The Clearing House Association, a membership business league comprised of eleven of the largest financial institutions in the United States, is a party to the pending appeal in the United States Court of Appeals for the Second Circuit by the Board of Governors of the Federal Reserve System (the “Board”) in Board of Governors of the Federal Reserve System v. Bloomberg L.P., No. 09-4083 (2d Circuit, filed September 30, 2009) , which concerns whether the Freedom of Information Act (“FOIA”) requires the Board to disclose bank-by-bank and loan-by-loan information about borrowing by financial institutions with Federal Reserve Banks (“FRBs”). The Clearing House Association supports the Board’s position that FOIA Exemption 4 protects such competitively sensitive financial information from public disclosure. The Second Circuit held oral argument on January 11, 2010. The Association’s opening and reply memoranda in support of its appeal are available here and here.
The Fed Lending Programs. Through its Freedom of Information Act (“FOIA”) request, Bloomberg, the global news service, asked the Board to disclose bank-by-bank and loan-by-loan details about two kinds of lending programs: (1) the Discount Window, a permanent feature of the Federal Reserve System, that provides short-term loans to eligible banks; and (2) certain temporary special credit and liquidity facilities, created during the recent financial crisis to supply additional liquidity to “primary dealers,” i.e., designated banks and securities broker-dealers with which the Federal Reserve Bank of New York trades U.S. government and other securities (collectively, the “Fed Lending Programs”).
Bloomberg’s FOIA request was unprecedented because, since establishing the Discount Window program in 1914, the Board has not disclosed the identities of borrowing banks and details of their individual borrowings. That long-standing policy of borrower confidentiality reflects the Discount Window’s role as a source of “safety valve” liquidity for banks. Consequently, borrowing from the Discount Window can lead depositors, counterparties, and market participants to infer—perhaps erroneously in some cases—that a bank is experiencing a liquidity issue and react by withdrawing their funds from the bank or discontinuing to extend credit.
Bloomberg’s Lawsuit. The Board, in keeping with its longstanding policy of borrower confidentiality, declined to disclose to Bloomberg the identities of, and extent to which, institutions borrowed from the Fed Lending Programs. Bloomberg then filed an action in the United States District Court for the Southern District of New York to obtain documents responsive to its FOIA request.
In responding to Bloomberg’s lawsuit, the Board, in relevant part, relied on FOIA Exemption 4, which authorizes a government agency to withhold documents that contain “commercial or financial information obtained from a person and privileged or confidential.” 5 U.S.C. § 552(b)(4). The Board provided substantial evidence to the District Court, including the declarations of senior Board and Reserve Bank officials, showing that disclosure of bank-by-bank, loan-by-loan information about borrowing from the Fed Lending Programs likely would cause substantial competitive harm to borrowing institutions, because the public likely would interpret such borrowing as a sign of financial weakness. The Board further introduced evidence that, should such information become known, institutions would be deterred from accessing the Fed Lending Programs out of fear that depositors, counterparties and other market participants may stigmatize them as financially unsound.
The District Court ruled against the Board, prompting The Clearing House Association to intervene in order to participate in the Board’s appeal to the Second Circuit.
The Clearing House Association’s Position
On appeal, The Clearing House Association supported the Board’s historic policy of borrower confidentiality, which has coexisted with the FOIA for nearly 50 years. The Association explained that the Board already discloses a wealth of information about the Fed Lending Programs, such as aggregate lending data, and that the Board’s policy of individual borrower confidentiality was supported by decades of industry experience with the Discount Window. The Association further emphasized that the Board’s disclosures about the Fed Lending Programs are more extensive than similar disclosures by other central banks, and that any redesign of Board policy should come about through legislative action, whereby Congress could work with the Board and financial institutions to weigh the benefits and dangers of bank-by-bank, loan-by-loan disclosure of borrowing from the Fed Lending Programs and design a disclosure regime addressing those dangers.
Specifically, The Clearing House Association argued that the District Court committed three errors in ordering the Board to disclose bank-by-bank, loan-by-loan information about borrowing from the Fed Lending Programs: (1) the District Court improperly dismissed the Board’s evidence of the likelihood of competitive harm as “speculative” or “conjectural”; (2) the District Court failed to recognize the Board’s substantial interest in effectuating the purpose of its lending programs as an additional basis for non-disclosure; and (3) the District Court incorrectly held that the information sought by Bloomberg, except for borrower names, was not “obtained from” borrowing institutions.
Competitive Harm. The Clearing House Association argued that the Board had satisfied its burden to show that disclosure of bank-by-bank, loan-by-loan information likely would cause borrowing institutions substantial competitive harm. The Association cited: (i) the detailed declarations from experienced Board and Reserve Bank officials explaining the concept of borrower “stigma” and how that stigma likely would harm a borrowing institution; (ii) the harm to a bank in the early 1990s after rumors circulated that the bank had borrowed from the Discount Window; (iii) examples of banks paying very high rates in the private federal funds market to avoid the risk of such harm; and (iv) the example of British bank Northern Rock plc, which suffered the first bank run in the United Kingdom since Victorian times after the BBC reported that it had obtained emergency support from the Bank of England. The Clearing House Association also presented six other examples of major financial institutions, such as Bear Stearns and Washington Mutual, that failed or nearly failed due to rumors or reports of their financial weakness.
The Clearing House Association further explained that the Second Circuit was not positioned to determine categorically whether the information at issue was commercially “stale,” as Bloomberg claimed, simply because of the passage of time between the Board’s denial of Bloomberg’s FOIA request and the time that the appeal was heard. The District Court did not address “staleness” below, and there was nothing in the record before the Second Circuit on the “staleness” of the requested information. Indeed, Bloomberg sought records reflecting borrowings by banks large and small, strong and weak; as a result, the determination of “staleness” inevitably would vary from bank to bank, from loan to loan.
Program Effectiveness. The Clearing House Association also urged the Second Circuit to recognize, as an additional basis for non-disclosure, the government’s interest in effectuating the purposes of its lending programs. That interest would be impaired if the Board were forced to breach its longstanding policy of borrower confidentiality. If financial institutions perceived a risk that their identities and details of their individual borrowings would be publicly disclosed, those institutions would be discouraged from using the Fed Lending Programs, thereby frustrating the programs’ objective of injecting liquidity into the financial system. Moreover, if borrowing institutions perceived such a risk, such institutions might not make use of an important source of backstop financing, potentially forcing them to pay higher rates in the private federal-funds market or to conduct fire sales of assets to obtain needed liquidity.
Source of Information. Finally, The Clearing House Association argued that the information at issue was, in fact, obtained from borrowing institutions. Specifically, The Association explained that it was the borrowing institutions that asked for a particular loan amount, whether directly or through auction (subject to an overall auction maximum set by the Board). The Association further explained that it was the borrowers that determined the origination dates of their loans, either by asking for loans on a particular date or by choosing the date on which they participated in auctions for loans.
Conclusion. In sum, The Clearing House Association believes that disclosure of the identities of, and extent to which, financial institutions borrowed from the Fed Lending Programs likely would cause such institutions substantial competitive harm, and would impair the effectiveness of the Fed Lending Programs. Accordingly, The Association urged the Second Circuit to reverse the District Court’s ruling and hold that the Board had properly invoked Exemption 4 to deny Bloomberg’s unprecedented request for bank-by-bank, loan-by-loan information about borrowing from the Fed Lending Programs during the recent financial market crisis.