- Key Insight: In a legal filing, the former Fed officials claim an opinion from the Department of Justice’s Office of Legal Counsel is factually incorrect.
- What’s at Stake: The CFPB will run out of funding early next year and Vought claims that he cannot request funding from the Federal Reserve.
- Expert Quote: “The core factual premise of the OLC opinion is thus incorrect,” — Kevin Friedl, senior counsel at Democracy Forward.
Five former Federal Reserve officials told a court that acting Consumer Financial Protection Bureau Director Russell Vought has an obligation to request funding for the agency and that the Federal Reserve System has turned a profit.
The former officials filed a legal brief late Friday in support of the National Treasury Employees Union’s fight against Vought to fund the CFPB. The filing supports the union’s motion for the U.S. District Court for the District of Columbia to clarify that Vought violated a preliminary injunction that bars him from firing employees en masse with his refusal to request funding from the central bank.
Also late Friday, three nonprofits filed a lawsuit against Vought and the CFPB in San Francisco claiming they will suffer “imminent harm” if the CFPB is defunded. The lawsuit was filed in the U.S. District Court for the Northern District of California, setting up a second legal challenge on the CFPB’s latest funding issue, which some legal experts think could
The latest round of legal filings comes after the
Vought has taken the position that he cannot request funding because the Federal Reserve System is technically “unprofitable.” He cited
Kevin Friedl, senior counsel at Democracy Forward who represents the former Fed officials, said in the filing that a proper understanding of the Federal Reserve’s role, operations, and independence “contradicts the analysis offered by OLC.”
“The opinion fails to take seriously either the Federal Reserve’s different understanding of its “combined earnings” or the way the Federal Reserve System actually operates, particularly in its implementation of monetary policy,” wrote Friedl, who is a former senior counsel at the CFPB. “The core factual premise of the OLC opinion is thus incorrect.”
Some legal experts think a court could force Vought to ask for funding from the Federal Reserve, though the CFPB likely would appeal or find some other excuse for Vought to continue his campaign to eliminate the agency.
Going forward, District Court Judge Amy Berman Jackson
The former Fed officials include Donald Kohn, a 40-year Federal Reserve System veteran, who served as a board member and then vice chair from 2002 to 2010; Thomas C. Baxter, Jr., who served as a Federal Reserve lawyer for more than 36 years; Sandra Braunstein, who spent 27 years at the Fed, and directed its division of consumer and community affairs for a decade; William English, a 25-year Board veteran and former senior economist at the White House Council of Economic Advisers and the Bank for International Settlements; and Donald Hammond, the Fed’s former chief operating officer and a former deputy director of the division of Reserve Bank Operations and Payment Systems.
The Fed officials claim that the Office of Legal Counsel’s opinion interprets the Fed’s combined earnings based on concepts that apply to private businesses, and not the central bank.
“Neither the Board of Governors nor the Reserve Banks are profit-maximizing private enterprises,” they wrote. “The Reserve Banks are public-private enterprises and ‘are not operated for profit.’ The Federal Reserve’s specialized accounting practices do not track ‘profit,’ and neither that term nor that general concept are used in the annual audited financial statements of the Board of Governors or the Reserve Banks. Nor does the Federal Reserve track and report out, under any label, the particular measure of ‘earnings’ that the OLC opinion uses.”
The arguments delve into the unique operations of the Federal Reserve System, claiming the Trump administration’s Office of Legal Counsel is wrong and that Vought has an obligation to requests funds and no authority to decline to do so.
The 12 regional Federal Reserve Banks generate substantial income through fees for services to depository institutions and, in particular, from interest on securities they hold and acquire. The banks use part of that income to pay so-called “necessary expenses,” which is a category that includes transfers to the CFPB, as well as interest payments to banks on balances they maintain at the Reserve Banks, and to pay dividends to member banks.
In recent years, as the Federal Reserve raised interest rates to control inflation, the amount it was required to pay in interest on deposits at the Reserve Banks exceeded its earnings on securities. So rather than remitting money to the Treasury, the Fed has been accruing a deferred asset that it will pay down before resuming remittances, the former Fed officials claim.
The former Fed officials claim that the Fed’s earnings on securities, and income from other sources, now exceed its expenses. The Fed itself also projects that its net interest income will continue to rise, largely due to lower short-term interest rates and to reinvestments in higher-yielding securities.
The officials cite the Fed’s most recent weekly balance sheets that show the deferred asset’s total size fell to $243.2 billion on Nov. 26, a drop of $600 million from Nov. 5.
“The Federal Reserve System is earning more than it is expending and thus has positive ‘combined earnings’ under any of the definitions of that term considered in the opinion, including the definition embraced by OLC,” Friedl wrote.