NEW YORK - The Federal Reserve, which prides itself on never having lost a dime on a loan it made, is sitting on almost $1 billion of debt in a hotel chain that filed for bankruptcy court protection.
The disclosure of that surprising news came not from the central bank, but from last week's bankruptcy filing by Extended Stay Hotels. It listed an entity controlled by the Fed as the company's third-largest creditor, an investment it reluctantly inherited after the collapse of Bear Stearns last year.
For the Fed, which has pledged to be more forthcoming about how hundreds of billions of dollars of its funds are being used to bail out the financial system, this is a surprising lack of transparency.
It's also a sobering reminder to members of Congress, some of whom are already questioning the Obama administration's proposal to boost the power of the U.S. central bank as part of a broad overhaul of the financial regulatory system.
Over the last two years, the central bank has used its emergency powers to establish various programs to lend money or buy debt to help mend the financial system and lift the country out of recession. In the process, its holdings have more than doubled since September and now total more than $2 trillion.
Those programs have saddled the Fed with massive credit risk, but the public has largely been unaware of what's behind the numbers.
The Fed just this month started releasing monthly figures for its credit and liquidity programs that began in the summer of 2007. While that's a step in the right direction toward boosting transparency, some experts say it doesn't go far enough.
Details in the monthly reports are also skimpy, such as disclosures about the holdings of Maiden Lane L.L.C., which was formed by the Fed in the spring of 2008 to facilitate Bear Stearns' fire sale to JP Morgan Chase & Co.
As part of that arrangement, the Fed supplied a line of credit to Maiden Lane to fund the purchase of Bear Stearns assets.
Bundled in the Maiden Lane holdings is some of the debt of Extended Stay Hotels, of Spartanburg, S.C. The hotel chain has been battered by a plunge in spending among business travelers. But most of its woes are self-inflicted; its debt burden ballooned after a 2007 takeover that was financed by $7.4 billion in loans.
The Fed wound up with nearly $900 million of various classes of Extended Stay's debt.
It is not yet known what the Fed will be entitled to as Extended Stay reorganizes under Chapter 11 bankruptcy court protection, which it entered June 15. A spokesman for the Federal Reserve Bank of New York declined comment.