Wiki, Fed Data Show Fear of Disclosure Worse than Real Thing

So now we know: Citigroup Inc. went to emergency lending troughs 174 times over 2008 and 2009, and American diplomats in Rome observed a close relationship between the Russian and Italian heads of state.

Between data released by the Federal Reserve and diplomatic cables posted by WikiLeaks, it has been a big week for disclosures of information previously treated as closely guarded secrets.

And yet arguably the most damaging "information" to come out this week never materialized. Rather, in a twist combining the public's twin interests in complex financial institutions and shadowy Internet provocateurs, it was merely the threat of disclosure that helped wipe out $3.6 billion of Bank of America Corp.'s market capitalization on Tuesday, as rumors spread that the company is to be the target of an upcoming WikiLeaks exposé. By Thursday's market close, B of A had more than recovered the hit to its value.

When it comes to disclosure, could it be that the only thing banks have to fear is the fear of disclosure itself?

Christopher Bellini, a former Federal Reserve lawyer who co-chairs the financial institutions group at Gibson, Dunn & Crutcher LLP, worries that the latest experiments with transparency in banking will lead regulators and policy makers to exactly that conclusion.

"Just because this particular instance passed without any great disruption to the market doesn't mean [that transparency] doesn't create a risk in the future," said Bellini, who advises banks on investments, regulation, legislation and capital requirements.

He suspects that the details about borrowings in 2008 and 2009 failed to move markets because the information probably did not differ much from the suspicions most people had about what banks were doing at the height of the financial crisis.

But down the road, institutions that could very well use the funding available at the Fed's discount window might try harder to stay away, to avoid the stigma that might accompany disclosure of such borrowing. If that happens, Bellini said, then the demands for transparency might "make a future crisis more likely" by steering troubled banks away from facilities that otherwise might help them stave off more catastrophic liquidity crunches later on.

Of course those concerns, no matter how logical, still are centered more around the idea of disclosures than the impact of disclosures themselves. Banks can't really know yet how much weight to assign to the potential fallout from disclosure when deciding whether it makes sense to access funding from the Fed.

But they may learn soon enough. The Dodd-Frank Act requires the Federal Reserve to report the names of firms that have used emergency credit facilities, borrowed at the discount window or participated in the Fed's open market operations. The central bank also was instructed by Congress to disclose the amounts and terms involved.

"Everyone is going to have to get used to it," said Thomas Cooley, an economics professor at New York University's Stern School of Business.

Making this an easier pill for banks to swallow, long lag times were baked into the disclosure process required under the financial reform bill. For example, the Fed has one year after the termination of an emergency credit facility to report on the facility's usage, and two years to report on open market transactions. If the Fed doesn't officially run down the clock on a facility, then Congress considers the program terminated after 24 months of inactivity, which could add two years to the reporting lag.

Cooley credits the lag time for the market's indifference to the Fed's inaugural disclosure, which primarily focused on emergency facilities made available in 2008 and 2009 and did not detail usage of the discount window.

"It's hard for me to see where it is damaging to Goldman Sachs or Citi," Cooley said. But if their liquidity needs "had been known in real time, we would have been very nervous about it. That's the legitimate part of the fears about these disclosures being destabilizing."

Another common fear in the industry is that disclosures about the intricacies of banking will be misconstrued in the mainstream.

"The issue with transparency that I hear most often is that the public might misunderstand the data, or that generally the public isn't sophisticated enough to understand the real importance or real meaning of isolated bank transactions, such as borrowing with the Fed," said Robert Schwartz, a banking lawyer at Smith, Gambrell & Russell LLP in Atlanta.

Big banks, through their entrenched public relations machines, are famous for their efforts at controlling the flow of information from their firms. But bankers at small institutions also have long been proponents of keeping information close to the vest, a likely by-product of participating in an industry that gets regular reminders about how closely the threat of a deposit run looms. And smaller banks may have more experience handling unwelcome transparency.

"Community banks generally operate in a manner where everyone knows what's going on anyway," said Schwartz, who mainly represents smaller institutions. "I've been doing this for 35 years and I can't tell you why or how it works that way, but it just does. And it generally has no effect on the ability of the bank to operate in the community."

The main exception is when word spreads about impending receivership, Schwartz said. Then banks are in trouble. Schwartz also said the findings of bank examiners and ratings by regulators deserve to stay cloaked. "That's pretty sacrosanct," he said.

If sunlight were to hit enough areas of banking enough times without threatening bank safety and soundness, the industry might get more comfortable with the idea of transparency, just as the Fed did over the past decade as it began unveiling more about its reasoning for monetary policy. But industry support for more transparency will rest on a key assumption: that the information is treated fairly in the public sphere.

"I think the biggest concern is the potential for misunderstanding by the public," Schwartz said, "not the actual disclosures."