In my previous post I mentioned the Fed’s TAF (Term Auction Facility) program that allows banks to borrow from the Fed anonymously. The comparable program for Primary Dealers (brokers) is the TSLF (Term Securities Lending Facility). The Fed has loaned over $2 trillion through this program. Bloomberg has tried to force the Fed to release the details of the program, including the identity of the borrowers, through the Freedom of Information Act. The Fed has refused:

Dec. 12 (Bloomberg) — The Federal Reserve refused a request by Bloomberg News to disclose the recipients of more than $2 trillion of emergency loans from U.S. taxpayers and the assets the central bank is accepting as collateral.

Bloomberg filed suit Nov. 7 under the U.S. Freedom of Information Act requesting details about the terms of 11 Fed lending programs, most created during the deepest financial crisis since the Great Depression.

The Fed responded Dec. 8, saying it’s allowed to withhold internal memos as well as information about trade secrets and commercial information. The institution confirmed that a records search found 231 pages of documents pertaining to some of the requests.

“If they told us what they held, we would know the potential losses that the government may take and that’s what they don’t want us to know,” said Carlos Mendez, a senior managing director at New York-based ICP Capital LLC, which oversees $22 billion in assets.

The Fed believes releasing the names of the recipients could cause problems:

In response to Bloomberg’s request, the Fed said the U.S. is facing “an unprecedented crisis” in which “loss in confidence in and between financial institutions can occur with lightning speed and devastating effects.”

I’ve got news for the Fed; there has already been a loss of confidence. There is a lack of confidence exactly because we don’t know who is borrowing from the Fed. That’s why traditionally borrowing directly from the Fed was accomplished through the discount window. It was transparent and everyone knew when a bank was in trouble.

Here’s another interesting tidbit in the information the Fed did release:

The Fed supplied copies of three e-mails in response to a request that it disclose the identities of those supplying data on collateral as well as their contracts.

While the senders and recipients of the messages were revealed, the contents were erased except for two phrases identifying a vendor as “IDC.” One of the e-mails’ subject lines refers to “Interactive Data — Auction Rate Security Advisory May 1, 2008.”

Is the Fed accepting Auction Rate Securities as collateral for the borrowing? If so, that is outrageous. Investors are stuck in these securities because the issuers refuse to redeem them. They were sold by brokers as cash equivalents to investors who now can’t sell them and access their cash. So, banks can create liquidity by borrowing from the Fed but investors are stuck. A number of firms have already settled with the NY AG and promised to pay back the investors over the next couple of years. Will they pay back the investors by borrowing from the Fed? Will taxpayers be stuck with these illiquid securities? Probably…

The banks involved are afraid that if their identity is released customers will leave and their stock might go down:

Banks oppose any release of information because that might signal weakness and spur short-selling or a run by depositors, Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, a Washington trade group, said in an interview last month.

The Fed was created and is owned by the member banks. They work for them, not us. If there was ever any doubt about that, this should clear it up.

Taxpayers deserve to know how and to whom their money has been lent. Taxpayers deserve to know the quality of the collateral that has been accepted in exchange. Depositors deserve to know the true condition of their bank. The Fed should release this information immediately.

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