During the ongoing Senate debate on the financial reform bill, Federal Reserve transparency briefly took center stage. Sen. Bernie Sanders (I-VT) introduced an "Audit the Fed" amendment to the bill during the week of May 16, which the Senate approved in a 96-0 vote after the amendment was greatly scaled back. The amendment would instruct the Government Accountability Office to "conduct a one-time audit of all loans and other financial assistance provided during the period beginning on December 1, 2007 and ending on the date of enactment of this Act."

Supporters of the Audit the Fed movement, led by Rep. Ron Paul (R-TX), are disappointed that the amendment would not require full, regular audits of the Fed, which would include audits of the setting and execution of monetary policy, communications among or between employees of the Fed, and transactions with foreign banks. Instead, the amendment the Senate passed is a narrowly focused accounting of the Fed's actions during the financial crisis, specifically its use of so-called Section 13(3) powers.

Section 13(3) of the Federal Reserve Act gives the Fed broad powers. The important sentence in the statute reads, "In unusual and exigent circumstances, the Board of Governors of the Federal Reserve System" may provide discounted "notes, drafts, and bills of exchange," provided they are properly secured (collateralized), and the institution in question could not obtain credit from another bank. In other words, so long as the Fed believes there are "unusual and exigent circumstances," the Fed can decide to lend money to almost any financial institution, even non-depository institutions (not all of the Fed's emergency actions were under Section 13(3), but the most controversial actions were).

Beginning in 2008, the Fed began to use these powers for the first time since the 1930s. The Fed set up several programs, with names such as the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Term Asset-Backed Securities Loan Facility (TALF), and the Commercial Paper Funding Facility, all of which were variations on the same theme: the programs were all designed to function as the lender of last resort. If no other institution will lend to a financial firm, it can turn to the Fed and receive loans. While the rates provided by the Fed through these programs were not very favorable compared to market rates, they provided important lifelines to struggling firms that rely on open market borrowing for their daily business.

However, there is virtually no oversight over these programs. The Fed can choose to declare "unusual and exigent circumstances" whenever it wants to, and it can lend as much money as it wants to almost any institution it wants, so long as the loans are collateralized. Congress has no oversight over these actions. Also significantly hindering oversight of the Fed’s actions is the fact that the Fed is not required to disclose which institutions receive aid from Section 13(3) programs. Outside of the Fed, no one knows who is receiving public funds through these programs. There is no guarantee, for instance, that firms receiving these loans were struggling because of liquidity problems and not because they were on the brink of collapse due to over-exposure to subprime loans. The Fed is supposed to be helping the former institutions, not the latter.

Supporters of the Audit the Fed movement were hoping to use the recent exercise of Section 13(3) powers to bring about a full audit of the Fed. Capitalizing on populist distrust of the Fed, Paul's Audit the Fed bill, which mandates a full audit, had over 300 cosponsors in 2009 when it passed the House as part of that chamber's financial reform package, far more than it has garnered in sessions past. That momentum died in the Senate, where Sanders' companion bill had far fewer cosponsors, and Sanders eventually had to pare back his amendment in order to gain enough support. The Senate version is a step back from the House version; specifically, it would not audit the Fed's monetary policy decisions, one of Paul's main targets. Both chambers’ versions would, however, require an audit of the Fed's international currency swaps, which are outside of the Fed's Section 13(3) powers but have garnered criticism.

Importantly, the Senate amendment does include a provision the House version does not. It requires the Fed to publish information on recipients of Fed emergency support, such as name, amount of support, type of support, and rationale for providing the support. As noted earlier, who received the Fed's support to troubled financial institutions is a closely held secret, as the Fed argues that releasing this information would constitute a black mark against the firms, hurting their ability to borrow in the open market. Only firms in danger of collapsing would need such help, the argument goes, so announcing which firms were receiving aid would be like announcing which firms are on the brink of collapse, making it even harder for them to recover.

Transparency advocates and members of the media have long fought for disclosure of the identities of these institutions, arguing that the public has a right to know how its money is being used. Bloomberg News is in the process of suing the Fed for these names.

While the House bill calls for an audit of the Fed's emergency lending actions, it does not require publishing information on recipients of the aid. This addition will bring significant transparency to the Fed's actions over the past several years and will help give a better picture of the financial crisis.

Observers say even this limited Audit the Fed amendment is meaningless if the Senate does not approve the larger financial reform package. Senate Majority Leader Harry Reid (D-NV) filed cloture on the bill late on May 17, setting up a final vote on May 19. It looks likely that the bill will pass the Senate, setting up a conference committee between the House and Senate. The recipient disclosure provisions from the Senate's version will likely stay in, but it is unclear how broad the final audit will be. It seems that the president and Fed officials have been persuasive, at least in the Senate, where they have successfully lobbied for Sanders' weaker amendment, and Rep. Barney Frank (D-MA), chair of the House Financial Services Committee, was initially reticent to support a wide-ranging audit. These factors make it more likely the Senate's narrow audit will be the version that comes out of the conference committee later in 2010.