Guest Post: Fed Transparency Watch

Sometimes guest blogger Lune sent us a piece on a post by Willem Buiter, “Stigma, Schmigma,” that I had included in Links last night. I had been tempted to comment on it, but events intervened, and Lune independently took up the mission.

From Lune:

Willem Buiter does a great takedown of the Fed’s policy of not disclosing the banks it has lent to nor the assets it has bought.

As noted in a previous blog entry, Bloomberg News has filed suit against the Fed to force it to disclose the transactions it has undertaken through its various lending programs. While the details of statutory authority and application of the Freedom of Information Act to a private entity such as the Fed (more specifically the Federal Reserve Bank of NY) will have to be hashed out in court, Buiter analyzes the policy reasons behind the Fed’s secrecy and finds them wanting:

The argument is that to reveal that a bank has chosen to use (or been compelled to use) the lending facilities of the central bank, would cause this bank to be perceived as less creditworthy than before (and than it would have been if its use of central bank facilities had not been revealed). As a result, the bank becomes a less attractive counterparty in private financial transactions. It becomes more costly and more difficult, perhaps impossible, for that bank to fund itself privately. Using the loan facilities of the central bank could therefore, paradoxically, lead to the funding situation of the bank being worse than it would have been had it not borrowed from the central bank.

Buiter argues that there are three possible outcomes from Fed disclosure:

Banks aren’t stigmatized. No problem here.

Banks are stigmatized, but it’s a legitimite stigma (i.e. people do have reason to be concerned about its credit worthiness). Again, no problem, because if the Fed’s lending facilities do their job, the banks should become sound again, or else the banks should be folded up. That is the purpose of the Fed’s program right?

Banks are stigmatized, but this stigma is undeserved. Not a problem, because if it’s undeserved, then the banks have enough capital to continue to function. If “stigma” can force a “sound” bank to fail, then it’s not really sound in the first place.

In the second part, Buiter argues that the real cause of a bank’s “stigma” is not the revelation of its transactions with the Fed, but the lack of revelation of the rest of its transactions. This inability to accurately evaluate a bank’s balance sheet means that the market is unable to determine good credit risks from poor ones, and must use imperfect secondary information (such as borrowing from the Fed) to try to make a guess. Thus, stigma is caused by asymmetric information in general rather than because of Fed transactions. And thus, the answer to stigma is more disclosure, not less.

His final conclusions are worth considering as well:

In my view, the true reasons for the unwillingness of the central banks to make public the identities of the banks using their liquidity or lending facilities have nothing to do with stigma. For the banks, commercial confidentiality is an overriding concern. They see the revelation of the identities of banks borrowing from the central bank as the thin end of the wedge towards more onerous reporting and audit obligations. Even if shareholders might be interested, management and captive boards would not be, as it would dilute their discretion to manage the bank for their own purposes.

There are wider political externalities associated with accepting ‘stigma’ as an argument for hiding relevant information about the use of public resources. It would create a dangerous precedent as regards accountability for the use of public resources in other areas than liquidity support by the central bank. I am sure many other beneficiaries of state’s financial largesse would prefer to have their names kept out of the papers. They should not be granted this wish. Accountability for the use of public funds is well worth a bit of stigma.

For the central banks, the refusal to reveal the identities of the borrowers is partly just the manifestation in this particular setting of a long-standing central bank obsession with secrecy and confidentiality. This goes back to the period of central bankers as performers in quasi-religious mysteries, with central banks as their temples. Significant remnants of this ethic can still be found on the European continent and in the US – less so in the UK.

Many central banks are also far too close to the banks they deal with – they have been the objects of cognitive regulatory capture or other forms of regulatory capture. As a result they tend to act as advocates or lobbyists for the banking sector rather than as supervisors, regulators and sources of scarce public funds that have to be properly accounted for.

In addition, revealing the identities of the borrowing banks is likely to be seen by the central banks as part of a political drive towards greater accountability by the central banks for their use of public resources – as asset managers or indeed as portfolio managers. Central banks rightly fear that the pursuit of their traditional objectives – price stability (or price stability and full employment) and financial stability – could be impaired by too close a scrutiny of their performance as managers of ever larger and ever more risky portfolios of public and private securities. Well, welcome to the 21st century world of central banking.

This is all there is. You break it, you own it, even if you broke it in a worthy cause.

Buiter is right to note the dangerous precedent the Fed is setting. After all, the bailout of the auto makers has been debated in full view of the public, including congressional hearings where the CEOs themselves had to testify as to the health of their companies and their plans for the future. The automakers could easily argue that such open disclosure of their ill health has led to adverse effects (anyone seen the discount on GM’s commercial paper lately?). In the future, why should any industry be forced to endure such “stigma” if the banks are protected?

Print Friendly, PDF & Email


  1. mxq

    RE: auto bailout…congress needs to “urge” cvx, bp, shell, xom et al to “invest” some of their collective ~$100bn cash horde in a “recapitalization” effort of the auto industry.

    Saving these clowns makes me wretch as much as anybody else, but maybe we can minimize the pain by, at the very least, forcing the crack dealers take care of their junkies.

    And heck, both industries spend millions on gushy commercials about how green they are becoming…why not actually follow through with this hollow promise this time…for once?

  2. alexblack

    Why should the Fed allow the banks to have such secrecy? For the same reason police hang sheets in front of bad car wrecks. Saves passersby from a traumatic visual experience.

    And the cop telling everyone to, “Move along. Nothing to see here,” also keeps saying, “FDIC insured. FDIC insured….”

