Thursday, November 13, 2008

Bloomberg Sues The Fed For Loan Disclosure

Lost in the wake of Henry Paulson’s announcement Wednesday that Treasury is “changing direction” in how it doles out money in the bank rescue plan is a little-noticed lawsuit filed last Friday by Bloomberg LP, the business news wire service. It is suing the Federal Reserve Board’s governors for public records that would answer two simple questions: Who is receiving $2-trillion in Fed loans and what collateral are taxpayers getting to support them?

That’s trillion, with a “t.”

And, yes, as hard as it is to believe, taxpayers don’t know the identity of the borrowers to whom they are lending. They also don’t know what kind of junk — Stocks? Bonds? Three milk cows and a ’69 Camaro? — they are getting to collateralize the federal loans.

As Bloomberg wrote Monday, “The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.”


Listen, one can argue about whether the Fed’s loan program is wise or not though most people think it is.

But now that the Treasury’s vaults have been thrown open, taxpayers have a right to know who is getting the loans. Likewise, taxpayers should know the collateral being held, especially given the virtual certainty it is worth far less than the cash they are lending. Taxpayer exposure is enormous.

Loans Worth $2-Trillion

The $2-trillion in loans that are the subject of its suit are separate and apart from the $700-billion rescue package passed by Congress in October. At least, that law has some measure of transparency — we know which banks are getting capital — and safeguards to ensure that taxpayers’ investment is secured.

The Fed lending program is different. As the Bloomberg suit explains, before August 2007 the Fed typically loaned money to regular banks for very short periods of time requiring gold-leaf collateral and had about $1-million in loans outstanding at any one time. Come the financial crisis, the Fed added three new lending programs and dramatically eased terms and dropped collateral standards, opening the loan spigot. By the first week of October, the Fed had average lending of more than $400-billion. Now, the figure is much higher.

Almost daily, the Money Honeys on CNBC announce that such numbers are unprecedented, and it is all too true.

In return, banks handed over collateral of unknown and, assumedly, poor quality. The gap between amount loaned and the amount the collateral is worth is the amount the taxpayers may have to pay if banks can’t make good on these loans.

Seeks Basic Information

The Bloomberg suit is looking for very basic the information:

The government documents that Bloomberg seeks are central to understanding and assessing the government’s response to the most cataclysmic financial crisis in America since the Great Depression. The effect of that crisis on the American public has been and will continue to be devastating. Hundreds of corporations are announcing layoffs in response to the crisis and the economy was the top issue for many Americans in the recent elections …

In response to the crisis, the Fed has vastly expanded its lending programs to private financial institutions. To obtain access to the public money and to safeguard the taxpayers’ interests, borrowers are required to post collateral. Despite the manifest public interest in such matters, however, none of the programs themselves make reference to any public disclosure of the posted collateral or of the Fed’s methods of valuing it. Thus, while the taxpayers are the ultimate counterparty for the collateral, they have not been given any information regarding the kind of collateral received, how it was valued, or by whom.

Seems pretty clear to me. The documents Bloomberg request are all pretty basic stuff.

Records to sufficient to show the names of the Relevant Securities.

Records sufficient to show the amount of borrowing permitted as compared to the face value [the non-marked-down value of the collateral], also known as the ‘haircut…’

Records sufficient to describe whether valuations or ‘haircuts’ for the Relevant Securities changed over time [i.e. whether taxpayer losses are growing]…

Records sufficient to show the terms of the loans and the rates that the borrowers must pay…

Records, including contracts with outside entities, that show the employees or entities being used to price the relevant securities and to conduct the lending process.

Who’s running the program? A simple question.

Unneeded Secrecy

There are arguments against disclosure, of course, but the secrecy case here seems especially weak.

Banks oppose any release of information because it might signal weakness and spur short-selling or a run by depositors, said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, a Washington trade group.

Barney Frank gives it a try and comes across sounding foolish which Rep. Frank is not: “I talk to [New York Fed Chairman Tim] Geithner and he was pretty sure that they’re OK. If the risk is that the Fed takes a little bit of a haircut, well that’s regrettable.” Such losses would be acceptable, he said, if the program helps revive the economy.

Pretty sure they’re okay? Sorry, Barney, that’s just not enough. And then he makes an equally weak case for secrecy.

Frank said the Fed shouldn’t reveal the assets it holds or how it values them because of “delicacy with respect to pricing.” He said such disclosure would “give people clues to what your pricing is and what they might be able to sell us and what your estimates are.” He wouldn’t say why he thought that information would be sticky.

Actually, it’s more likely that visibility would help the market, as Bloomberg’s story points out:

Revealing how the Fed values collateral could help thaw frozen credit markets, said Ron D’Vari, chief executive officer of NewOak Capital LLC in New York and the former head of structured finance at BlackRock Inc.

“I’d love to hear the methodology, how the Fed priced the assets,” D’Vari said. “That would unclog the market very quickly.”

Misplaced Fear

The fear for banks is misplaced. They already have the loans, so they’re fine. The real purpose of secrecy is hiding how badly taxpayers are in the hole. As the Bloomberg suit points out:

The public has significant and legitimate interest in the Fed’s conduct with respect for these four lending facilities because the Fed’s assets are public assets. Taxpayers are entitled to understand and assets the decisions by the Fed on the valuation of the collateral it accepts as security for public money being lent to private institutions. The public’s interest is particularly pronounced in light of the new expansive powers of the Fed, the new risks that the Fed is taking with public money, and the ongoing financial crisis and its effects on the American economy.

As the public’s independent eyes and ears on the government, news organizations, can do no less than everything in their power to put a spotlight on these public expenditures. The power to tax and spend is probably government’s most basic one. To me, watching those is a news organization’s first order of business: It is Job One.

Freedom of Information Act requests are a common newsgathering tool and so are lawsuits to force disclosure when the law is violated. The Bloomberg suit is a reasonable, appropriate and measured tactic by a mainstream news organization. And the suit is manifestly in the public interest.

News organizations compete but they usually cooperate on matters of press freedom and transparency. This is one of those times.

Business Week, Fortune, Forbes, The Wall Street Journal, Barron’s, The New York Times, CNBC and every other print and broadcast media that purports to cover business news to join the Bloomberg suit.

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