Bloomberg News filed a federal lawsuit on November 7, 2008, to force disclosure by the Federal Reserve, under the US Freedom of Information Act, about the lending by the Federal Reserve system to private banks. Bloomberg wants to know the identities of the borrowing banks, how much each one borrowed, and the assets the Fed has accepted as collateral for these loans by the Fed.
The request is not prima facie unreasonable. Under the 11 facilities cited in the lawsuit (which don’t include the $700 bn of the TARP, which is a Treasury programme), the Fed has extended well over $2 trillion worth of credit. Initially, most of this was secured. With the growing volume of Fed purchases of commercial paper, and given the range of options for outright purchases of private securities provided by the $800 facility announced on November 26 ($200 bn for consumer credit and $600 bn for purchases by the Fed of mortgage-backed securities and of debt issued by mortgage lenders), the Fed is now also a major unsecured creditor.
The Fed’s exposure to credit risk is likely to escalate rapidly as the Fed engages in large-scale quantitative easing, taking onto its balance sheet, either as collateral or through outright purchases, ever larger amounts of every poorer quality private securities. A trillion here, a trillion there - even in Washington DC, you are talking real money for which accountability to the Congress, the US tax payer and the wider public is essential.
Our financial leaders certainly talk the accountability and transparency talk.
Consider Treasury Secretary Paulson’s words at the September 23, 2008 hearing of the Senate Banking Committee about the need for transparency in the purchase of distressed assets (the original intent of the TARP as a fund for price discovery for toxic assets was still alive then): “We need oversight,… We need protection. We need transparency. I want it. We all want it.’‘ On September 24, 20098, Bernanke also sang the Transparency Hymn in relation to the TARP: “Transparency is a big issue,”.
Transparency is such a big issue, apparently, that it cannot be squeezed into the Fed’s procedures for managing its lending facilities. Following an initial request for this information by Bloomberg in May 2008, the Fed stonewalled, never gave a formal answer, but hinted that it could not provide the information because of a commercial confidentiality exemption clause in the Freedom of Information Act.