Fed to America: You Can't Handle the Truth
Many of you may remember way back to November 7th, when Bloomberg (the company, not the person) filed suit against the Federal Reserve under the Freedom of Information Act demanding details of the assets they are accepting as collateral under their various new lending programs. The Fed finally got around to responding. From Bloomberg:
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.”
“Notwithstanding calls for enhanced transparency, the Board must protect against the substantial, multiple harms that might result from disclosure,” Jennifer J. Johnson, the secretary for the Fed’s Board of Governors, said in a letter e-mailed to Bloomberg News.
“In its considered judgment and in view of current circumstances, it would be a dangerous step to release this otherwise confidential information,” she wrote.
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Colonel Jessup
For those of you following at home, let's summarize what happened here. The Fed has 11 lending programs, 8 of which were started in the past year and a half. Many of these programs accept a wide range of collateral, from treasuries to commercial real estate loans to collateralized mortgage obligations (CMOs) and collateralized debt obligations (CDOs). Many of the banks participating in these programs did so because the assets they were holding became toxic under the mark-to-market accounting (marking asset prices at the end of the day according to the going rate in the market), i.e. there was no liquid market for which the banks to sell them hence they became worthless (that is a gross oversimplification but demonstrates the point). Bloomberg's suit wants to find out the details on the quality of these debt products that the Fed is accepting as collateral, and for good reason; if they truly are worthless, or near worthless, then the Federal Reserve is just giving away money to prop up failing banks. The Fed responds by telling Bloomberg that they don't want to scare the American public, and that under Exemption 4 of the Freedom of Information Act they do not have to reveal "trade secrets and other confidential business information." There are only two reasons that come to mind why the Fed would not give up the details on these assets, A) the Fed doesn't even understand how to value them, or B) they truly are near worthless and they don't want riots in the streets.
“There has to be something they can tell the public because we have a right to know what they are doing,” said Lucy Dalglish, executive director of the Arlington, Virginia-based Reporters Committee for Freedom of the Press.
The scary part is there does not have to be something they can tell the public. The Fed is only a quasi-government agency. It was designated by, and accountable only to Congress, but acts in private in order to "keep politics out of monetary policy." It is owned, via stock (paying a 6% dividend), through its member banks. There are currently 865 member banks. So you tell me, when you run a company, are you responsible to the public, or your shareholders?
“I understand where they are coming from bureaucratically, but that means it’s all the more necessary for taxpayers to know what exactly is going on because of all the money that is being hurled at the banking system,” [Bruce] Johnson said [a lawyer at Davis Wright Tremaine LLP in Seattle].
“Americans don’t want to get blindsided anymore,” [Carlos] Mendez [a senior managing director at New York-based ICP Capital LLC] said in an interview. “They don’t want it sugarcoated or whitewashed. They want the complete truth. The truth is we can’t take all the pain right now.”
“It would really be a shame if we have to find this out 10 years from now after some really nasty class-action suit and our financial system has completely collapsed,” she [Lucy Dalglish, executive director of the Arlington, Virginia-based Reporters Committee for Freedom of the Press] said.
From the looks of it, that's exactly how we're going to find out. Let's see how it would play out in court:
Paulson: I'll answer the question. You want answers?Lt. Kaffee: I think I'm entitled to them.
Paulson: You want answers?!
Lt. Kaffee: I want the truth!
Paulson: You can't handle the truth! Son, we live in a world that has mortgages, and those mortgages have to be collateralized by men with PhDs. Who's gonna do it? You? You, Lieutenant Weinberg? I have a greater responsibility than you can possibly fathom. You weep for the foreclosed, and you curse Fannie and Freddie. You have that luxury. You have the luxury of not knowing what I know -- that those foreclosures, while tragic, probably saved the economy; and my existence, while grotesque and incomprehensible to you, saves the economy. You don't want the truth because deep down in places you don't talk about at parties, you want me creating these mortgage products -- you need me to create these mortgage products. We use words like "default rate," "prepayment," "tranche." We use these words as the backbone of a life spent analyzing numbers. You use them as a punch line. I have neither the time nor the inclination to explain myself to a man who rises and sleeps under the blanket of the very credit that I provide and then questions the manner in which I provide it. I would rather that you just said "thank you" and went on your way. Otherwise, I suggest you pick up a calculator and value the risk. Either way, I don't give a DAMN what you think you're entitled to!
Lt. Kaffee: Did you order the "bailout?"
Paulson: I did the job I was –
Lt. Kaffee: Did you order the “bailout”?
Paulson: You’re Goddamn right I did!!
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