Taxpayers have a right to know

WSJ, SEPTEMBER 18, 2009

Transparency and the Fed

Taxpayers have a right to know where all the bailout money went.

By MATTHEW WINKLER

Facing a banking collapse that was unlike anything it had seen since the Great Depression, the Federal Reserve created $2 trillion of assets and debts during the past year to rescue the nation's financial institutions. But it did not make clear to taxpayers just where all of this money went. Taxpayers—involuntary investors in this case—have a right to know who received loans, in what amounts, for which collateral, and why specific loans were made.
The Fed says taxpayers don't have the right to know these things. What's more, it went to court to resist giving an accounting of its actions under the Freedom of Information Act. The request was filed by Bloomberg News through its parent, Bloomberg LP.
Last month, Chief U.S. District Judge Loretta A. Preska in Manhattan disagreed with the Fed. In a 47-page ruling, she found that the facts and the law require the central bank to release its lending records. The Fed is now considering whether to appeal her ruling.
The Fed says it can't give up the documents without stigmatizing banks and frightening customers into yanking their deposits. There is no evidence to support such an assertion, and recent events show that the opposite is true. When Citigroup Inc. in November received a government rescue package that shielded it from losses on toxic debt and injected $20 billion of capital, Citigroup shares soared 58% in New York trading. About the same time, E*Trade Financial Corp., the No. 4 online brokerage by client assets, surged 50% (the most in 12 years) after saying it was "optimistic" about receiving taxpayer funds under the government's Troubled Asset Relief Program.
Since its creation in 1913, the Fed has been the watchdog over our money. Now it is running interference for banks that borrowed our money, and went so far as to insist to a federal judge that the public shouldn't worry about what it does with our money.
The law doesn't allow the government to get away with secrecy based on a mere claim that some sort of damage would result if it released the information in question. To prevail, the Fed must "provide evidence that if the requested information is disclosed, competitive harm would be 'imminent,'" Judge Preska wrote. The Fed must show that competitors would use against a bank the fact that it received federal dollars—that running to the government trough for sustenance would become a competitive disadvantage.
That isn't an easy test, and with hundreds of billions poured into financial institutions, it shouldn't be. What's more, the Fed didn't come close to meeting this test. All it offered in court were sworn statements from Fed employees speculating that borrowers might be labeled as losers. They said nothing about how competing banks might use the information.
The issue at stake here is understanding the financial crisis and its aftermath. The information Bloomberg is seeking is vital to that, and it belongs to all Americans. Bloomberg isn't alone in saying so. Dow Jones, the New York Times, the Associated Press, Gannett Newspapers, Hearst, Advance Publications, and the Reporters Committee for Freedom of the Press have all expressed support for Bloomberg's efforts and may join a friend-of-the-court brief if the decision is appealed.
Any appeal would have to be mounted by Solicitor General Elena Kagan, who reports to President Barack Obama through Attorney General Eric Holder. While the decision is theirs to make, the buck still stops at 1600 Pennsylvania Avenue.
"Openness will strengthen our democracy and promote efficiency and effectiveness in government," Mr. Obama wrote in a letter to all agency and department heads on his second day as president. "Transparency promotes accountability" because "information maintained by the federal government is a national asset,'' he noted. "My administration is committed to creating an unprecedented level of openness in government.''
This is an opportunity for Mr. Obama to make good on his promise. If he forgoes an appeal, he will show that he means what he says about transparency. So far, there has been far too little accountability at the Fed for how it used taxpayer money to save banks that failed their shareholders and creditors by making bets that didn't pay off.

Mr. Winkler is editor in chief of Bloomberg News.
Printed in The Wall Street Journal, page A21