Bloomberg Picks a Fight With the Fed on Disclosure

Information provider Bloomberg has started a fight with the Federal Reserve that may turn some stones in the secretive private organisation that has never been audited.

Bloomberg had asked the Fed to see documents concerning the collateral the Fed accepts in exchange for freshly digitized credit in its bailouts. The Federal Reserve first insisted on a Freedom Of Information Act (FOIA) request and then said the data required is from the Fed New York which does not fall under the FOIA

In his book "Secrets of the Temple" - the most extensive work about the Fed - William H. Greider highlights the opaque legal status of the Federal Reserve that is neither federal nor has any reserves (besides unlimited fiat currency) but takes the best from both worlds to keep its doors closed to the public. Being the biggest fiat money creator in the world the Fed has never been audited, controls itself and does not even publish a balance sheet that would fulfill the expected norms.

A 9-shot salute goes to nakedcapitalism which was the first blog to break this important story. In a sarcastic lead Yves Smith (or Ed Wright) writes up the most important points:

In case you somehow managed to miss it, our friendly pawnbroker of last resort (central bank) has been taking lots of crap (collateral) in return for loans under its alphabet soup of facilities. As we are learaning in our housing meltdown, collateral may not prove to be worth as much as it was said to be at the time the loan was made. Inquiring minds are curious as to what, exactly the Fed has taken, particularly as the numbers are becoming stratospheric.
Bloomberg has asked nicely for some of this information, and is now being forced to sue under to the Freedom of Information Act, and the Fed intends to fight! This ought to be a scandal, but after the TARP, the electorate is seems resigned to taxpayer money being thrown at floundering financial enterprises with little in the way of checks or prudence. If the Fed indeed was taking conservatively valued collateral as it has always claimed it was, there would be no reason for it to attempt to squash this request. The Fed's argument, as I infer, is the loans were made by the Federal Reserve Bank of New York, which isn't a federal agency and thus not subject to the FOIA.

David Merkel's Aleph Blog was quick to come up with five reasons for the Fed's secrecy, all of them most alarming for believers in a free market system. Headlining "What Do You Have To Hide" he lists the following:

1. The Fed is breaking its own rules, and lending on collateral that it publicly said that it wouldn’t lend against.
   
2. They are playing favorites with institutions, and don’t want that to be revealed.
   
3. The assets in question are technically in compliance with the rules of the Fed, but are worth far less than the amount loaned against them.
   
4. Certain banks would be embarrassed by revealing what they own.
   
5. It’s just a power game, and the Fed thinks it is above the law, particularly during a crisis (that it helped to cause).

The reporters committee for freedom of the press has some technical details on the lawsuit Bloomberg has filed.

Bloomberg News filed a Freedom of Information Act lawsuit against the Federal Reserve system Friday, seeking documents related to the financial services crisis, the news service reported.
The suit, filed in federal court in New York, asks for documents the government says are held by the Federal Reserve Bank of New York. The bank, one of a dozen in the Federal Reserve system, has not complied with FOIA because it has not been considered a government agency.
In contrast, the Federal Reserve Board of Governors in Washington is subject to FOIA. However, the bulk of the documents Bloomberg wants are housed at the New York bank, the Fed told Bloomberg.
According to Bloomberg, the Fed has made loans totalling $1.5 trillion to banks, not including the $700 billion bailout package. Bloomberg is seeking information on the collateral the banks posted for the loans. The news service’s FOIA requests have gone unanswered.

Creditwritedowns joins the team of Fed bashers, publishing the Bloomberg story on the topic and peppering it with criticism on the Fed's overly secretive style that should be a thing of the past.

For those of you concerned about the Fed's risky behavior, its ballooning balance sheet, and its acceptance of dodgy collateral, well you may be about to see whether the American democracy can allow this unchecked power to continue without oversight. Bloomberg News has sued the Federal Reserve to force them to reveal what kind of collateral they are accepting in loaning out trillions of dollars to U.S. banks.
The Federal Reserve, a quasi-government body (which strictly speaking is a private corporation in that it is owned by member banks), has been accepting assets of ever more dubious quality in a bid to liquify the U.S. banking system. Moreover, their efforts should be considered highly inflationary and a long-term threat to the value of the U.S. dollar and to the American economy.
The Fed balance sheet is expected to balloon to $3 trillion by the end of the year, up from $900 billion in August -- a rise in the Fed’s balance sheet from 6% of GDP to more than 20% of GDP in four months. In Japan, which was known for quantitative easing during its own deflationary crisis, the central bank’s balance sheet rose progressively from 9% of GDP to 29% of GDP. But this was over ten years from 1994 to 2004. At the current pace, the Fed might do in six months what it took ten years to do in Japan. Amazing.

