Stephen Foley: A step back for financial stability

Sunday 23 October 2011 05:46
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US Outlook: If the US deserved three cheers for the financial reforms it voted into law in July, I'm afraid we have to give at least one of the cheers back, because we are about to lose an important support for financial stability here.

Wall Street has watched with alarm as the US courts ordered the Federal Reserve to publish details of which banks borrowed money through its emergency lending facilities during the financial crisis. Bloomberg and Fox News have been pursuing the names under the Freedom of Information Act (FOIA) to which the Fed previously thought it had an exemption.

This week, the Fed asked for a stay of the order so it can consider one last appeal to the Supreme Court. Let's hope it keeps fighting. As it has argued, the rulings to date could force it to disclose details of any bank coming to its so-called "discount window", where it disburses funds to solvent banks facing a short-term liquidity problem.

There are loopholes in the FOIA to protect trade secrets and confidential financial data, but in the first ruling last year, a New York judge said the exemption didn't apply because there was no proof banks would suffer. That is an opinion very difficult to square with the fact that, in the febrile atmosphere of 2007 and 2008, even a rumour that a bank was accessing emergency funds was enough to send the shares plunging, or worse. Anyone remember Northern Rock?

The Fed has been told that if it wants an exemption to the FOIA, it will have to ask Congress to legislate one. But it just took all the Fed's lobbying power to prevent its foes in Congress – libertarians who oppose the very existence of a central bank – from introducing an annual audit of all its activities, something that would have politicised monetary policy. The chances of politicians voting for "Fed secrecy" are about nil.

The bar for FOIA exemptions should be set very high indeed. But if there is one lesson from recent events, it is that a crisis for one bank can quickly become a crisis for all. The Fed was created to stem panics. It looks like it is about to get much harder for it to do so.

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