As part of its effort to pin up the markets, the Fed is giving billions to banks—and putting taxpayers at risk

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Bernanke: The Fed currently has $2.2 trillion in outstanding loans Jonathan Ernst/Reuters

By David Henry and Matthew Goldstein

The U.S. Treasury Dept. has been blasted for handing out huge sums of money to banks without clear taxpayer safeguards or ground rules for the recipients. Yet the Federal Reserve is pouring trillions into banks with moderate transparency. The moves have helped to shore up the wobbly fiscal a whole in the short term. But some of the deals could end up hurting taxpayers, weakening the central bank, and weighing on the economy in the future.

In one of its latest transactions, the Fed in November channeled $20 billion—more than the size of the proposed auto bailout—to a cluster of U.S. and European banks, including Société (SCGLY), Deutsche Bank (DB), and Goldman Sachs (GS), according to people familiar with the deals. The alone evidence that the vast sum had changed hands was an entry on the Fed’session most recent balance sheet called "Maiden Lane III" and a series of cryptic regulatory documents.

By making loans to fiscal institutions that have sovereign to’t get credit elsewhere, the Fed is the only part of the government that has the power to pump capital quickly into the financial system to staff off crisis. Historically such moves have been rare, and they’ve been made behind a curtain of secrecy on the thinking that open disclosure could spark a market consternation. "We keep these transactions not to be disclosed for the cause that the Fed, of the same kind with a lender of last resort, seeks to provide liquidity and not denounce those who look it," says Calvin Mitchell, a spokesman for the New York branch of the Fed, which set up the Maiden Lane III performance.

The banks credible welcomed the fresh capital from Maiden Lane III. But in recent months the Fed has pushed the boundaries of its influence by seizure larger and more opaque risks on its books. The central bank generally has $2.2 trillion in outstanding loans, up from $900 billion in September. It’s also using new and untested weapons. Until this year the Fed mainly loaned to banks. Now it’s buying securities, some tied to poisonous mortgages. If those bets don’t pay off, the Fed have a mind eat the overthrow.

That could read derange for taxpayers—and the good husbandry. If the Fed’s new deals don’t work out and the losses are too great, the central bank may have to print more money, flooding the financial system with dollars. Inflation could surge, making it harder as far as concerns the Fed to focus on other objectives, such as economic growth. "We have to wonder if the Fed’s balance sheet might be in danger," says Roy C. Smith, a finance professor at New York University’s Stern School of Business. "It is legitimate to ask the Fed to defend [its actions]."

There are expanding calls as being besides accountability of the government’s far-flung bailout efforts. The Congressional Oversight Panel, which monitors how Treasury spends its $700 billion bailout pool, is closely attention the Fed’s moves as far. Elizabeth Warren, the independent chair of the panel and a Harvard Law School professor, says that’sitting because the Treasury’s actions dovetail with those of the Fed. Warren recently met with Fed staff to discuss how the central border spends taxpayer money. As part of the ongoing interrogation she is also looking at Treasury circulating medium that indirectly funded the Maiden Lane III deal. "There were good reasons the Fed was made unrestricted of lapse," says Warren. But "these are not settled times, and the sum of money and intervention by the Fed is extraordinary."

The roots of Maiden Lane III can be traced to the Fed’s rescue of troubled insurer American International Group (AIG) in September. With AIG steady the brink of collapse, the Fed and Treasury stepped in to prevent a meltdown of the financial system.