Are Bernanke and the Fed Playing Favorites With Bailout Money?

Today the U.S. Government Accountability Office (-GAO) published the results of a recent audit of emergency lending activities by the Federal Reserve Bank. The audit found that “The Reserve Banks, primarily FRBNY, awarded 103 contracts worth $659.4 million from 2008 through 2010 to help carry out their emergency activities,” and may have been doing so on a less than fair basis. GAO writes, “Most of the contracts, including 8 of the 10 highest-value contracts, were awarded non-competitively, 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.”

Fed bashers are using the results of the audit as ammunition to go after a highly targeted Bernanke. Sen. Bernie Sanders, for instance, said of the non-competitive handling of contracts, “This is a clear case of socialism for the rich and rugged, you’re-on-your-own individualism for everyone else. No agency of the United States government should be allowed to bail out a foreign bank or corporation without the direct approval of Congress and the president. No one who works for a firm receiving direct financial assistance from the Fed should be allowed to sit on the Fed’s board of directors or be employed by the Fed.” The GAO also recommended that the Fed take action to improve possible conflicts of interest between its employees and large contract recipients. Many recipients of bailout money were closely tied to Federal Reserve Banks, such as JP Morgan’s (NYSE:JPM) CEO Jamie Dimon who also maintained a seat on the board of the New York Fed while his firm got extensive loan assistance from the bank.

While it is certainly important to have collaboration between policy makers and private sector leaders to ensure effective resolution to crises such as the financial meltdown in 2008, law-makers need to ensure that certain interests are not overrepresented through exploitation of these networks. The results of the GAO audit are sure to intensify criticism of friendly overlaps between private sector and government leadership.