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3/20/2010 10:52:17 AM

The Fed's emergency lending program just got hit with a Freedom of Information Act order...  
 
<a href="http://www.bloomberg.com/apps/news?pid=2… />
 
Federal Reserve Must Disclose Bank Bailout Records (Update5) 
 
By David Glovin and Bob Van Voris 
 
March 19 (Bloomberg) -- The Federal Reserve Board must disclose documents identifying financial firms that might have collapsed without the largest U.S. government bailout ever, a federal appeals court said.
The U.S. Court of Appeals in Manhattan ruled today that the Fed must release records of the unprecedented $2 trillion U.S. loan program launched primarily after the 2008 collapse of <a onmouseover="return escape( popwQuoteShort( this, 'LEMNQ:US' ))" href="http://www.bloomberg.com/apps/quote?tick… Brothers Holdings Inc.</a> The ruling upholds a decision of a lower-court judge, who in August ordered that the information be released.
The Fed had argued that disclosure of the documents threatens to stigmatize borrowers and cause them “severe and irreparable competitive injury,” discouraging banks in distress from seeking help. A three-judge panel of the appeals court rejected that argument in a unanimous decision.
The U.S. <a onmouseover="return escape( popwOpenWebSite( this ))" href="http://www.usdoj.gov/oip/" target="_blank">Freedom of Information Act</a>, or FOIA, “sets forth no basis for the exemption the Board asks us to read into it,” U.S. Circuit Chief Judge <a onmouseover="return escape( popwSearchNews( this ))" href="http://search.bloomberg.com/search?q=Den… Jacobs</a> wrote in the opinion. “If the Board believes such an exemption would better serve the national interest, it should ask Congress to amend the statute.”
The opinion may not be the final word in the bid for the documents, which was launched by Bloomberg LP, the parent of Bloomberg News, with a November 2008 lawsuit. The Fed may seek a rehearing or appeal to the full appeals court and eventually petition the <a onmouseover="return escape( popwOpenWebSite( this ))" href="http://www.law.cornell.edu/rules/supct/1…" target="_blank">U.S. Supreme Court</a>.
Right to Know
If today’s ruling is upheld or not appealed by the Fed, it will have to disclose the requested records. That may lead to “catastrophic” results, including demands for the instant disclosure of banks seeking help from the Fed, resulting in a “death sentence” for such financial institutions, said <a onmouseover="return escape( popwSearchNews( this ))" href="http://search.bloomberg.com/search?q=Chr… Kotowski</a>, a bank analyst at Oppenheimer & Co. in New York.
“Whenever the Fed extends funds to a bank, it should be disclosed in private to the Congressional oversight committees, but to release it to the public I think would be a horrific mistake,” Kotowski said in an interview. “It would stigmatize the banks, it would lead to all kinds of second-guessing of the Fed, and I don’t see what public purpose is served by it.”
Senator <a onmouseover="return escape( popwSearchNews( this ))" href="http://search.bloomberg.com/search?q=Ber… Sanders</a>, an Independent from Vermont, said the decision was a “major victory” for U.S. taxpayers.
“This money does not belong to the Federal Reserve,” Sanders said in a statement. “It belongs to the American people, and the American people have a right to know where more than $2 trillion of their money has gone.”
Fed Review
The Fed is reviewing the decision and considering its options for reconsideration or appeal, Fed spokesman <a onmouseover="return escape( popwSearchNews( this ))" href="http://search.bloomberg.com/search?q=Dav… Skidmore</a> said.
“We’re obviously pleased with the court’s decision, which is an important affirmation of the public’s right to know what its government is up to,” said <a onmouseover="return escape( popwSearchNews( this ))" href="http://search.bloomberg.com/search?q=Tho… Golden</a>, a partner at New York-based Willkie Farr & Gallagher LLP and Bloomberg’s outside counsel.
The court was asked to decide whether loan records are covered by FOIA. Historically, the type of government documents sought in the case has been protected from public disclosure because they might reveal competitive trade secrets.