  3. PghMike

    It seems to me that another aspect of the secrecy may be that the Fed doesn’t want to show what poor quality assets it is accepting as collateral, especially in things like the Citibank deal, where they don’t even pretend the quality is AAA.

    But even in those cases where they claim to be accepting only AAA-rated securities, by now we know that there are many ways to get a AAA rating, and some of them are simply jokes.

  4. Independent Accountant

    I don’t understand what’s going on. All SEC registrants must file 10-Qs. If the transactions involved are material, they must be disclosed. Period. If not, sue the bastards. For the matter, if the Fed is attempting to squelch disclosure, it can be sued as an “issuer” under the securities laws. Worse, the Fed could be indicted for aiding and abetting securities fraud. The Fed’s position makes no sense. AIG’s recent 10-Q disclosed its $63 billion liabiltity to the Fed.

  5. YK

    “…If “stigma” can force a “sound” bank to fail, then it’s not really sound in the first place…”

    I thought, the entire point of worrying about “stigma” was that “stigma”, in fact, CAN force a sound bank to fail.

    Maybe someone can clarify which of the above is true.

  6. Anonymous

    It’s that elusive number that they are trying to hide. You know the number that represents all the bad investments in the world. Expose that number and we will be shown to be insolvent as a nation.

    As long as the Federal Reserve gets to keep the Treasury’s books, we’ll never know the true number. Congress certainly doesn’t want to know.

  7. Independent Accountant

    I read Buiter’s piece and agree with his regulatory capture argument and have made it myself. As to his audit and reporting requirements, I can’t buy it. I think what the Fed is doing is trying to conceal, not any “stigma” of the bank borrowers, but that the Fed is insolvent and would have to be shut down by Sheila Blair if it were a commercial bank.

  8. ndk

    I think what the Fed is doing is trying to conceal, not any “stigma” of the bank borrowers, but that the Fed is insolvent and would have to be shut down by Sheila Blair if it were a commercial bank.

    I can’t agree with you, but only because Sheila Bair doesn’t actually shut down insolvent banks. Otherwise, spot on, as these Englishmen might say.

  9. M.G.

    Buiter underlines that “Significant remnants of this ethic can still be found on the European continent and in the US – less so in the UK”. I am interested in transparency in the European continent and would like to know more about highly levered European banks and their exposures to US derivative markets. Could the ECB shed some lights?

  10. River

    I have read a lot if verbiage regarding the suit: Bloomberg vs Fed. What I have not read is Why Did Bloomberg Decide To File Suit?

    I understand that it would be great if Bloomberg forced transparency. Question is, is transparency the motivation behind the suit or is there some other, or an additional, rational?

  11. fresno dan

    Certainly agree that there is no good arguement for secrecy. But as a gubermint weenie, it is par for the course. The truth is painful, and there is little benefit to speaking it – we are going to be significantly poorer. Its easy to say that everybody else getting a 20% haircut will be what happens, but damn, I really don’t want to give up my mocha latte grande.

  12. Lune

    That’s been the argument, that stigma can force a sound bank to fail, but Buiter doesn’t buy it (and neither do I). The argument is that “stigma” i.e. unfounded concern about a bank’s solvency can hinder banks from raising additional capital through the private market (since investors are prone to stay away from stigmatized banks). Thus, a bank taking some money from the govt can actually worsen their financial situation because they lose far more private money than they gain from the govt.

    The problem with this argument is twofold. First, if the stigma really is unfounded, then the bank should have enough capital reserves to weather a 6 month stain on its reputation. If it doesn’t have that much in reserve, then it really isn’t sound and the stigma is deserved. It’s sort of like the argument with the AAA rating. If you really need that AAA rating to raise enough capital to stay alive for the next 6 months, and can’t tolerate a downgrade, then you really aren’t AAA.

    Secondly, if the point of all this Fed bailout money is to make unsound banks sound, then banks should be advertising the fact that they got bailed out since that implies that whatever the case may have been prior, they have been made whole by the govt and are now sound, giving private investors the confidence to start investing again. That’s the whole ostensible point of all these lending facilities. Otherwise, we’re just throwing away $700 bil without actually increasing the stability of the banking system.

    So in the end, either stigmatized banks really aren’t sound, and deserve the stigma, or the Fed’s programs are useless at improving the soundness of banks. Neither conclusion provides justification for not disclosing the deals that have been made so far.

  13. M.G.

    “The GAO’s discouraging report makes clear that the Treasury Department’s implementation of the (rescue plan) is insufficiently transparent and is not accountable to American taxpayers,” said House Speaker Nancy Pelosi, D-Calif.
    Transparency and accountability

  14. Anonymous

    It’s a dog and pony show all the way.

    Congress votes for TARP and then tries to ridicule it at the same time.

    You can rest assured that the Federal Reserve can’t go broke due to the printing press available to them. Unfortunately, inflation leading to hyper-inflation will be the results of these bank bailouts.

    Just give it some time to appear.

  15. S

    Excellent post.

    And for all those cheering the Geithner nomination i suggest winding back the Senate hearings on bear Stearns and watching the exchange over disclosure of the cusips of the securities. I belive it was geithner who said they would disclose the Cusips. Never happened of course. Also it was the NY Fed that just hired the former head of the BS risk management. Indeed it owuld be interesting to see hiom asked about this at the confirm hearings but i am sure this is a minor detail compared to the AIG and every other facility the Fed has instituted.

    Welcome to the promise land.

Comments are closed.