Federal Reserve Seeks to Block Release of U.S. Bailout Secrets

By Thom Weidlich and David Glovin

Jan. 12 (Bloomberg) -- The Federal Reserve asked a U.S. appeals court to block a ruling that for the first time would force the central bank to reveal secret identities of financial firms that might have collapsed without the largest government bailout in U.S. history.

The U.S. Court of Appeals in Manhattan will decide whether the Fed must release records of the unprecedented $2 trillion U.S. loan program launched primarily after the 2008 collapse of Lehman Brothers Holdings Inc. In August, a federal judge ordered that the information be released, responding to a request by Bloomberg LP, the parent of Bloomberg News.

“This case is about the identity of the borrower,” said Matthew Collette, a lawyer for the government, in oral arguments yesterday. “This is the equivalent of saying ‘I want all the loan applications that were submitted.’”

Bloomberg argued that the public has the right to know basic information about the “unprecedented and highly controversial use” of public money. Banks and the Fed warn that bailed-out lenders may be hurt if the documents are made public, causing a run or a sell-off by investors. Disclosure may hamstring the Fed’s ability to deal with another crisis, they also argued. The lower court agreed with Bloomberg.

‘Right to Know’

“The question is at what point does the government get so involved in the life of the institution that the public has a right to know?” said Charles Davis, executive director of the National Freedom of Information Coalition at the University of Missouri in Columbia. Davis isn’t involved in the lawsuit.

The ruling by the three-judge appeals panel may not come for months and is unlikely to be the final word. The loser may seek a rehearing or appeal to the full appeals court and eventually petition the U.S. Supreme Court, said Anne Weismann, chief lawyer for Citizens for Responsibility and Ethics, a Washington advocacy group that supports Bloomberg’s lawsuit.

New York-based Bloomberg, majority-owned by Mayor Michael Bloomberg, sued in November 2008 after the Fed refused to name the firms it lent to or disclose the amounts or assets used as collateral under its lending programs. Most were put in place in response to the deepest financial crisis since the Great Depression.

“Bloomberg has been trying for almost two years to break down a brick wall of secrecy in order to vindicate the public’s right to learn basic information,” Thomas Golden, an attorney for the company with Willkie Farr & Gallagher LLP, wrote in court filings. He said the Fed may be trying “to draw out the proceedings long enough so that the information Bloomberg seeks is no longer of interest.”

FOIA Case

The lawsuit, brought under the U.S. Freedom of Information Act, or FOIA, came as President Barack Obama criticized the previous administration’s handling of the $700 billion Troubled Asset Relief Program passed by Congress in October 2008. Obama has said funds were spent by the administration of former President George W. Bush with little accountability or transparency.

FOIA requires federal agencies to make government documents available to the press and public.

In arguments yesterday, Golden disputed the Fed’s contention that it doesn’t have to reveal the information because it hasn’t since its inception.

“The rules changed since 1913 with FOIA’s enactment,” he said.

Much of the debate centered on the potential harm to banks if it was revealed that they borrowed from the Fed’s so-called discount window. Collette, the government lawyer, said banks don’t do that unless they have liquidity problems.

Discount Window

Yvonne Mizusawa, a lawyer for the Fed, said that if banks stopped using the discount window because of a perceived stigma, it may affect the Fed’s ability to set monetary policy.

“This would make it much more difficult to control short- term interest rates,” Mizusawa said, citing an expert for the central bank. “The stigma results from the fact that the Federal Reserve is a backup source of liquidity.”

Golden denied that revealing the loan information will hurt banks. He said that the central bank and the Clearing House Association LLC, an industry-owned group that joined the Fed in its bid to overturn the lower court order, came up with only two examples of meltdown-related bank runs: Citigroup Inc.’s offices in Asia and Northern Rock in the U.K.

‘Wasn’t a Run’

“It’s interesting that there wasn’t a run in the U.S.,” he said. “The board has the burden at all times to prove that that competitive injury would result.”

During yesterday’s hearing, the appeals court judges asked about the “staleness” of the information Bloomberg seeks. Golden said the information would concern banks that got help from the Fed from about November 2007 to May 2008.

“This court has nothing in the record to say whether this information is stale now or not,” said Robert J. Giuffra Jr., a lawyer for the Clearing House at Sullivan & Cromwell LLP in New York. “Banks will not use the discount window if they know the information will be available in, say, 20 days.”

The Fed’s balance sheet debt doubled after lending standards were relaxed following Lehman’s failure on Sept. 15, 2008. That year, the Fed began extending credit directly to companies that weren’t banks for the first time since the 1930s. Total central bank lending exceeded $2 trillion for the first time on Nov. 6, 2008, reaching $2.14 trillion on Sept. 23, 2009.

Loan Records

In her Aug. 24 ruling, U.S. District Judge Loretta Preska in New York said loan records are covered by FOIA and rejected the Fed’s claim that their disclosure might harm banks and shareholders. An exception to the statute that protects trade secrets and privileged or confidential financial data didn’t apply because there’s no proof banks would suffer, she said.

In its appeal, the Board of Governors of the Federal Reserve System argued that disclosure of “highly sensitive” documents, including 231 pages of daily lending reports, threatens to stigmatize lenders and cause them “severe and irreparable competitive injury.”

Historically, the type of government documents sought in the case has been protected from public disclosure because they might reveal competitive trade secrets, Davis said. Laws governing such disclosures may be due for a change, he said, following the far-reaching U.S. bailout.

“If you are in need of a bailout and turn to the federal government and say, ‘help,’ with that comes some requirements in terms of transparency,” Davis said.

Joined in Bid

In court papers, New York-based Clearing House, which processes payments between banks, assailed the judge’s decision for what it said were legal errors, such as applying the wrong standard in weighing the exception to FOIA.

The group includes ABN Amro Bank NV, a unit of Royal Bank of Scotland Plc, Bank of America Corp., The Bank of New York Mellon Corp., Citigroup Inc., Deutsche Bank AG, HSBC Holdings Plc, JPMorgan Chase & Co., US Bancorp and Wells Fargo & Co.

More than a dozen other groups or companies filed amicus, or friend-of-the-court, briefs, including the American Society of News Editors and individual news organizations.

The judge postponed the application of her ruling to allow the appeals court to consider the case.

Also yesterday, the same appeals panel heard arguments in a lawsuit brought by News Corp. unit Fox News Network seeking similar documents. U.S. District Judge Alvin Hellerstein in New York sided with the Fed in that case and refused to order the agency to release the documents.

“The press is looking for facts so that the public can make informed decisions,” Steven Mintz, a lawyer for Fox at Mintz & Gold LLP in New York, told the panel.

Giuffra, the lawyer for the Clearing House, told the judges that he knows of no other central bank that discloses the information the media companies are seeking.

“Very few countries around the world have a Freedom of Information Act,” Dennis Jacobs, chief judge of the appeals court, responded.

The other two judges on the panel were Pierre Leval and Peter Hall.

The case is Bloomberg LP v. Board of Governors of the Federal Reserve System, 09-04083, U.S. Court of Appeals for the Second Circuit (New York).

To contact the reporters on this story: Thom Weidlich in the U.S. Court of Appeals for the Second Circuit in Manhattan at tweidlich@bloomberg.net; David Glovin in U.S. District Court for the Southern District of New York at dglovin@bloomberg.net.