The Fed had argued that it could withhold the information under an exemption that allows federal agencies to refuse disclosure of “trade secrets and commercial or financial information obtained from a person and privileged or confidential.”
Payment Processors
<a onmouseover="return escape( popwOpenWebSite( this ))" href="http://www.theclearinghouse.org/about/as…" target="_blank">The Clearing House Association</a>, which processes payments among banks, joined the case and sided with the Fed. The group includes ABN Amro Bank NV, a unit of Royal Bank of Scotland Plc, <a onmouseover="return escape( popwQuoteShort( this, 'BAC:US' ))" href="http://www.bloomberg.com/apps/quote?tick… of America Corp.</a>, The Bank of New York Mellon Corp., <a onmouseover="return escape( popwQuoteShort( this, 'C:US' ))" href="http://www.bloomberg.com/apps/quote?tick… Inc.</a>, Deutsche Bank AG, HSBC Holdings Plc, <a onmouseover="return escape( popwQuoteShort( this, 'JPM:US' ))" href="http://www.bloomberg.com/apps/quote?tick… Chase & Co</a>., US Bancorp and <a onmouseover="return escape( popwQuoteShort( this, 'WFC:US' ))" href="http://www.bloomberg.com/apps/quote?tick… Fargo & Co.</a>
<a onmouseover="return escape( popwSearchNews( this ))" href="http://search.bloomberg.com/search?q=Pau… Saltzman</a>, general counsel for the Clearing House, said the decision did not address the “fundamental issue” of whether disclosure would “competitively harm” borrower banks.
“The Second Circuit declined to follow the decisions of other circuit courts recognizing that disclosure of certain confidential information can impair the effectiveness of government programs, such as lending programs,” Saltzman said in a statement.
The Clearing House is considering whether to ask for a rehearing by the full Second Circuit and, ultimately, review by the U.S. Supreme Court, he said.
Deep Crisis
<a onmouseover="return escape( popwSearchNews( this ))" href="http://search.bloomberg.com/search?q=Osc… Suris</a>, a spokesman for Wells Fargo, JPMorgan spokeswoman <a onmouseover="return escape( popwSearchNews( this ))" href="http://search.bloomberg.com/search?q=Jen… Zuccarelli</a>, Bank of New York Mellon spokesman <a onmouseover="return escape( popwSearchNews( this ))" href="http://search.bloomberg.com/search?q=Kev… Heine</a>, HSBC spokeswoman <a onmouseover="return escape( popwSearchNews( this ))" href="http://search.bloomberg.com/search?q=Jua… Gutierrez</a> and RBS spokeswoman <a onmouseover="return escape( popwSearchNews( this ))" href="http://search.bloomberg.com/search?q=Lin… Harper</a> all declined to comment. Deutsche Bank spokesman <a onmouseover="return escape( popwSearchNews( this ))" href="http://search.bloomberg.com/search?q=Ron… Weichert</a> couldn’t immediately comment. Bank of America declined to comment, <a onmouseover="return escape( popwSearchNews( this ))" href="http://search.bloomberg.com/search?q=Sco… Silvestri</a> said. Citigroup spokeswoman <a onmouseover="return escape( popwSearchNews( this ))" href="http://search.bloomberg.com/search?q=Sha… Bell</a> declined to comment. U.S. Bancorp spokesman <a onmouseover="return escape( popwSearchNews( this ))" href="http://search.bloomberg.com/search?q=Ste… Dale</a> didn’t return phone and e-mail messages seeking comment.
Bloomberg, majority-owned by New York Mayor <a onmouseover="return escape( popwSearchNews( this ))" href="http://search.bloomberg.com/search?q=Mic… Bloomberg</a>, sued after the Fed refused to name the firms it lent to or disclose loan amounts or assets used as collateral under its lending programs. Most of the loans were made in response to the deepest financial crisis since the Great Depression.
Lawyers for Bloomberg argued in court that the public has the right to know basic information about the “unprecedented and highly controversial use” of public money.
“Bloomberg has been trying for almost two years to break down a brick wall of secrecy in order to vindicate the public’s right to learn basic information,” Golden wrote in court filings.
Potential Harm
Banks and the Fed warned that bailed-out lenders may be hurt if the documents are made public, causing a run or a sell- off by investors. Disclosure may hamstring the Fed’s ability to deal with another crisis, they also argued.
