Monday, September 14, 2009

Fixing what you can't see 

Last month I wrote about and interviewed my colleague Vern McKinley on a FOIA lawsuit he has with the Federal Reserve and FDIC over its decisions in using emergency powers to generate a large amount of funds for the bailout of AIG, Bear Stearns, etc. We have a major newspaper running a story this weekend that Lehman had to die so the others may live; it would be nice to know if such rational thought ran through the process, did they just muddle through, or what?

The Wall Street Journal, at least, has taken notice.

Last December, Mr. McKinley sent a FOIA request to the Fed to find out what Fed governors meant when they said a Bear Stearns failure would cause a "contagion." This term was used in the publicly-released minutes of the Fed meeting at which the central bank discussed plans by the Federal Reserve Bank of New York to finance Bear's sale to J.P. Morgan Chase. The minutes contained only the vague warning of doom, without any detail on how exactly the fall of Bear would destroy America. Mr. McKinley's request sought the supporting documents for this conclusion.

He also requested minutes of the autumn FDIC board meeting at which regulators approved financing for a Citigroup takeover of Wachovia. To provide this assistance, the board had to invoke the "systemic risk" exception in the Federal Deposit Insurance Act, and therefore had to assert that such assistance was necessary for the health of the financial system. Yet days later, Wachovia cut a better deal to sell itself to Wells Fargo, instead of Citi. So how necessary was the FDIC's offer of assistance?

After Mr. McKinley sued the agency this summer, the FDIC coughed up a previously undisclosed staff memo to the FDIC board. Again, the agency redacted the substance, providing roughly two pages of text from the nine-page original. The section of the memo titled "Systemic Risk" was entirely erased. As for the Fed, it blew off Mr. McKinely's initial request and has since responded mainly with some highly uninformative letters from the Fed staff to Congress.

Vern's documents are all published at Scribd. The feds, of course, would like to get a judge to simply throw out these cases, but Judicial Watch is currently on this case.

Many of FDIC's actions are relatively routine. Its closure over this weekend of $7 billion Corus Bank of Chicago, however, contains a "private placement" of $4 billion of Corus assets. How private is this? Who is the purchaser, and how many bids are there? One would think this is public information. Researchers like Vern are simply interested in writing the history of this unique moment in international finance.

The WSJ concludes:
A public debate on which banks really needed a bailout via the government's AIG conduit has hardly taken place. And did all of Bear Stearns' creditors, including hedge funds, need to be made whole to ensure the survival of American capitalism?

A year after the epic meltdown, this is the debate Congress needs to undertake before legislating any new federal authority. Regulators should not receive a blank check to prevent systemic risk without even defining what that term means.

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