Bloomberg sued the Fed to force it to reveal the names of the banks that have dumped all their crap assets onto the Fed's balance sheet (a.k.a., the taxpayer).

And Bloomberg won!

But the Fed is still refusing to reveal which banks it has secretly bailed out. And the Fed is now appealing the ruling.

The Fed says its refusal to reveal the names is about "competition." Please.

Paul Kasriel of Northern Trust explains the real reason: The Fed is scared to death that the revelation will trigger another run on some banks.

On November 7, 2008, Bloomberg LP sued the Federal Reserve Board under terms of the

Freedom of Information Act to obtain the names of borrowers of funds from the Federal Reserve

as well as lists of the collateral posted by the borrowers. On August 25, 2009, a U.S. District

judge ruled in favor of Bloomberg, ordering the Federal Reserve Board to turn over to Bloomberg

the requested information within five days. At this writing, the Fed has yet to comply and has yet

made a decision to appeal the ruling. The Fed has been reluctant to reveal the names of its

borrowers allegedly out of a concern that such a revelation could have an adverse competitive

impact on the borrowers.



The reason I bring this up is that it is similar to a situation that arose in 1932 with the

Reconstruction Finance Corporation (RFC). The RFC was established by an act of Congress on

January 22, 1932, for the purpose of making loans to financial institutions, railroads and to extend

credit for crop loans. The Treasury provided some capital to the RFC and the RFC was permitted

to borrow from the Treasury. Initially, the RFC granted credit primarily to banks. These loans

coincided with a reduction in bank failures and currency held outside the banks declined.



On July 21, 1932, the RFC was authorized to make loans for self-liquidating public works

projects, and to states to provide relief and work relief to needy and unemployed people. This

legislation also required that the RFC report to Congress, on a monthly basis, the identity of all

new borrowers of RFC funds. On orders from the Speaker of the House of Representatives,

commencing in August 1932, the names of banks borrowing from the RFC became public

information. 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.



In mid February of 1933, a Detroit bank began having difficulties. The RFC was willing to lend to

this bank, but because of a dispute between one of the Michigan senators and Henry Ford, a large

depositor in the bank, the RFC loan was not allowed to be made. A bank panic started in

Michigan as a result. This Michigan bank panic served as a catalyst for a nationwide bank panic. The failure of the Detroit bank was not because the bank was reluctant to borrow from the RFC.

But one can only speculate as to whether other banks in Michigan and nationwide were reluctant

to borrow from the RFC because their names would have been published. And one can only

speculate that if these other banks had willing to borrow from the RFC if a nationwide bank could

have been averted.



Today, we have federal deposit insurance. Therefore, the probabilities and magnitude of depositor

runs on banks are much reduced compared with 1933. Yet, we can see “runs” by stockholders and

other creditors of banks if there is a suspicion of financial problems. 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.

You can read more Paul Kasriel here >