Federal Reserve locks vault on bailout records

From the Fall 2009 issue of The News Media & The Law, page 15.

A federal appeals court will decide how transparent last year’s unprecedented taxpayer-funded bailout will be when it considers whether two media companies are entitled to obtain financial records that identify which companies received emergency funds from the government.

Bloomberg L.P. and Fox News Network brought nearly identical cases against the Federal Reserve Board that resulted in vastly different decisions from two judges sitting in the U.S. District Court in Manhattan. One ordered release of the records while the other shielded them from public view.

“Transparency — especially with the bailouts — is essential to good governance,” said Craig Jennings, a senior analyst at the nonprofit government transparency group OMB Watch. “Without understanding how the funds are being used it becomes impossible to judge the value of the bailout policy.”

Three news organizations filed Freedom of Information Act lawsuits in 2008 after the board — and in one suit the U.S. Department of the Treasury — denied or ignored their requests.

Bloomberg and Fox both asked for records relating to the board’s $2 trillion emergency lending program, including the name of companies that received funds, the terms and rates of the loans offered and the collateral that was posted. The New York Times sued the board and the treasury after both ignored requests for the appointment books, calendars, phone logs and correspondence of Federal Reserve Chairman Ben Bernanke and former Treasury Secretary Henry Paulson. That suit has not yet been decided by the district court.

Fox lost its suit in July and appealed to the U.S. Court of Appeals in New York City (2nd Cir.) on Sept. 9. Bloomberg won its FOIA suit in late August and the board appealed on Sept. 30. It is unclear whether the two cases will be consolidated.

What is an Agency?

Both cases hinge on whether records held at regional Federal Reserve Banks are subject to FOIA requests directed at the board. Congress oversees the entire Federal Reserve System, which is made up of the board — a federal agency located in Washington, D.C. — and 12 regional banks that operate as private corporations, receive private funding, possess distinct powers from those of the board and do not publish any FOIA regulations.

The subject of both the Bloomberg and Fox News suits was the Fed’s Discount Window lending program, which is regulated by the board.

In the Bloomberg case, Judge Loretta Preska rejected the board’s argument that the records sought were not board records because they were housed at the Federal Reserve Bank of New York. The board contended that because the bank is not an agency, its records are not subject to FOIA and maintained it was only obligated to search its own internal records and not those of the bank. Preska noted that if a record is kept in the board’s official file at any of the Fed’s regional banks — and the secretary of the board is the official custodian of that record — then it qualifies as an agency record of the board, regardless of the subject matter, and must be searched to comply with FOIA requests.

In a courtroom just down the hall, however, Judge Alvin K. Hellerstein found in the Fox case that the board was only obligated to search the records it physically possessed, not those of the regional banks.

“It may be, as Fox argues, that no [Federal Reserve Bank] has a FOIA office to which FOIA requests may be submitted, that the only FOIA office for the Federal Reserve System is in the Board, and if Fox cannot obtain documents from the Board, it will be deprived of obtaining any meaningful documents enabling a public accounting of the Board’s Discount Window loan program,” Hellerstein wrote in his decision. “Whether or not this is so, it does not alter the fact that Fox served its requests only upon the Board and that the definition of a Board record is limited by statute.”

Ultimately, neither judge wanted to answer the larger question of whether the regional Federal Reserve Banks are or are not themselves agencies, said Steven Mintz, an attorney for Fox News.

What is the harm?

Also at issue in both cases was FOIA’s Exemption 4, which protects trade secrets and commercial or financial information from disclosure if the material is privileged or confidential. Hellerstein and Preska again issued contradicting rulings on whether the exemption applied here.

In both cases, the board argued that even if the records housed at regional banks were agency records, it could refuse to hand them over under Exemption 4 because the records constituted confidential financial information that, if disclosed, would cause substantial competitive harm to borrowers and essentially destroy confidence in the banks, resulting in their collapse.

Evaluating that argument, Preska ruled that the board failed to establish imminent competitive harm and that negative information isn’t necessarily confidential. “[T]he risk of looking weak to competitors and shareholders is an inherent risk of market participation; information tending to increase that risk does not make the information privileged or confidential under Exemption 4,” Preska wrote.

But Hellerstein seemed to take the board’s argument as proof of imminent competitive harm, noting that “the Board’s concern is real that disclosure would reveal proprietary trading information of borrowers, their trading strategies and the size and nature of their portfolios of assets.”

In reaching this conclusion, Hellerstein relied heavily on affidavits from board employees describing how borrowers might draw adverse inferences about the companies that participated in emergency-lending programs. Preska, however, rejected the same argument holding that “conjecture, without evidence of imminent harm, simply fails to meet the Board’s burden of showing that Exemption 4 applies.”

“The burden an agency has under the exemption to show clear and convincing poof of likelihood of harm is not easily met,” said Charles Glasser, Bloomberg’s attorney. “Judge Hellerstein just assumed the Fed’s burden.”

Mintz thought a better barometer to judge whether substantial harm would occur was the Fed’s voluntary May 7 release of bank stress tests under its Supervisory Capital Assessment Program. Though the disclosure revealed that 19 of the largest banks would have to raise $100 billion to even be considered financially sound, there were no runs on those banks.

Resolving the split

Though Bloomberg won its suit, release of the records was stayed pending appeal. In September, Preska also granted a motion from the Clearing House Association — the nation’s oldest banking association that represents Bank of America, Citigroup, J.P. Morgan Chase and Wells Fargo, among others — to intervene on behalf of the board because it claimed members relied on the promise of confidentiality when participating in the emergency lending programs.

The fact that the Clearing House only intervened after the Fed lost is telling, some legal analysts say, given that the court will not consider new evidence now that the case has reached the appeals level. The Clearing House declined to comment on the matter.

Transparency advocates say the question of whether the board is exempt from disclosing lending records would be best answered by Congress.

“FOIA is created by Congress, which created 9 exemptions. If they want to create another one, they can,” Mintz said. “Congress also passed The Federal Reserve Act, and if you turn through all those boring pages, nothing creates secrecy.”

Critics say the push for secrecy from the Federal Reserve System contrasts sharply with President Obama’s campaign promises for increased government transparency.

“It’s disappointing . . . if the issue is transparency, then we have difficulty understanding what motivates anyone seeking transparency, advocating transparency, [into] descending secrecy and opacity,” said Bloomberg’s Editor-in-Chief Matthew Winkler during an interview. “Americans have the right to know how they became involuntary investors in this unprecedented bailout.”