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Seeking to crack the Fed's secrecy around the bank bailout

Section: Daily Dispatches

By Alan Feuer
The New York Times
Thursday, February 11, 2010

The crittical lawsuit challenging that mystery of finance known as the Bailout started, oddly enough, with a casual newsroom chat.

Mark Pittman, an investigative reporter for Bloomberg News, had filed a Freedom of Information Act request with the Federal Reserve Board, seeking the details of its unprecedented efforts to funnel money to the collapsing banks of Wall Street. Mr. Pittman, sometimes known as Bloomberg's Yoda for his Jedi-like command of economic issues, had quietly surmised that the Fed was holding tightly to the secrets of the bailout. So he was hardly surprised when, after four months, it had failed to even answer his request. He was nonetheless annoyed. One day, even grumpier than usual, he approached his boss, Amanda Bennett, as she stood talking in the company's East Side newsroom with an in-house lawyer named Charles Glasser.

"Pittman was this big shlumpy guy and he was wandering around going, 'Argh argh argh,'" Ms. Bennett said recently. "So we asked him, 'What's with your FOIA?' And Mark says -- he used some colorful language -- "They won't answer us.'"

"That was when we all sat down and said, 'So what do we do? They can't just get away with not answering us,'" Ms. Bennett recalled. "Charles said, 'You know, I suppose we could just sue the Fed.' So we went to Matt" -- Matthew Winkler, Bloomberg's executive editor -- "and said, 'What do you think about us suing the Fed?'" As she recounted this story, Ms. Bennett punched her left palm with her right fist -- precisely, she explained, as Mr. Winkler had. She added, "He loved it."

That was in September 2008. Just more than a year later, Mr. Pittman, a booming man with a beat reporter’s taste for whiskey, died unexpectedly at age 52. But his cause has persevered. It is now known as Bloomberg L.P. v. Board of Governors of the Federal Reserve, an attempt to unlock the vault of the largest Wall Street rescue plan in decades -- or, as the legal briefs put it, to "break down a wall of secrecy" that the Fed has kept in place for nearly two years in its "controversial use of public money to prop up financial institutions."

Narrowly construed, the suit, filed in November 2008, seeks the release under FOIA of documents called term reports. Those reports contain information about the hundreds of billions of dollars the Federal Reserve lent to banks at the height of the crisis -- first through its discount window and then through an acronymic soup of emergency programs with arcane-sounding names like the Primary Dealer Credit Facility and the Term Securities Lending Facility.

While the Fed does customarily release data in the aggregate about its lending -- the bank bailout is about $2 trillion, all told -- it has always shielded information about specific loans to specific institutions. If released, the documents in this lawsuit would punch directly through that shield: Who got money from the Fed? How much did they get? In exchange for what collateral? And under what terms?

That, said Charles Geisst, a finance professor at Manhattan College, would represent an unparalleled move toward openness. "It would mean that the transparency we now demand from our corporations, for example, would spread up all the way to the Fed," he said.

In its own briefs, the Fed has argued that such disclosures could "stigmatize" financial institutions by suggesting they were desperately in need of government money and, therefore, weak. In its doomsday scenario, the Fed has worried that these weak banks could be subject to 1930s-style bank runs and that, in the future, even strong banks that were considering taking money might instead retreat in trepidation, preventing the Fed from practicing the already delicate art of monetary policy.

The Fed's worries grew last summer when the chief federal district judge in Manhattan ruled in favor of Bloomberg News, setting up a showdown last month in the United States Court of Appeals for the 2nd Circuit. This appellate battle -- which includes a similar suit by Fox News that lost in the district court -- has quickly become the New York front in a bitter, two-pronged war against the Fed. (In Washington, legislation is pending to force the central bank to undergo an audit.) Indeed, as the lawsuit moved to its next round, its context was expanded by way of interventions and supporting briefs.

No, two Manhattan tribes appear to be squaring off: On one side are the news media -- among them The Associated Press, The Wall Street Journal, and The New York Times, which also has a FOIA bailout suit and has agreed to be bound by the 2nd Circuit ruling. On the other side are the banks -- JPMorgan Chase, Citibank, Bank of America, and others -- which, of course, have fallen in behind the Fed.

Mr. Winkler, a slight man who favors bow ties, started his career covering the Fed for The Daily Bond Buyer decades ago. He said Bloomberg has often pursued information by way of litigation. In 1993, for instance, Bloomberg successfully sued the private press clubs of Japan, called kisha clubs, which had prevented it from reporting on the Japanese economy by denying access to the corporate press releases that often came as a benefit of membership. Today, he said, Bloomberg has 156 FOIA requests pending with the United States government.

Nevertheless, the Fed was not a kisha club, and November 2008 was not necessarily a moment to take an aggressive legal stance toward economic policy makers. Things were still quite raw: It had been only two months since the collapse of Lehman Brothers and only two weeks since the Dow Jones industrial average, already down some 2,200 points in seven sessions, dropped nearly 700 more in the opening moments of a single day.

But Mr. Winkler had already chosen to sue, and had so informed Daniel L. Doctoroff, Bloomberg's president, and Peter T. Grauer, its chairman. Then, along with the outside law firm of Willkie Farr & Gallagher, he sought to write a document that would mirror in its language the vast sweep of recent economic events. Three days after the election of President Obama, his company filed a complaint that read, in part, "The documents that Bloomberg seeks are central to understanding the government's response to the most cataclysmic financial crisis in America since the Great Depression."

The complaint accused the Fed of failing to produce the documents and positioned Bloomberg, in a watchdog role, as "the eyes and ears of the public." It concluded that disclosure of the documents was needed so that taxpayers could be "informed of how the Fed is safeguarding the public's money."

