MNI EXCLUSIVE: Fed To Seek Treasury Cover In Crisis Aftermath

By Evan Ryser

     WASHINGTON (MNI) - The Federal Reserve is likely to look to the Treasury

Department for political cover as it seeks to minimize future Congressional and

public scrutiny in the aftermath of its emergency lending, former Fed and

Treasury officials told MNI, expressing concern that boundaries between the two

institutions are in danger of becoming blurred.

     Potential program mishaps and concerns over inequality could expose the Fed

to attack, said Michael Barr, former assistant secretary for financial

institutions at Treasury during the 2008-09 financial crisis.

     "There is a history of Congress turning on the Fed following crises," Barr

said. But by having Treasury on its side, the Fed has "political cushion."

     Congress often removes central bank powers in good times and returns them

in bad times, said Christopher Smart, former deputy assistant secretary of

Treasury and special assistant to President Barack Obama at the National

Economic Council, adding that the Fed will need political cover as "there surely

is going to be a lot of Monday-morning quarterbacking."

     "Nobody blames the firefighters for coming and putting out the fire, but

then when they look and see that their rug is soaked and see an axe in the front

door, they'll ask why it was done that way," Smart said.

     -- NO NEUTRALITY

     The Fed's rapid response exposes it to main street, corporate, municipal,

hedge fund and private equity lending. Its programs will inevitably exclude some

companies and sectors, inviting criticism for choosing winners and losers,

something the central bank has long sought to avoid.

     Chair Jerome Powell Apr. 29 said Treasury Secretary Steven Mnuchin "really

has authority over" the remaining USD260 billion of Congress's

already-appropriated USD454 billion, which must be invested in Fed emergency

facilities. Treasury Secretary Steven Mnuchin approved all nine Section 13(3)

facilities created so far.

     Top Democrats, including presidential contender Joe Biden, have called the

Treasury backstop a "slush fund for big businesses with minimal conditions."

Meanwhile, top Republicans have lobbied the Fed to help oil and gas companies.

     Fed support cannot remain completely neutral, Smart said, and there are

bound to be complexities once the crisis is over and it is withdrawn.

     Furthermore, while the Fed projects no losses on commercial paper and

money-market assets, it has signaled to Congress that taxpayers should expect to

see it lose money from backstopping high yield credit, munis, and "Main Street"

loans.

     "This is something that future lawmakers could scrutinize, especially if

taxpayers are not made whole," said Danielle DiMartino Booth, who spent nine

years advising the Dallas Fed.

     -- TOO FAR

     Calls to support more sectors could blur lines between Fed and Treasury,

she said, saying the special purpose vehicles have "been politicized" and that

the central bank was "no longer an independent institution."

     This is "a time that history could look back on and say it was a time of

emergency and that this time of crisis was taken advantage of," said DiMartino

Booth. She anticipates a renewed Treasury-Fed accord setting out

responsibilities and boundaries between the two bodies, and hopes for lines

between Treasury and the Fed to be "re-drawn with darker ink at a very minimum

in the future."

     A Fed spokesperson declined to comment for this story.

--MNI Washington Bureau; +1 202 371 2121; email: evan.ryser@marketnews.com

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