Much of the debate at the appeals court argument on Jan. 11 centered on the potential harm to banks if it was revealed that they borrowed from the Fed’s so-called discount window. <a onmouseover="return escape( popwSearchNews( this ))" href="http://search.bloomberg.com/search?q=Mat… Collette</a>, a lawyer for the government, said banks don’t do that unless they have liquidity problems.
FOIA requires federal agencies to make government documents available to the press and public. An exception to the statute protects trade secrets and privileged or confidential financial data. In her Aug. 24 ruling, U.S. District Judge <a onmouseover="return escape( popwSearchNews( this ))" href="http://search.bloomberg.com/search?q=Lor… Preska</a> in New York said the exception didn’t apply because there’s no proof banks would suffer.
Tripartite Test
In its opinion today, the appeals court said that the exception applies only if the agency can satisfy a three-part test. The information must be a trade secret or commercial or financial in character; must be obtained from a person; and must be privileged or confidential, according to the opinion.
The court said that the information sought by Bloomberg was not “obtained from” the borrowing banks. It rejected an alternative argument the individual Federal Reserve Banks are “persons,” for purposes of the law because they would not suffer the kind of harm required under the “privileged and confidential” requirement of the exemption.
In a related case, U.S. District Judge <a onmouseover="return escape( popwSearchNews( this ))" href="http://search.bloomberg.com/search?q=Alv… Hellerstein</a> in New York previously sided with the Fed and refused to order the agency to release Fed documents that Fox News Network sought. The appeals court today returned that case to Hellerstein and told him to order the Fed to conduct further searches for documents and determine whether the documents should be disclosed.
“We are pleased that this information is finally, and rightfully, going to be made available to the American public,” said <a onmouseover="return escape( popwSearchNews( this ))" href="http://search.bloomberg.com/search?q=Kev… Magee</a>, Executive Vice President of Fox Business Network, in a statement.
Balance Sheet Debt
The Fed’s balance sheet debt doubled after lending standards were relaxed following <a onmouseover="return escape( popwQuoteShort( this, 'LEMNQ:US' ))" href="http://www.bloomberg.com/apps/quote?tick… failure on Sept. 15, 2008. That year, the Fed began extending credit directly to companies that weren’t banks for the first time since the 1930s. Total central bank lending exceeded $2 trillion for the first time on Nov. 6, 2008, reaching $2.14 trillion on Sept. 23, 2009.
More than a dozen other groups or companies filed friend- of-the-court briefs. Those arguing for disclosure of the records included the American <a onmouseover="return escape( popwOpenWebSite( this ))" href="http://asne.org/" target="_blank">Society of News Editors</a> and individual news organizations.
“It’s gratifying that the court recognizes the considerable interest in knowing what is being done with our tax dollars,” said <a onmouseover="return escape( popwSearchNews( this ))" href="http://search.bloomberg.com/search?q=Luc… Dalglish</a>, executive director of the Reporters Committee for Freedom of the Press in Arlington, Virginia.
“We’ve learned some powerful lessons in the last 18 months that citizens need to pay more attention to what’s going on in the financial world. This decision will make it easier to do that.”
The case is Bloomberg LP v. Board of Governors of the Federal Reserve System, 09-04083, U.S. Court of Appeals for the Second Circuit (New York).
To contact the reporters on this story: <a onmouseover="return escape( popwSearchNews( this ))" href="http://search.bloomberg.com/search?q=Dav… Glovin</a> in New York at <a onmouseover="return escape( popwSendEmail( this ))" href="mailto:[email protected]">dglovin@bl…; <a onmouseover="return escape( popwSearchNews( this ))" href="http://search.bloomberg.com/search?q=Bob… Van Voris</a> in New York at <a onmouseover="return escape( popwSendEmail( this ))" href="mailto:[email protected]">vanvoris@…
Last Updated: March 19, 2010 16:15 EDT

