Bloomberg sued the Fed to force it to reveal the names of the banks that have dumped all their crap assets onto the Fed’s balance sheet (a.k.a., the taxpayer).
And Bloomberg won!
But the Fed is still refusing to reveal which banks it has secretly bailed out. And the Fed is now appealing the ruling.
The Fed says its refusal to reveal the names is about “competition.” Please.
Paul Kasriel of Northern Trust explains the real reason: The Fed is scared to death that the revelation will trigger another run on some banks.
On November 7, 2008, Bloomberg LP sued the Federal Reserve Board under terms of the
Freedom of Information Act to obtain the names of borrowers of funds from the Federal Reserve
as well as lists of the collateral posted by the borrowers. On August 25, 2009, a U.S. District
judge ruled in favour of Bloomberg, ordering the Federal Reserve Board to turn over to Bloomberg
the requested information within five days. At this writing, the Fed has yet to comply and has yet
made a decision to appeal the ruling. The Fed has been reluctant to reveal the names of its
borrowers allegedly out of a concern that such a revelation could have an adverse competitive
impact on the borrowers.
The reason I bring this up is that it is similar to a situation that arose in 1932 with the
Reconstruction Finance Corporation (RFC). The RFC was established by an act of Congress on
January 22, 1932, for the purpose of making loans to financial institutions, railroads and to extend
credit for crop loans. The Treasury provided some capital to the RFC and the RFC was permitted
to borrow from the Treasury. Initially, the RFC granted credit primarily to banks. These loans
coincided with a reduction in bank failures and currency held outside the banks declined.
On July 21, 1932, the RFC was authorised to make loans for self-liquidating public works
projects, and to states to provide relief and work relief to needy and unemployed people. This
legislation also required that the RFC report to Congress, on a monthly basis, the identity of all
new borrowers of RFC funds. On orders from the Speaker of the House of Representatives,
commencing in August 1932, the names of banks borrowing from the RFC became public
information. This publication of the names of banks borrowing from the RFC discouraged current
borrowers from continuing their borrowing and prospective borrowers from commencing
borrowings out of a fear that depositors would judge this borrowing as a sign of financial
weakness. By November 1932, the outstanding amount of RFC loans to banks had decreased.
In mid February of 1933, a Detroit bank began having difficulties. The RFC was willing to lend to
this bank, but because of a dispute between one of the Michigan senators and Henry Ford, a large
depositor in the bank, the RFC loan was not allowed to be made. A bank panic started in
Michigan as a result. This Michigan bank panic served as a catalyst for a nationwide bank panic. The failure of the Detroit bank was not because the bank was reluctant to borrow from the RFC.
But one can only speculate as to whether other banks in Michigan and nationwide were reluctant
to borrow from the RFC because their names would have been published. And one can only
speculate that if these other banks had willing to borrow from the RFC if a nationwide bank could
have been averted.
Today, we have federal deposit insurance. Therefore, the probabilities and magnitude of depositor
runs on banks are much reduced compared with 1933. Yet, we can see “runs” by stockholders and
other creditors of banks if there is a suspicion of financial problems. If the Fed is required to publish the names of financial institutions to which it has extended credit and this publication
induces financial institutions to refrain from borrowing from the Fed, one can only speculate if
this would be the tinder for another liquidity conflagration in the coming months.
You can read more Paul Kasriel here >
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.