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, the owner of this magazine, 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 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. Publicizing 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.
For the Fed, keeping information from investors is nothing new. Congress last year had to pry loose the details of $3.3 trillion worth of crisis-fighting programs that relied on the central bank’s vault. In the late 1990s, the Fed successfully resisted the SEC’s attempt to require banks to stop using hidden funds, or “cookie jar reserves,” to smooth quarterly earnings, says Turner.
Today’s Fed is undeniably more open. Until 1994 the central bank didn’t even publicly disclose when it changed the benchmark lending rate, leaving the market to figure that out for itself. Former Fed Chairman Alan Greenspan cultivated an image as an oracle who delighted in obscuring rather than explaining. Today, interest rate changes are announced in public statements after the policy making Federal Open Market Committee meets. Presidents of regional Fed banks give dueling public speeches on monetary policy. Bernanke has even taken “60 Minutes” on a tour of his Dillon, South Carolina, hometown. The chairman’s plans for quarterly press briefings beginning April 27 mark a further evolution in the Fed’s public outreach.
With its profile higher than ever, demands for greater accountability will only continue. William Greider, author of the 1989 Fed history “Secrets of the Temple,” says the bank is losing the battle to maintain its mystique. “What has happened in the last three years is the mask has been torn away from the central bank,” he says. “And they can’t put it back on.”
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Excel Breakdown Of All Discount Window Users Between March 2008 - 2009: (.ods) (.xls)