Fed’s L.A. Office Altered Records, Lawmaker Says

Officials at the Federal Reserve branch in Los Angeles altered internal records of the bank’s cash flow over a period of months in 1995 and 1996, if not longer, in a bid to smooth over discrepancies in their weekly reports to Washington, said Rep. Henry B. Gonzalez (D-Texas), the Fed’s chief critic in Congress.

At least $178 million in internal bookkeeping statistics were altered, some changes possibly exaggerating the amount of cash at the Los Angeles branch and some apparently underestimating it. Gonzalez on Monday called for an investigation by the General Accounting Office into what he termed the falsification of records at the Los Angeles branch bank.

“We cannot allow the central bank of the United States, the main custodian of the nation’s currency and coin, to commit continual and serious errors . . . nor can falsification of reports of currency activities be permitted,” Gonzalez said to Fed Chairman Alan Greenspan in a letter.

The allegations, first disclosed in the Wall Street Journal, are the most recent embarrassment for the independent and secretive central bank, which was criticized by a government audit in March for wasteful spending and lax management of its sprawling nationwide system.

It was not clear Monday whether the erroneous records affected Fed policy decisions in Southern California and nationally, as Gonzalez’s staff suggested, or were simply a housekeeping concern, as the Fed contended.

Gonzalez and his aides said the branch’s accounting procedures opened the door to waste at taxpayer expense. “We believe there’s a vulnerability for missing cash due to extremely large errors in bookkeeping, but we have no direct evidence of any money missing,” a congressional aide said.

Federal Reserve officials Monday acknowledged errors in information gathering at the Los Angeles branch but described the situation as an internal, statistical matter, unrelated to Fed policy decisions or to an understanding of the Los Angeles bank’s actual financial position. The situation, they said, was corrected in April.

“We learned in late January, based on a routine internal review of our statistical gathering process, that the procedure used to complete cash-related statistics appeared to have errors in it,” said John F. Moore, chief operating officer of the Federal Reserve Bank of San Francisco, which oversees the Los Angeles branch. “The discrepancy, now corrected, in no way suggests any wider problems.”

“The financial position is balanced daily, double-checked by a secondary source and periodically reviewed by the audit function and others,” Moore said.

While Fed officials downplayed the significance of the statistical changes, Fed critics contended that the alterations were highly significant. According to a staff memo that circulated within the Fed’s Board of Governors in February, the form that was routinely altered in Los Angeles is intended to help gauge the nation’s cash supply and assess the currency needs of different regions of the country.

The Los Angeles Federal Reserve branch is among the busiest currency processors in the country, holding deposits from banks, receiving newly minted currency and taking worn-out currency out of circulation, among other functions.

An internal memo from the Los Angeles branch, obtained by The Times, shows that some employees in the cash administration area had a term for their practice of smoothing over differences in the statistics. They called it “backing into” the numbers, an exercise in which one set of numbers was changed to match another.

“Until then [April 1996] we will continue ‘backing into’ our numbers,” Warren Howard, a manager in cash administration of the Los Angeles branch, wrote in the February memo. But he said the bank also attempted “to validate the numbers using new reports.”

An internal review at the Los Angeles branch earlier this year documented the pattern of discrepancies, which by some accounts has gone on for two years or even longer.

In October, a report to the Fed Board of Governors understated the amount of cash received in Los Angeles from commercial depositors by $5.8 million, at least according to the internal statistical reports that have drawn Gonzalez’s scrutiny. In November, the branch overstated the receipts by $61.8 million, and in December it understated them by $111.1 million, according to the in-house report.

While Monday’s disclosures entail hard-to-assess allegations about internal bookkeeping procedures, Gonzalez clearly has succeeded in drawing scrutiny to the Federal Reserve, a highly autonomous institution that has eluded the level of congressional oversight that other agencies have been forced to accept.

“The information I have received is that the falsification of the errors in the currency reports were known to personnel at the Los Angeles branch for a long period of time and were explicitly ordered by the management,” Gonzalez said. “I intend to investigate this thoroughly.”

Contending with congressional criticisms is not the only headache faced by Fed officials these days. In addition, Senate confirmation of a new term for Greenspan has been tangled up by the demand of some Democrats for a highly visible public debate on U.S. interest rate policy.