It's the question that just won't go away.
In the depths of the financial crisis, as the U.S. flooded the system with cash in a desperate effort to stave off collapse, which banks got what?
Despite a fusillade of criticism, much of it in Congress, the Federal Reserve has remained a tightly closed vault, so to speak. Repeated efforts to pry open the inner workings of the bailout have met with stiff resistance and mostly outright failure.
Now a lawsuit wending its way through the courts is close to forcing the Fed to do something unprecedented – provide a loan-by-loan accounting of its emergency aid to banks.
In the 97-year history of the Fed, the details of such operations have never been made public.
For the organization that initiated the lawsuit – Bloomberg LP, the global news-and-information behemoth – it represents nothing short of a crusade. The records involved are “central to understanding and assessing the government's response to the most cataclysmic financial crisis in America since the Great Depression,” reads their complaint.
Not surprisingly, the Fed takes a different view. If such records were made public, it would cause a world of harm to banks, the Fed says, making them look weak in the eyes of competitors and potentially depositors, leading to panic. It could make banks reluctant to seek help in the future, the Fed asserts, rendering the banking system more vulnerable.
The story all began on the fifth floor of Bloomberg's horseshoe-shaped, glass and steel headquarters on Lexington Avenue with one very frustrated reporter. For months, Mark Pittman had waited in vain for the Fed to reply to his requests filed under the U.S. public disclosure law, the Freedom of Information Act. One day, as he roamed around the office, Mr. Pittman came across his editor, Amanda Bennett, who happened to be in mid-conversation with the newsroom's in-house lawyer.
Mr. Pittman unloaded his irritation, complete with a stream of curses. Then the reporter and the editor turned to the counsel and asked: What can we do?
“I thought about it and said, ‘We could sue them,'” recalls Charles Glasser, the global media counsel for Bloomberg News. “The worst that would happen is we lose; the best that could happen is we vindicate the public's right to know.”
Mr. Pittman, like other Fed watchers, had seen the central bank ramp up its lending in late 2007 and early 2008. Soured housing-related investments were triggering a cascade of losses inside financial institutions. The Fed encouraged banks to borrow from its discount window, its traditional channel for helping institutions in distress. It also created an alphabet soup of new programs known by their acronyms (PDLF, TAF, TLSF), which for the first time loaned lent money to borrowers like investment banks.
The sums involved multiplied. During one week in August, 2007, the total lending outstanding at the Fed's discount window was $1-million (U.S.), according to Bloomberg's complaint. Less than a year later, in October, 2008, with the addition of the new programs, the figure had hit $400-billion.
By the standards of global central banks – a notoriously tight-lipped bunch – the Fed is fairly forthright. It releases, in aggregate, the totals for various types of loans and the kinds of collateral it accepted in exchange for the borrowing. Facing a withering attack by members of Congress, Fed chairman Ben Bernanke has called for further disclosures. Late last month, he said that he would support legislation to release the identities, after a lag, of the firms using some of the emergency-lending programs after a lag.
Despite that concession, the details of the loans made as the banking system imploded in 2008 remain locked away. The Bloomberg suit seeks to uncover the nuts and bolts of each individual loan to a financial institution: how much was borrowed, when, on what terms, and in exchange for what collateral.
Bloomberg opted to file the suit in New York rather than Washington, reasoning that the closer a judge was to the epicentre of the financial collapse, the greater the understanding of the stakes. That strategy paid off late last year, when a judge handed Bloomberg a victory.