9 comments

Latest

MisterGuy

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15 years ago

"'This money does not belong to the Federal Reserve,' Sanders said" 
 
Bernie is one of my favorite Senators, but he might not be right in this case.  The Fed currently controls roughly $248 Billion in gold alone, roughly $2 Billion in coin, $967 Billion in securities, and roughly $50-175 Billion in hard assets...so it's not like the Fed doesn't have any of its own money to loan out on occasion as a "lender of last resort".  
 
I though the Royal Bank of Scotland got bailed out by the UK?  A lot of those U.S. banks that sided with the Fed have already been disclosed as being bailed out by the federal government as well. 
 
Since I am one of many that think that the internal workings of the Fed need to be declared more clearly to the public (so that people can make more informed decisions about what the Fed does & doesn't do), this is a good decision on balance IMHO.

CTQWERTY

•

15 years ago

Mr. G., I agree.   Though despite his pledge to be "more open", obviously Bernanke's actions say otherwise.  

MisterGuy

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15 years ago

Yea, it's going to take action from Congress to make the Fed be more open.  BTW, I think I may have been wrong about the Fed owning the gold from below.  I guess they just hold it for governments at no charge.  What a great bunch of people, eh?   <img src="/editor/images/smiley/msn/wink_smile.gif" alt="" />

CTQWERTY

•

15 years ago

What's amazing about gold is that Central Banks around the world continue to hold it.   However if one listened to the CNBC tribe, gold has been "about done" since $600 or so (was $258 back in 2001.)   Today it's over $1,100.   Of course in CNBC's world it's a dead asset and doesn't grow the way the stock market can.   
 
I wonder who's behind "Cash for Gold"?    Since their ads started running they've been correct about the direction and price.

samsung1

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15 years ago

You’ve probably seen ads on TV and the Internet for Florida-based Cash4Gold, a service that buys gold from people (watches, rings, other jewelry, etc.) via the mail. You send in your stuff, the company sends you money. You have twelve days to say you don’t accept their offer and you get your gold back. The company pays shipping (both ways if necessary) plus insurance. 
 
The service launched in early 2007 to a perfect storm of soaring gold prices and a down economy. But still, it’s more than surprising that the company raked in $90 million in revenue in 2008, the second year of operations, according to a source close to the company. Profit, even after paying out cash to sellers and a huge marketing spend, was in the $30 million range. 
 
Revenues in 2009 are on track to hit $160 million, says our source, with a similar profit margin. That implies $50 million or so in 2009 profits. 
 
The company decided to buy a Super Bowl commercial in 2009, featuring MC Hammer (pictured in image above, sans dignity) and Ed McMahon. You can watch it here (embedding is disabled for some reason). Television, not Internet advertising, continues to be their most profitable marketing, says our source. 
 
The business velocity attracted the venture capitalists, of course. Sometime this year the company took a sizable investment from Mangrove Capital Partners and possibly other investors as well. Mangrove is notable because they’re a European firm (and also one of the first investors in Skype). 
 
So what’s next for Cash4Gold? Competition. A number of clones have launched in the U.S., which is driving marketing costs up. The company recently launched operations in the UK and will continue international expansion. They’re going to have to do some serious brand building and lock up key strategic partnerships if they intend to create a long term business. But in the meantime they’ve made a ton of money off a very simple but very good idea. 
  
http://techcrunch.com/2009/10/02/cash4go…

MisterGuy

•

15 years ago

"What's amazing about gold is that Central Banks around the world continue to hold it." 
 
This is really a carry-over from the days when currencies were backed up by a hard asset, like gold.  What was interesting to me was that the NY Fed office holds more gold than Fort Knox and that no one knows how much gold is in the Swiss banking system. 
 
"I wonder who's behind 'Cash for Gold'?" 
 
It's a division of Albar Precious Metal Refining headed by CEO Jeff Aronson, and the below info about them is correct...they apparently, intentionally undervalue the gold that they get from customers in order to maximize their profit.  You're better off going to a local pawn shop or jewelry store.

CTQWERTY

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15 years ago

Thanks Sam, Mr. G. 
 
Ben Bernanke made news yesterday by advocating for the elimination of bank reserve requirements.   I guess the idea their "risk taking" will just arrive all the quicker then (when the bibble inevitably bursts) at The Federal Reserve's/U.S. Treasury doorstep.   AYE Carramba!!!!!!!!

MisterGuy

•

15 years ago

"Ben Bernanke made news yesterday by advocating for the elimination of bank reserve requirements." 
 
WHAT?!?!  That's simply crazy talk.  I don't think that proposal will go anywhere.

CTQWERTY

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15 years ago

"The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system." 
 
It's the very last line in his testimony:  <a href="http://www.federalreserve.gov/newsevents… />

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