RICHARD DREW
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.
Matthew Winkler, the editor-in-chief of Bloomberg News, remembers being between meetings when Ms. Bennett phoned him to deliver the news. "Terrific," he replied. Mr. Winkler had championed the case from the outset. But in Bloomberg's stepped-up metabolism, there was no time to celebrate. Minutes later he was back to the daily whirl, Mr. Winkler recalls, with 10 other things to do and headlines to rewrite.
In her opinion, the judge said the Fed hadn't shown that the release of the information would lead to immediate and substantial competitive damage to the borrowers involved. The court ordered the Fed to produce the records within five days and also search for more relevant documents at the Federal Reserve Board of New York.
Not only did the Fed appeal the decision, but it also received back-up. Clearing House Payments Co. LLC, which is owned by 20 major American and European banks, asked to participate in the case, arguing its interests were in play.
Rallying behind Bloomberg was a who's who of the media world, including The New York Times, Dow Jones & Co., Associated Press and Reuters. The idea that the Fed could lend out a sum that eventually reached into the trillions and not reveal who got it and under what conditions is "fundamentally offensive," says David Schulz, a lawyer who filed a brief on behalf of the news organizations.
But such secrecy serves an important purpose, argues the Fed and its supporters. Robert Giuffra Jr., a lawyer representing The Clearing House, says that because the Fed acts as a lender of last resort, there is a stigma attached to any bank that needs such loans. Releasing that information can have an "adverse and even life-threatening impact" on banks, he says.
In 2007, for instance, news that Northern Rock, a U.K. bank, had approached the Bank of England for emergency support sent its shares plunging and depositors rushing to withdraw their cash, hastening its demise.
While individuals and groups have sued the Fed seeking information in the past, in general, the courts have supported its right to keep the records private. Until last year, no judge had ever ordered that the Fed must disclose information about its loans through the discount window.
A federal appeals court heard the case in January. The panel was what lawyers call "a hot bench," says Mr. Glasser, meaning the judges peppered both sides with tough questions. The hearing sailed through the assigned time limits, taking almost two hours, rather than the typical half-hour.
The three judges had pointed questions for the Fed, particularly its argument that disclosure of the information would tar the banks involved. "I'm having a little trouble with it being a stigma outside of, basically, a day," one of the judges told Matthew Collette, a lawyer representing the Fed, according to Reuters.
The decision from the appeals court could come any day between now and April, the lawyers involved said. Other similar cases against the Fed will also hang in the balance, including one filed by Fox News and one by The New York Times. There's a fair chance that whoever loses would appeal, setting up a potential showdown in the Supreme Court.
At Bloomberg, editors said the case has always been about a bigger principle - "People have a right to know what's being done with their money," said Mr. Winkler - and not simply the particular information it requested, which is now nearly two years old.
Not so for Mr. Pittman. Like a true reporter, he just "wanted to know this stuff," Ms. Bennett says, rather than prove a broader point.
Now this case will be a tribute to him. Only 52, Mr. Pittman died unexpectedly last November, still trying to get to the bottom of things. When he left the office for the last time, his computer screens were filled with information about collateralized-debt obligations, one of the complex derivatives that rotted the financial system from the inside.