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America's Press Sues the Fed

In perhaps the most epic lawsuit of the bailout era, the free press, led by Bloomberg L.P., sued the Federal Reserve over its commitment to keep the bank bailout details secret. Today's New York Times tells the story of the suit in great detail, but here's the key: If Bloomberg et al. win, we learn which banks the Fed loaned how much, when, and on what terms, including what collateral is backing those loans. In short, who got our tax money, and what, specifically, did we get for it? If the Fed and its bank allies win, all the bailout details will remain shrouded in secrecy.Why is the U.S. central bank -- a quasi-government institution and therefore ostensibly representing taxpayers -- siding with the likes of JP Morgan (JPM), Citigroup (C), Bank of America (BAC) and others over Bloomberg, the Associated Press, The Wall Street Journal (NWS), The New York Times (NYT) and the public's right to know? Granted, private banks make up part of the Fed structure, but the Fed's true power stems from its connection to the U.S. government, and the banks have only a minority voice.

Historical Precedent Is Meaningless

I'm sure the Fed would dispute the idea that the mere side it has picked reveals whose interests it represents, but the choice has resonance. It's no use to point out, as the Fed's allies in the lawsuit do, that such secrecy has been an unchallenged tradition since the Fed's 1913 creation, even after the 1966 advent of the Freedom of Information Act. Just because the Fed has always appeared to favor the banks over taxpayers when it comes to disclosures doesn't change the ramifications of that appearance today.

It doesn't help that the Fed's fundamental concern is that revealing the information will stigmatize the banks that got help, harming their competitive position, and perhaps dissuading them from seeking help when they need it. Since when is protecting banks from the consequences of an accurate financial portrait a legitimate aim for the Fed? The central bank also argues that such information could have triggered cascading bank runs and failures as disillusioned investors lost confidence in the banks. But the evidence it offers for its doomsday scenario, beyond the unique, catastrophic context of the time, is weak.

The Fed and its secrecy protector-allies point to a few case studies, only one of which involves people hearing about the Fed giving loans to a bank. That incident was in the 1990s, when rumors circulated that Citibank had taken money from the Fed's discount window. A run on some of Citibank's Asian branches resulted. No runs occurred on its American branches -- perhaps because people were reassured by rumors the Fed was helping Citi -- and in any case, Citi didn't come close to failing. Exactly how does this incident prove that letting the public know the bailout details would have triggered a system meltdown?

Investors and the Public Have the Right to Know

The Fed's defense of secrecy is problematic at a more fundamental level. American market ideology rests on the assumption that investors can get complete and accurate information about the companies being traded. Most securities regulation revolves around information disclosure for precisely that reason, and as recently as 2000 the Securities and Exchange Commission beefed up disclosure requirements with a new regulation "FD," as in "Fair Dealing," which aimed to level the informational playing field and make sure the investing public got material information at the same time market pros did.

That is, the SEC stood up for the investing public's right to know over the doomsday scenarios spun by business insiders. A year after Reg FD took effect, most businesses acknowledged they liked the rule, and the doomsayers were silenced. Has the Fed been swallowed by the banking borg?

Bloomberg and the disclosure advocates won round one last August when the federal District Court in Manhattan ruled in their favor. The Fed's appeal is currently pending in the Second Circuit, and a decision is likely weeks away.

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