The Fed Audit's Been Defanged, But Big Banks Face a Tsunami of Emergency-Loan Disclosure

Last Updated May 11, 2010 10:47 AM EDT

Yes, the Federal Reserve won a victory last week when last-minute political wrangling killed a plan (first championed by celeb Libertarian Ron Paul, R-Texas) that would have let Congress audit the central bank's decision making on interest rates.

But as part of the compromise to keep those monetary policy dealings private, the Fed will have to agree to spill details about loans it made during the financial crisis. It will have to disclose who took how much, and when. It will name names, like Bank of America (BAC), Wells Fargo (WFC), JPMorgan Chase (JPM), Citibank (C) and other banks that presumably accepted the Fed's $2 trillion in low/no interest loans when the crisis broke out in 2008.

Such revelations could administer an ugly black eye to banks in a few ways. One, if the record shows that the Fed propped up banks that would have failed, it won't exactly register as a vote of confidence in those institutions' share prices. Two, it will reopen an examination of potential favoritism surrounding why some banks received (Goldman Sachs) while others went without (Lehman Brothers). Most powerfully, though, it will set the tone for how this all plays out in future bailouts.

Paul Saltzman, general counsel of the Clearing House Association, a lobbying group for the 20 largest banks in the U.S., said that releasing real-time disclosures of discount window lending activity could cause a run on the banks.
The Fed doesn't go that far, but it is clearly running scared. On Monday, it formally asked the U.S. Court of Appeals in NY to reconsider a March decision requiring the Fed to name the banks that might have collapsed without the emergency bailout money (the decision stems from a Freedom of Information Act lawsuit filed against the Fed by Bloomberg LP). If the court says no, the next stop for the Fed is: the Supreme Court.

In the brief it filed to the court, the Fed says that revealing the identities of the banks that took the emergency lending facilities "will dramatically reduce the effectiveness of those facilities. ... Borrowers will be deterred by the stigma associated with the use of these facilities and will avoid using them.''

And that's a bad thing?