Fed Shrouding $2 Trillion in Bank Loans in ‘Secrecy,’ Suit Says

U.S. taxpayers need to know the risks behind the Federal Reserve’s $2 trillion in lending to financial institutions because the public is now an “involuntary investor” in the nation’s banks, according to a court filing by Bloomberg LP.

The Fed refuses to name the borrowers, the amounts of loans or assets banks put up as collateral under 11 programs, arguing that doing so might set off a run by depositors and unsettle shareholders. Bloomberg, the New York-based company majority- owned by Mayor Michael Bloomberg, sued Nov. 7 under the Freedom of Information Act on behalf of its Bloomberg News unit. It made the new filing yesterday.

“The Board’s arguments are based on wispy speculation, lack evidentiary support and are contradicted by economic theory,” said Thomas Golden and Jared Cohen, lawyers with New York-based Willkie Farr & Gallagher LLP, in a motion asking the judge to require disclosure.

“These government actions, which have been shrouded in secrecy, are at the heart of Bloomberg’s FOIA requests,” the attorneys said.

Members of Congress also have demanded more information than President Barack Obama and former President George W. Bush have disclosed on the bailout of the U.S. financial industry. Congress approved $700 billion to bolster banks, whose losses on mortgage securities and home loans contributed to the recession.

‘Within Their Discretion’

“We’ve all got a stake in how the government is managing this program,” said Lucy Dalglish, executive director of the Arlington, Virginia-based Reporters Committee for Freedom of the Press. “The information is definitely something that is within their discretion to disclose.”

Fed officials are considering steps to provide the public with more information about emergency programs, people familiar with the matter said April 14. The Federal Reserve, consisting of seven governors in Washington and 12 regional banks, was established in 1913 and charged by Congress with ensuring low inflation, maximum employment and a stable financial system.

The largest U.S. banks have tapped more than $125 billion in government aid under the Troubled Asset Relief Program in the past seven months. Bank stocks rose following the announcement of capital injections. Bank of America Corp. and Sterling Financial Corp. have voluntarily disclosed borrowing from the Fed, Bloomberg said in the suit.

The Fed began expanding its lending programs in August 2007 with the Term Discount Window program. The central bank’s loans don’t have oversight requirements or compensation limits that Congress imposed upon the TARP.

$2.09 Trillion

Assets, including loans and securities, on the Fed balance sheet totaled $2.09 trillion as of April 9.

The Fed Board of Governors contends that it is separate from member institutions, including the Federal Reserve Bank of New York, which runs most of the lending programs. Most documents relevant to the Bloomberg suit are at the New York Fed, which isn’t subject to FOIA law, according to the central bank. The Board of Governors has 231 pages of documents, to which it is denying access under an exemption for trade secrets.

“The Board cannot seriously maintain that the NY Fed does not perform governmental functions and control information of interest to the public,” Bloomberg said in yesterday’s motion.

Banks oppose any release of information because that might signal weakness and spur short-selling or a run by depositors, the Fed argued in its March 4 response. The release of the information “can fuel market speculation and rumors,” including a drop in stock price and a run on the bank, the Fed said.

‘Speculative Injuries’

Bloomberg replied yesterday that “these speculative injuries relate only to the reactions of customers, shareholders and other members of the public, not to competitors’ use of the borrowers’ proprietary information to their advantage,” the exception to disclosure under the FOIA law.

The Fed’s lending is “a strictly temporary measure to create expansionary support in the economy,” Fed Chairman Ben S. Bernanke said April 14 in response to questions at Morehouse College in Atlanta.

The Fed has “been working very hard to increase our transparency” on lending and operations, Bernanke said. The central bank’s Web site contains “a huge amount of information” on how the lending programs work, he said.

On Feb. 23, the Fed began disclosing a breakdown by broad categories for collateral pledged by banks and bond dealers after Congress demanded more transparency. The added disclosure doesn’t identify specific banks or collateral they posted.

$12.8 Trillion

Government loans, spending or guarantees to rescue the U.S. financial system total more than $12.8 trillion since the international credit crisis began in August 2007, according to data compiled by Bloomberg as of March 31. The total includes about $2 trillion on the Fed’s balance sheet.

The Freedom of Information Act obliges federal agencies to make government documents available to the press and public. The Bloomberg lawsuit, filed in New York, doesn’t seek money damages.

The case is Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Mark Pittman in New York at mpittman@bloomberg.net. (Bloomberg, 4.16.2009, Mark Pittman) http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aS89AaGjOplw

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