The Information Age

We are constantly being told that the information age is

engulfing the world, but much of it seems to be bypassing the banking industry. Many of the inner workings of the industry are revealed only when the taxpayers are called on for billions of dollars to bail out failed institutions. Certainly that was true when the savings and loan industry collapsed in the 1980s.

Much of the mystery surrounding the banking industry stems from the fact that the reports of examinations of the institutions–and anything remotely connected to the reports–remain totally secret, shielding from public scrutiny the mistakes of the regulatory agencies and the misdeeds of the industry.

Ironically, the Freedom of Information Act (FOIA)–designed specifically to provide public access to government information–helps build a wall of secrecy around financial institutions. Before FOIA was adopted in 1965, bankers and their regulators rushed to the Congress to gain a special blanket exemption that shields the inner workings of the financial community from public view.

The exemption gives the agencies the authority to withhold from public scrutiny anything “contained in or related to examination, operating or condition reports prepared by, on behalf of, or for the use of any agency responsible for the regulation or supervision of financial institutions”. The regulators interpret the language broadly as almost absolute power to withhold information from the public.

With the exception of a reference to geological data, the bank-bank regulator exemption is the only industry-specific exemption in FOIA. It stands out as a monument to the lobbying power of the industry.

It is true, as the regulators argue, that examination reports and “related material” contain sensitive information. But, so does information in control of other agencies of government. To deal

with these situations, the Freedom of Information Act contains specific exemptions that apply across the board to protect such areas as trade secrets, law enforcement data, privacy, personnel matters. These and other exemptions give the regulators plenty of leeway in dealing with truly “sensitive” material on a case by case basis without declaring the examination report in its entirety a secret document to be locked away forever.

The rationale for a special bank exemption is thin at best. With a massive deposit insurance system backed by the U. S. Treasury and the American taxpayers and with the economy so dependent on a healthy banking system, it is clear that there are overriding public reasons for full disclosure on a regular ongoing basis.

The special bank exemption in FOIA prevents the necessary information from reaching the public until insurance funds have been lost–and even then information often remains too sketchy to allow the public to determine culpability or to goad a reluctant Congress into imposing the necessary remedial actions.

The public’s need to know in this area is not theoretical. Only seven years ago, the American public awoke to hear the President of the United States announce that the deposit insurance fund for savings and loans had collapsed and that it would take billions of dollars of tax funds to replenish the insurance program and clean up the debris of institutions that had failed.

For years prior to that announcement, the public (and much of the Congress) had been kept largely in the dark about the growing problems and the magnitude of the losses that would be charged to the taxpayers. By 1988, it was in the political interest of the Reagan Administration, its regulators and key members of the U.S. Congress to downplay and keep secret the real facts until after the Presidential and Congressional elections. It was a conspiracy of silence and misinformation carried out by both parties and official Washington while hundreds of “dead” institutions were left open, draining billions from the insurance fund.

It is doubtful that the game could have continued had the data, hidden in examination reports and related documents, been available to the public. The press was less than vigorous in covering regulatory agencies in the 1980s, but it is reasonable to assume that a handful of investigative reporters and public interest organizations would have blown the whistle years and tens of billions of dollars earlier had key data been readily available at the Federal Home Loan Bank Board.

The cost of secrecy is always high in a democracy in terms of both public confidence and public money. No where is this more true than in the arena of insured financial institutions and their regulators. It is way overdue to amend the Freedom of Information Act to delete the special and very taxpayer-costly bank secrecy privilege.