On November 7th, Bloomberg News filed a federal lawsuit claiming that the Federal Reserve Bank has refused to identify the banks that received almost $2 trillion in emergency loans as well as the assets it accepts as collateral. With virtually no oversight, the Fed is quietly lending far more than the $700 billion bailout package passed by Congress.
Bloomberg News attempted to get these questions answered by filing a Freedom of Information Act (FOIA) request with the Federal Reserve Bank. The Fed failed to formally respond to Bloomberg's request and a lawsuit was born.
The fact that the Fed won't disclose loan recipients or collateral is typical, as regulators enjoy broad discretion in denying such requests. Generally, it is more the exception than the rule that regulators release important information to the public under FOIA. With the economy in rehab, however, the American people deserve and should expect more transparency.
The lending policies of the Fed to banks have rarely been questioned, but its lending didn't go much beyond $1 million at any one time. Today, we need to know at least some of the detail behind the economic policy being implemented -- the numbers are reaching the trillions. This is especially so as the Fed loosened its collateral standards in September.
On the other side is that while Treasury and Congress debated the bailout, the Federal Reserve was getting dirty in the trenches, busy keeping the global economic life support switch on. So why ask questions? The Fed has essentially become the commercial paper market in the United States and now acts as the lender to financial institutions of first resort instead of the lender of last resort.
Is this a reasonable position for the Fed to be in and what explanation does Fed Chairman Ben Bernake owe taxpayers under the circumstances? The Treasury and the Federal Reserve both responded to Congressional demands for transparency in the Bailout with assurances that it was a critical part of Treasury's execution of the rescue plan. It is arguable that the same level of transparency should be expected from the Federal Reserve Bank in its lending programs and that taxpayers have a right to understand the quality of the collateral being used in these transactions.
Regulators undertake a balancing test when deciding what to release and what to keep confidential. There is always a market reason when regulators place information in the public domain. Too much transparency can lead to major market disruptions, so some level of confidentiality is necessary. However, the Bloomberg lawsuit suggests that this power is being be used by the Fed to avoid public scrutiny of the massive increase in its lending activity and questionable collateral standards.
The fear surrounding the failure to disclose collateral stems from the very thin lending market and trust in that market is a long way away. Disclosure of highly questionable collateral could significantly rock the stock market. However, the market is far from stable and with regular swings of more than 800 points, that concern may be overblown. If the collateral is that bad, shouldn't we be told?
Some say confidentiality is necessary to quell the fear and terror in the market and, thereby, allow it to stabilize. However, the veil of secrecy that has existed through this entire disaster has only served to engender more fear and terror in the market. We all have witnessed this fear paralyze and devastate the global economy, causing irreparable harm.
President Elect Obama has a huge task in front of him and it begins with restoring confidence in our economic leaders. The time for treating the American people like they should only obtain information on an "If I tell you, I'll have to kill you" basis is over.
The essence of the regulatory relationship with banks is trust. Now it is time for regulators to earn the trust of the American people and give us the information we are entitled to. Only then can the global economy begin to heal.