said that if the legislation was approved today, the Fed would immediately have its monetary policy subject to a GAO review, which he added could be completed quickly if lawmakers gave the government audit group a tight deadline to complete it. He added that such a review would create confusion in the markets and make it more difficult for the central bank to implement its policy goal of fighting inflation and achieving maximum U.S. employment. Skeptics of the Fed, supporters of the bill Criticism of the Fed peaked in March, when lawmakers expressed outrage that the Fed didn't initially disclose that its taxpayer-funded, $190-billion bailout package to keep troubled American International Group Inc. /quotes/comstock/13*!aig/quotes/nls/aig (AIG 43.61, -1.39, -3.09%) afloat included large payments at par to foreign banks in China and Europe. Supporters of Paul's bill worry that the Fed is hiding a much larger bailout of the financial system behind its lack of transparency. "If our monetary system were really as strong, robust, and beyond criticism as its cheerleaders claim, why does it need to rely so heavily on public ignorance?" asked Thomas Woods, a senior fellow at the Ludwig von Mises Institute in testimony at the hearing. "How can it be a sound banking system that depends on keeping the public in the dark about the condition of its financial institutions?" Alvarez pointed out that the Fed has taken steps to expand the amount of information the central bank provides publicly. "We have substantially increased both the type and amount of information that we disclose concerning our liquidity and asset purchase programs," Alvarez said. Rep. Tom Price, R-Ga, said he was concerned that the Fed was continuing to expand its authority. He expressed worry about a proposed plan by the central bank to expand its oversight over executive and employee pay plans at roughly 5,000 financial institutions that register with the Fed. "The Fed's effort to set private sector compensation makes us believe that there should be greater oversight of the central bank," said Price. Ronald D. Orol is a MarketWatch reporter, based in Washington.