For most of its 98-year history, the Federal Reserve has operated with all the transparency and enthusiasm for change of the Vatican. Now the ultra-secretive Fed is starting to change its ways, if somewhat grudgingly. Some of the new openness, such as Chairman Ben S Bernanke’s plan for quarterly press briefings, is the central bank’s idea. Much of it comes under duress.
Today, the Fed is set to disclose which banks borrowed from its discount window during the darkest moments of the 2008-09 financial crisis. This unprecedented view of the emergency loans the Fed extended to hundreds of banks is the result of a March 21 Supreme Court decision that left intact lower court rulings ordering disclosure in lawsuits filed by Bloomberg LP, parent of Bloomberg News, and News Corp’s Fox News Network. Still, the Fed won’t disclose the collateral it accepted, which would reveal the risks it took. Future discount window borrowings will be made public, though only after a two-year delay, thanks to the new Dodd-Frank financial reform law.
Given the prominent role the world’s biggest banks played in causing financial losses worldwide, largely because of what investors didn’t know or didn’t understand, some say the loans should be made public at once, Bloomberg Businessweek reports in its April 4 issue. Only then, the reasoning goes, would investors and counterparties of a Fed borrower be able to manage their own risks. “The free-market system only works if it’s fully informed,” says Lynn E Turner, who battled the Fed over disclosure issues while serving as the Securities and Exchange Commission’s (SEC’s) chief accountant from 1998 to 2001. “There’s a lot of similarity between the Fed and an SUV with blacked-out windows.”
The Fed says such calls threaten its core function: preserving market confidence by acting as a lender of last resort. Publicising the names of discount-window borrowers could spark bank runs or discourage sick banks from seeking help until they are fatally compromised. “The full monty may not be a good thing,” says Frederic Mishkin, a former Fed governor.
