The Federal Reserve has asked a U.S. appeals court to block a ruling that for the first time would force the central bank to reveal the 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 lending programs that were instituted or expanded to help banks survive the longest recession since the Great Depression. 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 Monday. "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.
"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 is not 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.
Bloomberg, of New York, 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 financial crisis.
The lawsuit, brought under the U.S. Freedom of Information Act, or FOIA, came as President 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 transparency.
During the arguments, Thomas Golden, an attorney representing the company, disputed the Fed's contention that it does not have to reveal the information because it has not 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.
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. "The stigma results from the fact that the Federal Reserve is a backup source of liquidity."
During Monday'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 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 Clearing House Association LLC, an industry-owned group that joined the Fed in its bid to overturn the lower court order. "Banks will not use the discount window if they know the information will be available in, say, 20 days."