Fed Must Produce Documents on Securities Relating to Its Lending Programs; FOIA Exemptions Not Available

Rejecting claims of FOIA exemption privileges, a federal judge has ordered the Federal Reserve Board to produce documents about the Federal Reserve System’s extraordinary actions taken in early 2008 during one of the worst financial crisis in the nation’s history. The information, requested by two financial reporters, involves securities posted as collateral to, among other things, the Primary Dealer Credit Facility, the discount window, and the Term Securities Lending Facility, as well as documents on the portfolio securities, listed on a security by security basis, supporting the loan extended by the Fed in connection with the proposed acquisition of Bear Stearns by JP Morgan Chase.

The Board refused the request, citing FOIA Exemptions 4 and 5. The Fed also said that documents located at the NY Fed are not records of the Board under FOIA, and even if they were, would be covered by Exemptions 4 and 5. Bloomberg LP v. Board of Governors of the Federal Reserve System, SD NY, 08 Civ. 9595 (LAP), Aug 24, 2009.

The court first held that, if a record of the Fed is kept in the Board’s official file at the NY Fed, the Secretary of the Board is its official custodian, regardless of its subject matter, and it thus qualifies as a Board agency record. The court concluded that the Board had not conducted an adequate search of its agency records because it did not search any NY Fed records. The Fed improperly withheld agency records in response to a FOIA request by conducting an inadequate search.

FOIA Exemption 4 was not available since the documents were neither obtained from a person nor privileged or confidential. The court rejected the Board’s argument that the NY Fed obtained the information from the borrowers, who were people for FOIA purposes. Rather, the court found that the only information the Fed could have obtained from the borrowers was their names. The FRBs generated all the other information from internal data regarding their lending programs.

Further, the Board did not show that the information was privileged or confidential since the Board was unable to prove that disclosure of the information would cause substantial harm to the competitive positions of the borrowers.

Rejecting the Fed’s argument that borrowers might be stigmatized by disclosure of the fact that they had used the lending programs, the court reasoned that the risk of looking weak to competitors and shareholders is an inherent market risk and information tending to increase that risk does not make the information privileged or confidential under FOIA Exemption 4. Accepting the Board’s argument, said the court, would sweep within the scope of Exemption 4 all information about borrowers that anyone thought the entire marketplace might consider negative. Exemption 4 cannot withstand such inflation, said the court.

Also, Fed speculation that a borrower might enter a downward spiral of financial instability triggered by disclosure of its participation in the lending programs, without evidence of imminent harm, did not show immediate risk of competitive harm.

Exemption 5 protects inter-agency or intra-agency memos or letters that would not be available by law to a party other than an agency in litigation with the agency. Here, the documents consist of aggregate information about participants in the lending programs. They are not guidance or directives. They are historic data. Exemption 5 does not apply because the Board has not shown that they would be available by law to a party other than an agency in litigation with another agency.

The Supreme Court has said that FOMC policy directives to a senior manger at the NY Fed may well fall within the scope of Exemption 5. But the court said that the Supreme Court did not intend to create a sweeping new privilege for any sensitive information the release of which would significantly harm the government’s monetary function or commercial interests.

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