Commentaries

The FDIC plays hide the ball too

The Federal Reserve is fighting hard to keep details about the $2 trillion in emergency loans it has made during the financial crisis from seeing the light of day. And now it seems the Federal Deposit Insurance Corp. also has started playing the game of keeping secrets from the public.

The American Banker earlier this week reported that the FDIC is holding back on disclosing information about failed bids for troubled banks the government agency has taken over. The industry newspaper reports the FDIC is delaying the processing of Freedom of Information Act requests seeking such information, while the agency reviews its disclosure policy.

The FDIC announcement is disturbing because it comes at a time that the FDIC has been forced to close banks at a brisk clip and just put in place a plan for allowing private equity firms to bid on bank assets. (Full disclosure: my wife used to be an editor for the American Banker).

The FDIC’s position on releasing information about failed bids is not as sweeping as the Fed’s opposition to a Bloomberg News lawsuit seeking access to information about the $2 trillion in emergency loans. But as The Audit, a Columbia Journalism Review blog, point outs, the FDIC’s stance is another move towards “creeping government secrecy.”

Of all the financial regulators, I’ve been the most supportive of FDIC Chair Sheila Bair. I’ve praised her for not being afraid to take positions that offend the nation’s bankers. But on this issue of disclosure, Bair is doing a disservice not only to her reputation, but the public’s right to know.

Naming banks

A federal judge’s ruling that the Federal Reserve must disclose information about the $2 trillion in emergency loans it made during the financial crisis has been hailed by a number of commentators, including Matthew Goldstein, as a significant victory for transparency and accountability.

But Paul Kasriel, the economist with Northern Trust, wonders if this week’s court decision is a disturbing repeat of a legislative action during the Depression that helped spark bank runs.

The Reconstruction Finance Corp. was established Congress in 1932 to make loans, chiefly to financial institutions. An act passed in July of that year required the RFC to make monthly reports on its loans to Congress and the President. Milton Friedman and Anna Jacobson Schwartz in their 1963 classic, “A Monetary History of the United States, 1867 to 1960,” noted that Democrats pushed for disclosure of the loans as a safeguard against favoritism, and the House Speaker in August ordered that the information be made public. Kasriel explains what happened next:

This publication of the names of banks borrowing from the RFC discouraged current borrowers from continuing their borrowing and prospective borrowers from commencing borrowings out of a fear that depositors would judge this borrowing as a sign of financial weakness. By November 1932, the outstanding amount of RFC loans to banks had decreased

The historical parallel to the ruling in a lawsuit brought by Bloomberg is clear to Kasriel:

If the Fed is required to publish the names of financial institutions to which it has extended credit and this publication induces financial institutions to refrain from borrowing from the Fed, one can only speculate if this would be the tinder for another liquidity conflagration in the coming months.

This is an interesting echo, but his concern is not entirely convincing. There is a big difference, as Kasriel acknowledges, between 1932, before the New Deal and deposit insurance, and today, when the huge scale of federal intervention in the financial system is a given. And his concern is one that the judge did not find sufficiently compelling.

The big Fed news

A federal judge’s ruling that the mighty Federal Reserve must release information about some $2 trillion in “emergency” loans made during the financial crisis is a big blow to the central bank’s self-styled image as an impenetrable shrine.

US District Judge Loretta Preska should be applauded for not taking the Fed’s bait that to release information about the banks and financial institutions that received those loans would imperil the financial system. Preska rightfully concludes that the Fed’s fear is based on mere speculation and “conjecture.”

A big tip of the hat also goes to Bloomberg News for pursuing this lawsuit, after the Fed denied the media outlet’s Freedom of Information Act request seeking the loan information. Thanks to Bloomberg, the public’s right to know all the ins-and-outs of the federal government’s effort to bailout the banks has been preserved.

Of course, I fully expect the Fed to appeal this decision. So I don’t expect these loan documents to be released anytime soon. And that’s a shame because throughout the financial crisis the Fed has shown it is tone deaf when it comes to the issue of accountablity and public disclosure.

Remember, the Fed fought against releasing the names of the banks that got an indirect bailout from the federal government’s rescue of American International Group. And the Fed has been less then forthcoming in providing information about the $30 billion in ailing assets it took on from Bear Stearns as part of the forced sale of the failing investment bank to JPMorgan Chase.

The Fed’s arrogance only has emboldened its critics and given ammunition to those on Capitol Hill who oppose the Obama administration’s plan to turn the Fed into some sort of uber-regulator.

Now that President Obama has rewarded Fed Chairman Bernanke with a new term (subject to Congressional approval), maybe the nation’s top money-man will move to breakdown the Fed’s historic wall of silence.

Goldman should disclose more

Goldman Sachs doesn’t report second-quarter earnings until Tuesday, but some Wall Street analysts aren’t waiting to sing the giant investment firm’s praises.

What’s impressing the analysts the most is Goldman’s ability to again print money like no one else — especially when it comes to trading stocks, bonds, commodities and currencies. Bank of America analyst Guy Moszkowski sounded almost giddy the other day in predicting blowout trading revenues for Goldman, describing the firm as “arguably the most well-respected investment bank.” Moszkowski now expects net trading revenues to top the record $25 billion raked in by Goldman in 2007.

It makes one fear that analysts will again start prefacing their questions during the firm’s scheduled conference call with comments like “Great quarter, guys.”

Please don’t.

Before everyone starts crowning Goldman the king of trading, is it too much to ask that analysts ask more probing questions of the firm’s executives? Investors deserve more disclosure about where all those dollars are coming from.

A question or two about how much of the trading revenues was related to client trades versus proprietary trades for the firm’s own account would be a good place to start. Don’t let Goldman executives get away with the firm’s standard answer about how most of its risk-taking is for clients, without ever quantifying that risk.

