President Barack Obama went to the center of New York's financial district this week to describe how his Administration intended to overhaul U.S. financial regulations. The hallmarks of these reforms, he said, would be transparency and accountability.
Fortunately, the President need not wait on Congressional enactment of legislation to get the transparency he seeks. He already has the authority to release all the details of the TARP bailout and identify the beneficiaries, how much money they got, what terms the Treasury Department imposed, what collateral was posted and what the recipients did with the taxpayers' funds. If the Treasury lacks that data, the General Accountability Office has the authority and resources needed to collect, organize, and analyze it.
A more difficult challenge will be to persuade the Federal Reserve System to release similar information on the $2 trillion of emergency loans it made as part of its economic recovery program.
Several news organizations, including Fox and Bloomberg, have sought that information under the provisions of Freedom of Information laws since 2007. Throughout the spring, summer and fall of 2008, Federal Reserve officials stalled the requests, finally claiming that release of the information might embarrass recipient stockholders, might trigger a run by bank depositors and might make their economic recovery efforts more difficult.
Bloomberg News filed a federal lawsuit in November 2008 in the U.S. District Court, Southern District of New York (Manhattan) challenging that stonewalling and won the case. Chief U.S. District Judge Loretta Preska on August 24 ruled that the Fed had "improperly withheld agency records" giving it a week to disclose daily reports on its loans to banks and other financial institutions.
Three days later, Federal Reserve lawyers asked the courts for a delay so that they could make an expedited appeal of her decision. Several major banks, operating through an organization named "The Clearing House," filed a supporting brief with the appeals court, claiming that the Federal Reserve had provided its members emergency funds under an agreement not to identify the recipients or the loan terms.
The Clearing House brief described its members as, "[T]he most important participants in the international banking and payments systems and among the world's largest intermediaries in interbank funds transfers." They include ABN Amro Bank, N.V. (Dutch), Bank of America, The Bank of New York Mellon, Citibank, Deutsche Bank Trust (Germany), JP Morgan Chase Bank, UBS (Switzerland), and Wells Fargo.
As the sheer volume of the Fed financing makes clear, the bailout of the financial sector involves more than the $700 billion approved by Congress in late 2008. The Federal Reserve's $2 trillion of secret deals is by far the largest portion.
Why are the Fed and the banks fighting so hard to keep the loan details secret? Congress and taxpayers cannot know until they have the information the Federal Reserve is keeping from them, but several plausible explanations exist.
One is that the Fed has taken a great deal of worthless collateral and is propping up failed companies and banks. A second is that the information will make the issue of paying out huge Wall Street bonuses in 2009 politically radioactive, particularly if it turns out the payments are dependent on these federal loans.
Finally, the Federal Reserve probably does not want that information to be part of the forthcoming Senate hearings on the re-confirmation of Ben Bernanke, current Chairman of the Federal Reserve.
If President Obama seriously wants transparency and accountability, the place to start is Ben Bernanke's confirmation hearing.
The President and the U.S. Senate should put Bernanke's nomination on hold until the Federal Reserve makes public the detailed information about these unprecedented $2 trillion of secret loans.