A federal appeals court on Monday appeared skeptical of U.S. Federal Reserve efforts to prevent the press and the public from learning the names of participants in emergency lending programs designed to support and bail out the financial system.
The central bank has argued that disclosure would cause "competitive and reputational harm" to participants, perhaps triggering bank runs, and impede its ability "to effectively manage the current, and any future, financial crisis."
Bloomberg News and News Corp.'s Fox News Network LLC had sought details of the Fed's actions under the federal Freedom of Information Act, or FOIA, which requires government agencies to make documents available to the public.
A release of data could give the public, including bank shareholders, a better sense of how the Fed was moving to prop up the financial system during what is widely considered the worst financial crisis since the Great Depression.
In a nearly two hour oral argument, a panel of the U.S. Second Circuit Court of Appeals in Manhattan questioned the Fed argument that if potential participants knew they might be named, they might choose not to borrow rather than face a possible "stigma" for seeming to be in trouble.
This, the Fed had argued, could harm the broader financial system.
"I'm having a little trouble with it being a stigma outside of, basically, a day," Circuit Judge Peter Hall told Matthew Collette, a lawyer representing the Fed.
"You're talking of a crisis of a moment, or maybe a few days, or a week," Chief Judge Dennis Jacobs added.
Collette said that if banks were dissuaded from borrowing out of fear their names would be disclosed, it could harm their businesses and force them into unwanted activities, perhaps including fire sales of assets or firings of employees.
"The stigma is very real," Collette said. "This is a problem in which there will be an assumption, potentially, that this bank is in trouble."
Bloomberg brought its case to force the Fed to release records of actions it took to shore up the financial system starting in late 2007, including the March 2008 sale of Bear Stearns Cos. to JPMorgan Chase & Co.
Emergency lending programs have more than doubled the Fed's balance sheet to am amount in excess of $2.2 trillion, especially following the Sept. 15, 2008, collapse of Lehman Brothers Holdings Inc.
FOIA "breeds confidence in our public institutions, which quite frankly is something that is sorely needed right now," said Thomas Golden, a lawyer for Bloomberg.
Bloomberg had won its case in Manhattan district court in August. Chief District Judge Loretta Preska ruled that the Fed failed to show that disclosing names could lead to a "downward spiral of financial instability."
Fox News, in contrast, lost its case in the same court the prior month. Judge Alvin Hellerstein said "the national economy is not so out of danger, and the frailty of banks so different now ... as to make the board's concern academic."
An appeals court panel typically takes several weeks or months to rule. Its ruling may be appealed to the full court or to the U.S. Supreme Court.
The Clearing House Association LLC, an industry-owned group of banks, supported the Fed's position.
This group includes the ABN Amro Bank NV unit of Royal Bank of Scotland Group PLC, Bank of America Corp., Bank of New York Mellon Corp., Citigroup Inc., Deutsche Bank AG, HSBC Holdings PLC, JPMorgan Chase & Co., UBS AG, US Bancorp and Wells Fargo & Co.
"The press would like a blanket rule and change nearly 100 years of central banking policy in this country," said Robert Giuffra, a lawyer for the Clearing House. "The problem is, you can't set a blanket rule." He urged the court to step back and leave it to Congress to set disclosure rules.
The Bloomberg case is Bloomberg LP v. Board of Governors of the Federal Reserve System et al, U.S. Second Circuit Court of Appeals, No. 09-4083. The Fox News case in the same court is Fox News Network LLC v. Board of Governors of the Federal Reserve System et al, No. 09-3795.
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