Now given Goldman’s general animus to the notion of fuller disclosure, I wouldn’t expect its executives to say much if pressed by analysts. So it probably will require the power of the Federal Reserve — Goldman’s new overseer — to lean on the investment bank to force it to provide more detail about the firm’s trading prowess.

Goldman’s derivatives puzzle

Earlier today I posted an item saying that Goldman Sachs is hard as ever to figure out, based on the kind of information (or lack thereof) that it publishes about its operations.  I focused on a little-known Goldman real estate management company called Archon Group.

And now comes derivatives guru Janet Tavakoli with a nice followup, noting that Goldman offers few details in regulatory filings about its derviatives business, despite having some big exposure to those often complex investment contracts.

In a note to clients, Tavakoli notes that Goldman now ranks as the US bank with the fourth greatest notional value of derivatives at $30 trillion. But using an Office of the Comptroller of the Currency formula, she says Goldman has a far higher total credit exposure to capital ratio than JPMorgan Chase, Bank of America or Citigroup–the three banks with higher notional exposure.

And Goldman’s potential exposure isn’t just a little bit larger than its peers–it’s way, way larger. The OCC ratio for Goldman is 1,056, compared to smaller ratios of 179 for BofA, 278 for Citi and 382 for JPMorgan.

Tavakoli is not sure why there’s such a big discrepancy and says some of Goldman’s exposure could be offset with “collateral calls,” such as the kind the bank famously had with AIG. It doesn’t appear the OCC takes collateral calls into consideration in formulating its ratio. But guess what? Goldman provides little information in its regulatory filings to determine just how hedged, or limited its exposure to derivatives really is.

Says Tavakoli: “Goldman’s reporting on derviatives is very light, however. Goldman Sach’s 10K provides only a brief discussion of interest rate swaps used with variable interest entities and qualified special purpose entities.”

Maybe Goldman should start paying the lawyers who prepare its regulatory by the word. If that were to happen, maybe we’d start getting some fuller disclosure on all these important issues.

Goldman still puzzles

Investing in Goldman Sachs still requires a leap of faith in the investment firm’s ability to out-trade, out-wit and out-muscle everyone else on Wall Street.

Sure, the bulls will say that with fewer competitors and with the Federal Reserve keeping bank borrowing costs near zero, Goldman’s traders should be able to print money. But here’s the thing: The post-federal bailout version of Goldman is as much of an investing riddle as the pre-crisis Goldman that many critics called a giant hedge fund or an inscrutable black box.

Even after becoming a bank holding company last fall, Goldman still doesn’t make it easy for investors to get their arms around all the firm’s many moving pieces. Trying to get a clear picture of how Goldman makes all that money and where the risks to its profitability may be lurking is like embarking on a treasure hunt with a ripped map.

Here’s an example. Go to the section of Goldman’s most recent 10-K where there is a list of the firm’s “significant subsidiaries.” There you’ll find the names of some 115 companies and where each was incorporated.

That may sound like a lot, but that figure just scratches the surface. In all, Goldman has more than 800 subsidiaries operating around the globe. But Goldman never discloses the identities of the vast majority of those subsidiaries anywhere in its annual report.

Now technically, Goldman, which declined to comment, doesn’t have to disclose information about so-called insignificant subsidiaries. Securities and Exchange Commission regulations, relying on a complicated formula, only require companies to disclose the identities of subsidiaries that account for a “significant” percentage of a company’s income. But not all financial firms play it so close to the vest. Morgan Stanley, for instance, lists the names of every single one of its 1,300 subsidiaries in its 10-K. The list is so long it takes up 26 pages.

Actually, there is a place to find a more detailed list of all of Goldman’s subsidiaries and that’s in the regulatory filings for its small insurance firm, Commonwealth Annuity and Life Insurance Company.

Who is the Fed accountable to?

It’s pretty clear the Federal Reserve is going to emerge as the big winner in the Obama administration’s proposed overhaul of the financial regulatory system. But any grant of new powers to the Fed must come with legislation requiring greater accountabilty from the nation’s central banker.

Now this is not meant to knock the job the Fed has done in the current financial crisis.  In many respects, Fed Chairman Ben Bernanke should be applauded for showing a willingness to improvise and come up  with creative solutions for trying to limit the damage to the banking system and the economy. But throughout the crisis, Benanke &  Co. have shown an utter disdain for transparency and full disclosure.

A good illustration of this is the contracts the NY Fed signed last fall with investment advisor Blackrock to manage the distressed assets the Fed acquired from AIG, the hobbled insurance giant.  The contract between the NY Fed and Blackrock for managing the CDOs that AIG insured and the Fed took off the banks’ hands is 37 pages. But a good number of those pages are blank–some 13 page to be exact.

And what is spelled out on these blank pages? Oh, just a few minor details like the fees paid to Blackrock, the firm’s potential CDO conflicts and the firm’s key personnel managing the assets. To be clear, this information isn’t totally secret. All this information has been disclosed to the NY Fed. It’s just that Fed officials have seen fit to keep this information secret from the public.

But if you’re counting on this veil of secrecy to be lifted by the Obama administration when it unveils its regulatory overhaul plan on Wednesday—think again. The architect of the financial regulatory overhaul is Treasury Secretary Tim Geithner, who just happened to head the NY Fed when these contracts with Blackrock were signed.

As I pointed out last week, Geithner hasn’t shown much interest in the need for government transparency in his new job. Treasury, in agreeing to let 10 banks repay money to the TARP, couldn’t even name the list of financial institutions.

Financial regulatory overhaul won’t mean much unless the general public and investors get more information about the inner workings of the financial institutions the government is seeking to better control. And the new regulations won’t inspire much confidence, if the public doesn’t feel the regulators are also being held to account.