By Mark Felsenthal
WASHINGTON (Reuters) - A congressional audit of the Federal Reserve's 12 regional banks looks set to land this week with a whimper instead of a bang as energies and sympathies on Capitol Hill have shifted since the financial crisis that spawned the inquiry.
The study of the central bank's far-flung network was mandated by the Dodd-Frank law that last year rewrote financial rules to try to prevent a repeat of the financial crisis.
Since then, however, Republicans have captured control of the House of Representatives, putting more of a focus on reining in a Fed which some lawmakers see as meddling in fiscal affairs than rooting out perceived cronyism at the regional banks.
In fact, GOP lawmakers are unlikely to want to undermine the regional Fed banks, which they see as heartland bulwarks against "big government" interventionism by the central bank's Washington-based board.
"We have low expectations on this one," said a congressional source, who spoke on condition of anonymity.
In contrast, some Democrats have long wanted to clip the wings of regional central bank officials who are seen as less sympathetic to the Fed's congressionally mandated full-employment goal than their Washington peers.
Representative Barney Frank has proposed making regional Fed bank chiefs appointees of the president, subject to Senate confirmation, which the Massachusetts Democrat says would make them more accountable to the public.
While Fed board members are presidential appointees, the presidents of the regional Fed banks are picked by local boards with heavy representation from commercial bankers, another trouble spot for Democrats.
Representative Spencer Bachus, the Alabama Republican who took control of the House Financial Services Committee from Frank in January, made his sympathies clear at a July hearing with the head of the Kansas City Federal Reserve Bank.
"Your appearance here today will serve as a good rebuttal to the view that the Federal Reserve Bank Board of Governors in Washington, D.C. needs less input from the regional Feds and the rest of the country. Actually, they need more," he said.
That sentiment has led Capitol Hill staff and Fed insiders to expect the GAO look into the governance of the regional Fed banks, which could some as soon as Tuesday, to make few waves.
Some at the Fed who had been nervous that the study could blunt regional Fed banks' influence now say the audit process was productive, and that there was extensive back and forth between auditors and the regional banks.
Even Republican efforts to narrow the Fed's focus to battling inflation, announced with some fanfare at the beginning of the year, appear unlikely to gain traction in a divided Congress already focused on the 2012 general election.
"I don't think there's much momentum behind that," Sen. Bob Corker, a supporter of the change, told Reuters recently.
The Fed found itself the target of harsh criticism for its efforts to bail out banks during the 2007-09 financial crisis and for perceived loose regulation in prior years that was widely seen as having sown the seeds of the crisis.
Dodd-Frank, which was signed into law in July of 2010, strengthened the Fed's regulatory powers, but also sought to strip away secrecy surrounding the institution by mandating audits of its emergency lending and internal functions.
One provision asked the Government Accountability Office, a congressional watchdog agency, to examine the regional Fed system for possible conflicts of interest.
During the crisis, New York Fed board chairman Stephen Friedman, a former Goldman Sachs chairman who was still serving on Goldman's board, was forced to step down when it was revealed he bought shares in the investment banking giant after it had won the right to borrow at the Fed's discount window.
Although Friedman believed he had cleared the way to do so, the episode embarrassed the central bank and raised questions about conflicts of interest and accountability that opened the system to wider scrutiny.
Some also have longed questioned the need for so many regional Fed banks -- there are two in Missouri alone -- in an era when the economy, transportation and communications have evolved greatly since the system was established in 1913.
IRE OVER EASING
Yet the focus of the GAO study is so narrowly confined to governance issues that it appears unlikely to provide justification for sweeping changes, a Hill source said.
The Fed remains under fire -- both in the halls of Congress and on the presidential campaign trail -- but for reasons that have changed with the political landscape.
Several prominent Republicans attacked the Fed last November for its $600 billion bond-buying program, known as quantitative easing, which they said risked inflation and debased the U.S. dollar.
That led to lawmakers proposing to pare the Fed's dual mandate of pursuing both price stability and full employment to an exclusive focus on inflation fighting.
"I find the activism at the Fed right now a major turnoff, and I am very concerned," Corker told Fed Chairman Ben Bernanke at a hearing in July. "I believe that the dual mandate that we've set up is causing you ... to do a lot of things that I think are going to create some long-term damage."