A beam of sunlight for the bailout

From the Winter 2009 issue of The News Media & The Law, page 11.

“Follow the money.” The legendary words of Watergate source Deep Throat have inspired a host of stories since they were first uttered on screen.

But as the federal government becomes increasingly involved in the financial services industry in attempts to shore up the ailing economy, many groups — from journalists to watchdog non-profits — are having difficulty following anything.

The transparency initiatives from the Obama administration may make that process easier than it was when George Bush was in the White House, but a variety of records are still being withheld.

“There’s a whole range of information that the public, and for that matter Congress, needs in order to understand this process in order to ensure accountability,” said Patrice McDermott, director of OpenTheGovernment.org, which is part of a loose coalition of groups advocating broadly for transparency in the bailout. “Our push is to have better and more usable reporting done proactively by the agencies that are involved — including the Fed, which is the most opaque of them all.”

The Fed, or the Federal Reserve Board of Governors in Washington, regulates some banks and is crucial in implementing monetary policy. The Federal Reserve system encompasses 12 regional banks, among them the New York Federal Reserve Bank, which has been a major player in the bailout.

Watchdog groups and reporters are seeking several categories of information, explained John Irons, an economist at the Economic Policy Institute. Broadly put, they want data linked to several different government transactions as a means of gauging, in Irons’ words, “Are taxpayers getting a good deal with this?” or “Is this a handout to banks?”

What’s at stake

One sought-after category — encompassing details of the government’s transactions with the banks — was withheld by the Bush administration. But President Obama’s team released several contracts in late January. For at least the largest banks that received cash infusions from the government, such as Bank of America and Citigroup, the Treasury Department has now posted a variety of documents detailing such transactions. That paperwork includes data on what the government is getting for its money and how healthy the banks are.

Similarly, the Treasury Department has posted online its contracts with the automakers that received government assistance as part of the bailout. Treasury Secretary Tim Geithner in January announced a new government policy of posting on the Web investment contracts for new Troubled Assets Relief Program funds within five to 10 business days after the contracts are executed.

Yet, Treasury is allowing banks to redact some information from the documents — and those redactions aren’t uniformly applied: Some banks have withheld crucial capitalization amounts; others have withheld only office fax numbers.

The second type of documents other watchdog groups are after includes data the government is collecting from the banks. Irons said these documents are tied to the question, “What kind of information would we have to have in order to evaluate whether this thing is working?”

This would include information on how Treasury is tracking the value of its newly acquired assets, and whether it has done anything to protect against a loss.

“The thought is if we, the people, own a pretty big chunk of financial institutions, we ought to know more,” Irons said. For example, “What is the Fed looking at when they decide to give $1 billion to Bank of America?”

Bloomberg News and Fox News filed Freedom of Information Act requests for this type of information. When the government denied those requests, the news agencies sued.

Some saw the refusal to release the information as part of a culture that has long protected financial data.

There’s an “attitude at the Fed and at Treasury that some of these disclosures can be self-defeating,” Irons said. “The goal of the [TARP] program is to make banks more sound and secure, and there is a thought that if people actually knew what these banks’ balance sheets looked like, that would make them less sound and secure.”

Ordinarily that might be true, he said. But now so many parts of the financial system are afflicted by the overall downturn, that’s not likely to be the case.

Most often, government withholds the information it collects from a bank in order to prevent a run on it, and a drain of all of its deposits. But when all banks are somewhat unhealthy, the argument goes, a bank run is much less likely because there’s nowhere safer for depositors to go with their money.

Even if the banking regulators’ fears are overcome, though, it’s not clear how much of the collected information that journalists and watchdog groups want would even be considered public under FOIA, or if filing a request under the Act is in fact the best process for getting it.

“I think some of it will be able via FOIA, but I think there ought to be strings attached too,” Irons said, referring to the idea advocated early on by Obama that if banks accept government money, they should be required to make public disclosures about where that money is going.

“I think there’s a danger, which is you get a lot of FOIA requests and you get back answers saying you can read through financial statements, it’s already public, we’re not going to give it to you,” Irons said.

Bloomberg reporter Mark Pittman started asking for Federal Reserve loan documents in May when cracks were surfacing in the financial system, according to a complaint filed in federal court in New York.

