Everybody loves a good secret.
[img]663|left|||no_popup[/img]Our appetite for rumor and gossip is apparently insatiable. This explains the enduring popularity of TV shows like Access Hollywood and TMZ.
Without secrets, Americans would have little to discuss at the water cooler.
Getting the scoop on secrets sells the news. Behind every Pulitzer is a secret revealed.
The Downside of Transparency
Now Bloomberg LP, the financial news service whose majority is owned by New York Mayor Michael Bloomberg, is suing the Federal Reserve to reveal the identities of the banks that benefited from its emergency lending programs. A federal judge in Manhattan has ruled in favor of Bloomberg and given the quasi-private central bank until Monday to comply.
This is a bad ruling, and an even worse idea.
As a general rule, transparency is good, especially transparency in government. But there are times when the demand for transparency can do more harm than good.
The relationship between regulators and the regulated in the banking industry is predicated on the notion of complete access and full disclosure in exchange for confidentiality. Without this reciprocal relationship, regulators would be hobbled in their ability to oversee and aid critical financial institutions.
Rumors, particularly with banks, can cause customers to start pulling out their deposits, even if their funds are insured. History has shown that a run on one bank can lead to an industry-wide panic. Repeated bank runs from 1929 through 1933 deepened the Great Depression that left our financial system in a shambles.
Despite the record number of bank failures since the beginning of 2009, the Federal Deposit Insurance Corporation (FDIC) has operated quietly and effectively to protect depositors’ funds. Secrecy has been one of its most important weapons.
When the FDIC determines that a specific bank is in danger of imminent failure, it swoops without warning. Within days, the FDIC team protects the depositors by securing the assets and bringing in a more solvent institution to take over operations. If the FDIC were compelled to reveal the identity of each bank it targets, it would be unable to do its job with such efficiency.
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Banks subject themselves to Fed oversight in exchange for access to the government's lending capabilities, which have been robust during the credit crunch. This is not a relationship that should be stifled. By the same measure, releasing more confidential information about the 52 banks closed by the FDIC so far this year would not have saved them.
The issue in banking is not transparency but adequate oversight.
Headlines vs. the Law
Bloomberg should not be faulted for its zeal. Such is the purpose of the Fourth Estate.
Bloomberg is only responding to the appetite of its readers.
With the economy in crisis because of intemperate banking practices, public interest groups have been attacking the Fed for not providing more information on banks with lax lending standards or poor financial outlooks. In response to this pressure, Congress has convened numerous subcommittees to investigate the secrecy surrounding the Fed’s regulatory practices.
This makes for great headlines but lousy law.
Congress should focus its attention on making improvements to the existing structure of banking oversight instead of undermining the parts of the system that provide the Fed with valuable economic data needed to manage the economy. A good place to start would be to increase the training and retention of seasoned examiners to spot problem areas before they erupt into financial catastrophes.
Transparency in government is essential. But sometimes our need to know is outweighed by the need to ensure our own well-being.
This may be one of those rare instances where keeping a secret actually is beneficial to the greater good.
John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com
