Fed's Court-Ordered Transparency Shows Americans `Have a Right to Know'

A Supreme Court order that forces unprecedented disclosures from the Federal Reserve ended a two- year legal battle that helped shape the public’s perceptions of the U.S. central bank.

The high court yesterday let stand a lower-court ruling compelling the Fed to reveal the names of banks that borrowed money at the so-called discount window during the credit crisis. The records were requested by Bloomberg LP, the parent company of Bloomberg News. In July, Congress passed the Dodd-Frank law, which mandated the release of other Fed bailout details.

Fed Chairman Ben S. Bernanke “now must finally understand that this money doesn’t belong to the Federal Reserve, it belongs to the American people and the American people have a right to know how their taxpayer dollars are being put at risk,” said Senator Bernard Sanders, a Vermont Independent who wrote Fed transparency provisions in Dodd-Frank.

The financial crisis, which began in August 2007 and peaked after the bankruptcy of Lehman Brothers Holdings Inc. in September 2008, focused the public’s attention on the Fed and its $3.5 trillion effort to rescue the banking system, said U.S. Representative Ron Paul, who heads the House subcommittee that oversees the central bank.

“People wanted to know more about what the Fed was doing,” said Paul, a Texas Republican. “It’s been a significant change and the American people won’t ever be complacent about this.”

While Congress required the Fed in December to reveal details of assistance it provided through various emergency programs during the crisis, discount window loans were exempt. The central bank, which was created in 1913, has resisted transparency for the discount window, its oldest lending tool.

‘Reluctant to Borrow’

“The presumption is that the borrowers were to be kept private,” said William Poole, former president of the St. Louis Fed. “Other loans are another matter but banks that borrow at the discount window are often presumed to be in financial trouble. That might create a run on those banks and will make banks in the future reluctant to borrow.”

The high court’s order means the Fed will have to reveal an unprecedented level of detail about its discount window lending during the financial crisis -- including borrowers’ names and amounts. Officials are preparing to comply, said David Skidmore, a spokesman for the central bank. He declined to elaborate.

Attorneys for the Fed have not yet decided how or precisely when they will provide the information, said Thomas Golden, a partner with Willkie Farr & Gallagher LLP who represents Bloomberg LP in the case. Based on discussions with the Fed’s lawyers, Golden said he expects the central bank to comply within the next two weeks, though it’s not yet clear whether officials would post the information publicly on the Fed’s Web site.

Photographer: Joshua Roberts/Bloomberg

Ben S. Bernanke, chairman of the U.S. Federal Reserve. Close

Ben S. Bernanke, chairman of the U.S. Federal Reserve.

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Photographer: Joshua Roberts/Bloomberg

Ben S. Bernanke, chairman of the U.S. Federal Reserve.

Two-Year Lag

Under Dodd-Frank, the central bank will also publish details of discount window loans made after July 21, 2010, on a two-year lag. The new disclosure requirements may limit banks’ use of the window, said Dino Kos, managing director at Hamiltonian Associates Ltd., a New York-based economic research firm.

“I have never been a fan of revealing discount window” borrowers, said Kos, a former head of open market operations at the New York Fed. “Does transparency at such a granular level really add to anybody’s wealth of knowledge?”

More openness and accountability would make it easier for the central bank to do its job of ensuring maximum employment and maintaining stable prices, said Joseph R. Mason, a finance professor at Louisiana State University in Baton Rouge.

Enhancing Independence

“Remaining accountable and transparent enhances independence because it shows that you made the proper moves at the right time,” Mason said.

Paul, who has called for abolishing the central bank, signed up more than 300 co-sponsors for a 2009 bill requiring a Fed audit. The measure passed the House before being dropped by the Senate. It was quite a difference from similar proposals in the 1970s that attracted little attention, he said.

“The Bloomberg lawsuit had a lot to do with the cultural change,” Paul said. “Bloomberg has credibility that politicians don’t have.”

During the financial crisis, Bernanke used Depression-era authority to buy securities from Wall Street investment bank Bear Stearns Cos. and to prop up insurer American International Group Inc. (AIG) The Fed loaned to U.S. government bond dealers, bought the short-term debt of U.S. corporations, and helped finance the purchase of securities backed by loans to small businesses, college students and car buyers.

Lending Soared

Lending through the discount window soared to $111 billion as credit markets nearly froze in the wake of Lehman’s bankruptcy on Sept. 15, 2008. While the loans provided banks with backstop cash, the public has never known which banks borrowed or why.

Bloomberg LP sued for the records after the late Bloomberg News reporter Mark Pittman requested them under the Freedom of Information Act. The media company won at district and appellate courts.

The Fed declined to appeal the case to the Supreme Court; the Clearing House Association LLC, a group of the largest U.S. commercial banks, asked the high court to intervene.

Under the trial judge’s order, which the Supreme Court refused to reconsider, the Fed must reveal 231 pages of documents related to discount window borrowers in April and May 2008, along with loan amounts. After Bloomberg filed suit, News Corp. (NWSA)’s Fox News Network LLC requested similar records over a longer period of time and also filed suit. It stands to receive 6,186 pages of documents on loans made from August 2007 to November 2008.

The Fed must be forced to divulge such information, said Mark Williams, executive-in-residence at the Boston University School of Management and a former Fed bank examiner.

“The Fed has to be held to higher accountability,” Williams said. “It takes lawsuits like this to do that.”

To contact the reporters on this story: Bob Ivry in New York at bivry@bloomberg.net; Craig Torres in Washington at ctorres3@bloomberg.net.

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net; Gary Putka at gputka@bloomberg.net.

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