Bloomberg had published this story last Friday:

Bloomberg News asked a U.S. court today to force the Federal Reserve to disclose securities the central bank is accepting on behalf of American taxpayers as collateral for $1.5 trillion of loans to banks.
The lawsuit is based on the U.S. Freedom of Information Act, which requires federal agencies to make government documents available to the press and the public, according to the complaint. The suit, filed in New York, doesn't seek money damages.
"The American taxpayer is entitled to know the risks, costs and methodology associated with the unprecedented government bailout of the U.S. financial industry,'' said Matthew Winkler, the editor-in-chief of Bloomberg News, a unit of New York-based Bloomberg LP, in an e-mail.
The Fed has lent $1.5 trillion to banks, including Citigroup Inc. and Goldman Sachs Group Inc., through programs such as its discount window, the Primary Dealer Credit Facility and the Term Securities Lending Facility. Collateral is an asset pledged to a lender in the event that a loan payment isn't made.
The Fed made the loans under 11 programs in response to the biggest financial crisis since the Great Depression. The total doesn't include an additional $700 billion approved by Congress in a bailout package.
Fed's Position
Bloomberg News on May 21 asked the Fed to provide data on the collateral posted between April 4 and May 20. The central bank said on June 19 that it needed until July 3 to search out the documents and determine whether it would make them public.
Bloomberg never received a formal response that would enable it to file an appeal. On Oct. 25, Bloomberg filed another request and has yet to receive a reply.
The Fed staff planned to recommend that Bloomberg's request be denied under an exemption protecting "confidential commercial information,'' according to Alison Thro, the Fed's FOIA Service Center senior counsel. The Fed in Washington has about 30 pages pertaining to the request, Thro said today before the filing of the suit. The bulk of the documents Bloomberg sought are at the Federal Reserve Bank of New York, which she said isn't subject to the freedom of information law.
"This type of information is considered highly sensitive, and it would remain so for some time in the future,'' Thro said.
The Fed didn't give Bloomberg a formal response because "it got caught in the vortex of the things going on here,'' said Michael O'Rourke, another member of the Fed's FOIA staff.
The case is Bloomberg LP v. Federal Reserve, U.S. District Court, Southern District of New York (Manhattan).

While this story is in itself highly interesting as it contradicts chairman Ben Bernanke's earlier vows to lead a more transparent Fed it could be the beginning of the dismantling of the Fed's untouchable aura.

Republican congressman Ron Paul has repeatedly called for an audit of the Fed and the abolition of the USA's third central bank. As the Fed's most important tool is to set the price of money via interest rates and recalling all its blunders it is most interesting that the constituionality of the Fed has never been challenged in court although the constitution says in Article 1, section 10:

No State shall ... coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts....

Story developing...follow this link

Fed Stonewalling on Giving Details About Collateral Accepted for Loans (naked capitalism, 11/7/08)

Fed Reverses Self on Promises of Transparency, Continues to Stonewall on Collateral, Lending Disc... (naked capitalism, 11/10/08)

For the first time since the Great Depression…. (Option ARMageddon, 10/7/08)

Comments

[axelrod608:]

Absolutely nothing surprises me anymore. In Colorado, an 8 year old shoots his dad and another man in a planned assasination and in government, the nation's central bank is a totally closed, secretive book, exempt from audit or even requests for information. Are we mad ? Is this nation out of control ? Is there an explanation why the central bank is run like a secret society ?

THE biggest problem in dealing with the current financial mess is lack of openness. We have no clue what assets/liabilities our corporations are hiding off their balance sheets, and the central bank is absolutely opaque.

Ben and Hank are like two blind guys handing out $100 bills on the street corner...... except the bills are $100,000,000,000.

We deserve the government we have and the mess we're in. Americans dutifully go to the polls and do the same stupid thing for a century or more - we send a batch of Republicrats to DC to make a mockery of "serving" the people and the nation.

We need CHANGE alright - new ruling parties. As long as the "fools on the hill" and in the White House are Republicrats, the only change will be the nameplates.

2008 Nov 11 09:21 AM

[Drew Horn:]

To re-state what may be obvious but is still very important, a basic principal is that government actions, especially its commitments of taxpayer money, should be open to the public . If the NY Federal Reserve Bank isn't a federal agency then its actions and obligations should not accrue to " the people". If the NY Fed is "creating money", it is perfoming a key function of government and should be a federal agency subject to direct oversight by congress and subject to the FOIA.

The current economic situation is not only a problem but also an opportunity to change for the better. Mayor bloomberg has the resources to pursue this issue through congress and the courts. I hope he has the intestinal fortitude to do so. For good reasons, Americans have little or no trust in government.

2008 Nov 11 10:21 AM

[NOWHEREMAN:]

So you are still here? I am surprised. I agree wholeheartedly with your opinion on Ben and Hank, but especially your second to last paragraph, which includes Kennedy, Nixon, and Clinton.

You have Change, a Democratic majority in both House and Senate with a Democratic President.

Contrary to what I said about Having a Democratic Congress before the Election, as a Republicrat I was obliged to do so, I believe we do need what the Democrats have to offer at this point in time. The ongoing Stupidity has to stop.

I only hope that President Obama does not fall too far under the influence of the richfatcrat economic advisors that surrounded him during his campaign. I really do wish him the best because without his best, we will all be up the creek without a paddle.

Take care Axelrod.

2008 Nov 11 10:26 AM

[mbborak:]

Don't worry, the Fed has our best interests at heart and is doing everything it can to protect the taxpayer and the long term health of this country. They won't spend too much on unrestricted loans to large corporations who got us into this crisis and refuse to take the risk to help us get out of it. After all, these Fed and Treasury guys are geniuses, right? Most of them are former bank executives, so they definitely know what they're doing with our money.
Plus, what right do we have as citizens to know what these unelected officials are doing with our $800+ Billion tax dollars?

Even if we end up losing all this money, our kids will eventually pay for it so we're in the clear!

2008 Nov 11 12:45 PM

[NOWHEREMAN:]

Hank headed Goldman when these packages were initially created. Hire a thief to catch a thief.

2008 Nov 11 09:36 PM