Tags: Fed Won’t Join Banks High Court Appeal on Crisis Loans

Wall Street Banks Seek to Keep Bailouts Secret

Tuesday, 26 Oct 2010 01:14 PM

A group of the largest commercial banks asked the U.S. Supreme Court to let the government continue to withhold details of emergency loans the Federal Reserve made to financial firms in 2008.

The Clearing House Association LLC, a group of the biggest commercial banks filed the appeal today. The Federal Reserve won’t file its own appeal, according to Kit Wheatley, an attorney for the central bank. Under federal rules for appeals, a lower court’s order requiring disclosure remains on hold until the high court acts. David Skidmore, a spokesman for the central bank, did not immediately respond to requests for comment.

The bank group is appealing a federal judge’s August 2009 ruling requiring the Fed to disclose records of its emergency lending. Bloomberg LP, the parent company of Bloomberg News, sued for the release of the documents under the Freedom of Information Act.

The central bank has never disclosed the identities of borrowers since the creation in 1914 of its Discount Window lending program, which provides short-term funding to financial institutions, the Clearing House said in its petition.

“Disclosure of this information threatens to harm the borrowing banks by allowing the public to observe their borrowing patterns during the recent financial crisis and draw inferences -- whether justified or not -- about their current financial conditions,” the group said in its appeal. Calls to Paul Saltzman, general counsel for the Clearing House, were not immediately returned.

‘More Accountability’

“Greater transparency results in more accountability, and the banks’ resistance continues to engender suspicion among taxpayers about the bailouts,” said Matthew Winkler, Bloomberg News editor-in-chief. “The banks’ move to appeal will deepen the public’s skepticism and defend a position that every other court has disagreed with. The public has the right to know.”

Under the Supreme Court’s normal procedures, the justices may say as early as mid-December whether they will take up the case. If so, they would hear arguments next year and likely rule by July.

The Fed is facing unprecedented oversight by Congress. The Wall Street Reform and Consumer Protection Act, known as Dodd- Frank, mandates a one-time audit of the Fed as well as the release of details on borrowers from Fed emergency programs. Discount Window loans made after July 21, 2010, would have to be released following a two-year lag. The Bloomberg lawsuit asks for information on that facility and others.

Term Reports

At issue in the litigation are 231 “remaining term reports,” originally requested by the late Bloomberg News reporter Mark Pittman, documenting loans to financial firms in April and May 2008, including the borrowers’ names and the amounts borrowed. Pittman asked for details of four lending programs, the Discount Window, the Primary Dealer Credit Facility, the Term Securities Lending Facility and the Term Auction Facility.

After averaging $257 million a week in the five years before March 2008, Discount Window borrowing jumped to a peak of $111 billion on Oct. 29, 2008. It was $20 million last week. The other three programs accounted for more than $800 billion in lending at their peak, according to Fed data.

“The Discount Window is problematic because the Fed since the 1930s has used it to provide assistance to banks on the verge of failure,” said Joseph R. Mason, a finance professor at the Ourso College of Business at Louisiana State University in Baton Rouge. “Making loans means you add liabilities to the bank, so lending a bank money makes it more insolvent. This is a chance to show that the Fed did not lend to weak banks.”

Bank Group

The New York-based Clearing House, which has processed payments among banks since 1853, includes Bank of America Corp., Bank of New York Mellon Corp., Citigroup Inc., Deutsche Bank AG, HSBC Holdings Plc, JPMorgan Chase & Co., US Bancorp and Wells Fargo & Co.

In trying to avoid disclosing the documents, the Fed invoked one of nine exemptions to the Freedom of Information Act, or FOIA, which mandates the rules for public disclosures by the federal government. Exemption 4 makes allowance for “trade secrets and commercial or financial information obtained from a person and privileged or confidential,” according to the law.

Revealing borrowers’ names may stigmatize them, said Brian F. Madigan, the Fed’s former director of monetary affairs.

‘Loss of Confidence’

The stigma “can quickly place an institution in a weakened condition vis-à-vis its competitors by causing a loss of public confidence in the institution, a sudden outflow of deposits (‘a run’), a loss of confidence by market analysts, a drop in the institution’s share price, and a withdrawal of market sources of liquidity,” Madigan said in a declaration that was part of the Fed’s defense.

Manhattan Chief District Judge Loretta A. Preska wrote in her Aug. 24, 2009, ruling that the risk of looking weak to shareholders and competitors was not reason enough to keep the information from the public. On March 19, an appeals court upheld Preska’s decision and on Aug. 20 the appeals panel denied the Fed’s request to reconsider.

“The Fed’s decision not to seek further review undermines the central premise of the Clearing House argument that disclosure severely damages banks that participated in borrowing from the Fed,” said David A. Schulz, a partner with the New York law firm Levine Sullivan Koch & Schulz LLP who filed a friend-of-the-court letter supporting Bloomberg’s position. “I’m surprised that the Fed, after arguing strenuously that disclosures would jeopardize its ability to protect and regulate banks, would decide to back down.”

On his first day on the job, President Barack Obama vowed to open government information to its citizens.

“The government should not keep information confidential merely because public officials might be embarrassed by disclosure, because errors and failures might be revealed, or because of speculative or abstract fears,” Obama said in a Jan. 21, 2009, memo.

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A group of the largest commercial banks asked the U.S. Supreme Court to let the government continue to withhold details of emergency loans the Federal Reserve made to financial firms in 2008. The Clearing House Association LLC, a group of the biggest commercial banks filed...
Fed Won’t Join Banks High Court Appeal on Crisis Loans
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2010-14-26
Tuesday, 26 Oct 2010 01:14 PM
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