The Federal Reserve Board, located in Washington, lends money to financial institutions in emergency situations. Until August 2007, the Fed did this largely through what is called the “discount window.” Those loans to banks were short term ones — typically overnight.

But then, according to the Bloomberg lawsuit, the Fed that summer abruptly started making loans for up to 90 days. It also added three new lending facilities for banks to use. Bloomberg’s complaint in the lawsuit explains that before the changes the Fed would have on average outstanding loans of $1 million. By October 2008, the Fed’s outstanding loans had reached, on average, $400 billion.

The changes prompted Pittman to file a FOIA request for the documents related to those short terms loans, including the collateral the banks had posted for the loans. The Fed never formally denied Pittman’s FOIA request, but a representative told him over the phone that it would.

Fellow Bloomberg reporter Craig Torres sought another set of documents last spring with a FOIA request for all paperwork “reflecting or concerning the portfolio of securities . . . supporting the loan extended by the Federal Reserve in connection with the proposed acquisition of Bear Sterns Co. by JP Morgan Chase & Co.”

The Fed denied that FOIA request for two different reasons, according to the court documents.

Many of the documents Torres requested are records of the Federal Reserve Bank of New York, not Washington, D.C.’s Federal Reserve Board. The 12 regional banks of the Federal Reserve system are not subject to FOIA because of a court decision holding that they don’t meet the law’s definition of “agency.” Only executive branch agencies are subject to FOIA.

But even if the documents were at the Fed in Washington, and subject to FOIA, the Fed has argued that they are protected by Exemptions 4 and 5, which cover confidential business data and information that would not be disclosed to a party in litigation against an agency. Those exemptions also protect the documents Pittman is seeking, according to the Fed.

Bloomberg rolled both sets of requests into its lawsuit.

Which exemptions apply?

Fox News is facing the same obstacles. It has filed FOIA suits in federal court in New York against the Fed and the Treasury Department seeking collateral information.

Steve Mintz is handling the suits for Fox. The data should be public because, he says, what Exemption 4 protects is “not really [the banks’] confidential information.”

Mintz said, “The actual collateral that’s posted — once it’s posted and given as security, it’s not their information.” Therefore, he says, it can be disclosed by the government.

Exemption 4 bars the release of information submitted to the government but treated as confidential by the person submitting the information. It is often used to protect trade secrets and other details crucial to a business’s profitable operation.

Fox also wants to find out more about the contracts between Treasury and bailed-out insurer AIG, and to get an un-redacted copy of the government’s contract with the Bank of New York Mellon detailing that bank’s management of parts of the TARP program. Treasury has posted a redacted version online, but has not disclosed the amount of money it is paying to the Bank of New York Mellon for its services.

But neither Fox nor Bloomberg has run into the problem many people assumed FOIA requesters in this area would: Exemption 8. That little-litigated, little-used exemption protects information in reports used by “an agency responsible for the regulation or supervision of financial institutions.”

It is possible Exemption 8 has not been an issue because much of what it protects is also considered confidential business information under Exemption 4. But even if the agencies were arguing that Exemption 8 protected the information, Mintz said he doesn’t think it applies in the news groups’ cases for the same reasons Exemption 4 doesn’t.

Ultimately though, when it comes to releasing details about the bailout and the documents Bloomberg and Fox want, Irons pointed out, “It might be still too early to say what the new administration is going to do with this.”

And while Mintz is concerned it will take too long to get the collateral information and the contract with the Bank of New York Mellon that Fox wants with a FOIA lawsuit, the new, self-proclaimed pro-transparency Obama administration could eventually release everything.

In September, as Congress was debating the initial bailout money, The New York Times reported that Obama had said on the campaign trail, “In return for their support, the American people must be assured that the deal reflects the basic principles of transparency, fairness, and reform.”

But a campaign’s proclaimed ideals may not hold up.

Another solution, McDermott and others groups have suggested, is simply that Congress require companies to agree to furnish the very information the watchdog groups want, as a condition of receiving TARP money.

Such a condition would avoid FOIA litigation and get the information out quickly. But what Congress will do is still unclear.