Nine months later, on Aug. 24 of last year, Loretta A. Preska of the United States District Court in Manhattan ruled for Bloomberg and ordered the Fed to release the documents within five days.

"We got the order and looked it at," Ms. Bennett said, "and thought, 'My God, it looks like we won.'"

They had -- pending an appeal. Two weeks later the Clearing House Association, a consortium of the world's largest financial institutions, won the right to join that appeal. In court papers, the Clearing House said that it was seeking to protect "the substantial interests of its members in confidential information that they provided to the Federal Reserve." It suggested that if the information got out it would cause "serious competitive harm" to the banks in a "period of continued market fragility."

Even a layman understands the fundamental role that information plays in the economy. But what about secrecy? Does it have a place in high finance? The Clearing House and the Fed believe it does.

The Federal Reserve has wrapped itself in secrecy since the turn of the 20th century, when a select group of financiers met at the private Jekyll Island Club off the eastern coast of Georgia and, forgoing last names to preserve their anonymity among the staff, drafted legislation to create a central bank. Its secrecy, of course, persists today, with Ben S. Bernanke, the Federal Reserve chairman, refusing to tell even Congress which banks received government money under the bailout. There is also a heated battle to force the Fed to disclose its role in the controversial attempt to save the insurance giant American International Group.

In its appellate briefs, the Clearing House invoked this tradition of silence. It pointed out that the Federal Reserve Board does release information on its Web site about the total money it gives out, although not about loans to specific banks. Bloomberg News, it maintained, was trying to "upset the board's longstanding policy against disclosure."

"Since the Fed was created in 1913, its policy has been to keep information about individual bank borrowing confidential," Robert Giuffra Jr., the Clearing House's chief lawyer and a partner at Sullivan & Cromwell, said in a recent interview. "The Freedom of Information Act was created in 1966, which means that it and the Fed have coexisted amicably for 43 years. Now, suddenly, the press plaintiffs in this case want to overturn that balance. They're saying, 'Oh no, we have a right to information.'"

Mr. Giuffra argues that the open flow of information -- while ostensibly a virtue -- can, in fact, be dangerous. The Fed's discount window, which provides money on a short-term emergency basis, is a lender of last resort, as is its alphabet soup of special programs. If depositors or creditors were to find out that a bank had reached the point of needing last resorts, it might be compromised in public. And, as Mr. Giuffra notes in his court papers, "banking history is replete with examples of financial institutions failing when the public loses confidence."

Indeed, his papers can, at times, sound something like the highlight reel from a financial disaster film. They refer to no fewer than eight bank runs -- many large, some small -- in recent years, though only two had anything to do with central banks.

One of those institutions was a British bank, Northern Rock, which, he argues, suffered a run in 2007 when the BBC reported that it received emergency funds from the Bank of England. The other was Citibank, which in the 1990s had some runs at its branches in Asia after rumors that it had borrowed from the Fed’s discount window.

Bloomberg maintains that arguments like these are speculative and a form of fear-mongering; that depositors and creditors want -- and should get -- information about banks they are involved with; and that openness concerning the Fed and its lending actually increases the stability of markets. Thomas Golden, Bloomberg's lawyer, also pointed out that the Citibank debacle, for one, could be subtly turned around: given the same set of facts, he said, one could argue that when word got out that Citibank was taking money from the Fed, there were no runs at its American branches.

To bolster the case that transparency is not, as the news media would have it, an unfettered good, the Fed and the Clearing House filed affidavits from several Fed employees, each one testifying that banks face a "stigma" when their emergency borrowing habits are known. The Fed wrote that these affidavits, coming as they did from experts on the front lines, were themselves enough to prove its case.

Bloomberg's lawyers have said that this line of argument smacks vaguely of "father knows best."

One of the abiding oddities of the case is that, after 16 months of litigation, it may change precedent but have little effect on the situation that prompted it. In May 2008, when Mr. Pittman first requested the documents, information about who got money from the Fed (and if they got it despite less than stellar collateral) could have, as the saying goes, moved markets. Now, with the passage of time, that seems less likely.

In that respect, at least, the case has become a principled grudge match. The Clearing House has accused Bloomberg News of wanting the information in order to describe a pointless and divisive horse race between strong banks and weak banks, adding that the information itself, if given out by, say, a bank employee, would quickly bring the Federal Bureau of Investigation to his door. Bloomberg, in turn, has said that it wants the information because getting information is what the news media does, and has accused the Fed of dragging out the process so long that the documents will no longer be of interest.

The Fed, meanwhile, has worried that if the appeals court rules for Bloomberg, then savvy traders could quickly get their hands on such data in the future and use it to their advantage even as the government was trying to stabilize the markets.

In the midst of these competing accusations sits the three-judge panel from the 2nd Circuit, which peppered Mr. Giuffra and the Fed's lawyer, Matthew Collette, with difficult questions during oral arguments last month. It is notoriously hard to infer judges' leanings from the questions they ask, but even Mr. Giuffra acknowledged that the panel, which is not likely to rule for several weeks, seemed to take a dim view of some of his points. Among them was his argument that the information in the documents was not the releasable kind generated by the government -- in this case, by the Fed -- but was instead obtained from "a person," or the banks, and was therefore private and protected.

Whatever the results, Ms. Bennett and her investigative team have walked away from the experience with their tribal energies revitalized.

"You can't know how exciting and explosive it's been," she said. "This wasn't some plan where we said, 'We're going to file the FOIA, then we’re going to wait, then we'll check it and our ultimate goal is to sue the Fed.'

"It came up spontaneously. It's like what it was like 30 years ago. Back in the days when journalism was exciting -- really exciting."

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