Help Me! But Please Don't Tell Anyone

A number of large commercial banks have vowed to continue their legal fight against a major news organization today, promising to go as far as the Supreme Court to keep their business secrets. Last year Bloomberg News launched a freedom of information campaign to unseal documents at the Federal Reserve showing which banks received emergency lending from the Fed and how much they received during the recent financial crisis. However, the banks are fighting a campaign tooth and nail to prevent those internal Fed records from being made public. Meanwhile, the Fed is remaining non-committal to both sides.

This lawsuit raises a pair of very interesting issues for the banks and the Fed. First, since the Fed is supported by public funds, shouldn't the media be able to report to the taxpayers where their money went? And, secondly, would the publicity of receiving 'emergency' air stigmatize recipients during a time of crisis? Since there is no clear cut legal basis to determine the outcome of this case, these two questions will likely determine it's outcome.

First, the Federal Reserve is technically a public bank supported by the government. In as much, the funds which the Fed uses are an extension of the Federal government and thus belong to the taxpayers. Along the lines of this argument, the media outlets should be allowed to report how public money was lent to private companies. It is not like it was a loan from one private bank to another, this was taxpayer money being lent out. Additionally, this was the type of situation where the Freedom of Information Act was intended to be used - giving public clarity to behind the scenes transactions. Unfortunately, the writers of the bill never imagined such a situation and thus did not specify the Federal Reserve banks under its purview.

The next major issue arises as to whether public knowledge of an emergency loan would stigmatize recipients. One of the famous interactions during the original TARP bill was when Treasury Secretary Paulson made all of the major banks take the aid regardless of whether they individually needed it. This was done so that a bank taking the aid would not be identified as weak and thus subject to predatory competition. By releasing the Fed's records, a decision would effectively identify the weakest banks and prevent others from engaging in future emergency actions.

By virtue of an unclear law and a badgering news organization, a number of large banks have been backed into a corner. When emergency aid was doled out last year, no one imagined potential long term consequences. The current information request by Bloomberg to divulge how taxpayer money was lent to troubled banks is a clear example of these problems. The banks took the aid to protect the system. They were not thinking about a year down the road, but instead only the next day. Such thinking is fraught with holes and future problems.