SAN DIEGO — For all the unease about the 2,300-page Dodd-Frank Wall Street Reform and Consumer Protection Act, with its hopes to defer to experts the hard decisions, there is one unambiguously good provision tucked away in its depths, where no one is looking – its anti-stigma provision. This is a measure designed to protect the power of the Federal Reserve Board to serve as lender of last resort in panics. I aim to explain how the provision got there. It is a drama in three acts.

Cast your mind back to the point in early 2008 at which the incipient financial crisis began to move beyond the hedge fund realm, into public view – the bailiwick of the media. That would be the collapse of the investment bank of Bear, Stearns which occurred in March 2008, when months of rumors about poor asset quality boiled over in a run on the firm.

Brokerage clients withdrew their cash. Overnight repurchase (repo) lenders refused to lend. Counterparties in foreign exchange swap transactions refused to pay unless Bear paid first.  Everybody wanted to take their money out of the firm, all at once. At the end of the week, the Fed forced the sale of he firm to J.P. Morgan Chase, and lent Morgan the money to make the purchase overnight.

This is what central banks are designed to do, to oversee and to maintain the integrity of the banking system, shutting down insolvent banks and supplying liquidity to the rest.  Before their powers were well understood, banks themselves had created clearinghouses to do something of the sort. At first these institutions existed simply to settle banks’ claims on one another – to sort out the welter of checks and other claims presented for payment at the end of the day.

By the second half of the nineteenth century, these clearing houses had evolved into conservators of the soundness of city banking systems. They developed the authority to require weekly reports of banks’ conditions, to examine one another’s balance sheets, and, in a pinch – in a condition of “stringency,” to use one old-fashioned term – to throw a cloak of anonymity around member banks as a whole, aggregating their data and promising to honor all claims, to discourage attacks on its weakest members. In emergencies, they sometimes even limited withdrawals from member banks when the soundness of the system itself was at stake.

Secrecy – discretion, as bankers call it – is of the essence when rumors of potential failures swirl. When Henry Thornton’s bank, Pole, Thornton, was caught short in 1825 (Thornton himself, the reigning authority on paper credit, had died ten years before, but his bank was still a pillar of London banking), the governor and deputy governor of the Bank of England went to the vault themselves one morning, before the staff arrived, to count out the gold necessary to keep the bank in business – to spare it the  stigma of being seen to be borrowing from the lender of last resort. (Even then, failure was only postponed for a week. When Pole, Thornton closed its doors, the panic became general, and many other banks closed too. Afterwards it became clear that Pole, Thorton had been solvent all along.)

And this, more or less, was situation that the Fed faced with Bear Stearns in March 2008.

There was this difference:  at least since the “quantquake,” of August 2007, when several hedge funds that had made bad bets on the market for subprime debt collapsed and were merged out of existence, Fed governors recognized that stigma was becoming a problem among banks. Firms that needed funds to shore up their reserves were reluctant to be seen borrowing from the discount window of the central bank; instead they paid a higher rate in the overnight market for federal funds. So the Fed created what it called a Term Auction Facility – a way to cloak borrowing by means of a periodic auction of Fed loans. And the TAF had been working well to shield the identities of the weaker banks and stave off potential runs. (For a lucid discussion, see Stigma and the Discount Window, by Renee Courtois Haltom, of the Federal Reserve Bank of Richmond,

Enter a populist reporter, Mark Pittman, of Bloomberg News.  Among his colleagues, Pittman was something of a legend. A big, vigorous man, hard-drinking, joyous, twice-married, the father of three, he’d worked out of college in 1981 as a reporter for the Coffeyville Journal in southern Kansas, spent a year in Rochester, N.Y., and another dozen years at the Times Herald-Record in Middletown, N,Y, before joining Bloomberg in the boost phase of its news-gathering start-up in 1997.  He came to specialize in hard-hitting financial coverage and in 2007 won a Gerald Loeb Award for a series of stories on the mortgage industry, “Wall Street’s Faustian Bargain.” He liked to tell his colleagues that they had the best jobs in the word.  “We have badges, we have guns, and we are on the trail of the biggest crooks in history.” When he died, unexpectedly, at 52, in 2009, on the verge of triumph, Joseph Stiglitz, of Columbia University, said,  “He was one of the great financial journalists of our time.”

The demise of Bear, Stearns energized Pittman. Within weeks, he filed a request to the Fed under the Freedom of Information Act, seeking details of its lending to troubled banks.  That’s been the prerogative of almost any investigative reporter in recent years. You don’t need a lawyer. A federal website offers instructions on how to do it yourself. For four months, the Fed didn’t reply.

We have a clear picture of what happened next, thanks to Alan Feuer of The New York Times, who wrote Battle over the Bailout, a story about the story, in February 2010.  Pittman’s editor was Amanda Bennett, a well-loved figure in American newspapering, for twenty years a Wall Street Journal reporter, former editor of the Philadelphia Inquirer, who now served as head of special projects and investigations for Bloomberg News. Feuer’s account is worth quoting here, because it goes to the heart of a broadly held view of newspaper best practice:

“Pittman was this big shlumpy guy and he was wandering around going, ‘Argh argh argh,’” Ms Bennett said recently. “So we asked him, what’s with your FOIA? and Mark said – he used some more colorful language – ‘They won’t answer us.’

“That was when we all sat down and said, ‘So what do we do? They can’t just get away with not answering us?,’  Ms Bennett recalled. Charles [Glasser, an in-house lawyer] said, ‘You know, I suppose we could just sue the Fed.’ So we went to Matt – Matthew Winkler, Bloomberg’s executive editor – and said, ‘What do you think of us suing the Fed?’ As she recounted the story, Ms. Bennett punched her left palm with her right fist – precisely she explained, as Mr. Winkler had.  She added, ‘He loved it.’”

So Bloomberg brought suit in the Southern District of New York in November 2008. “The documents that Bloomberg seeks are central to understanding the government’s response to the most cataclysmic financial crisis in America since the Great Depression,” said the complaint.

The Fed argued that disclosing the loans would stigmatize the banks that received them, citing the run that closed Britain’s Northern Rock bank a year earlier as an example of what could happen when word got out that a troubled bank was seeking emergency aid.  It pleaded to be considered as exempt from the FOIA. District Court Judge Loretta Preska read the law and, in April 2009, told the Fed there was no way it was exempt.

Keep in mind that bank runs had long been considered to be a phenomenon fundamentally extinct, like duels and smallpox epidemics. Britain hadn’t experienced a run for more than 150 years. The US hadn’t seen one since deposit insurance was created in 1933. Inflation and unemployment now dominated the Fed’s concerns. Its role as lender of last resort, for which it was created after the Panic of 1907, had been all but forgotten outside the Fed.

Certainly it had been overlooked in 1966, when President Lyndon Johnson signed the Freedom of Information Act into law. The statute was part of a burgeoning enthusiasm for transparency.  It has been amended more than once, mainly to protect the privacy of individuals.  Since Watergate, it has been sacrosanct, though technology has often complicated its limits.

The Fed appealed the district court’s decision. Such was the alarm among the banks that the Clearing House Association, a consortium of the world’s largest financial institutions, joined the suit, to argue that the loss of confidence that followed untimely disclosure could have devastating effects. Arguments were heard by a three-judge panel.

And in March 2010, the Second Circuit Court again found for Bloomberg.  The Fed was ordered to turn over the contested records. The Court wrote,  “If the Board believes an exemption would better serve the national interest, it should ask Congress for one.”

Which, of course, is exactly what they did. Three months later, the Dodd-Frank Act formally exempted the Fed’s emergency lending from FOIA requests – but required the release of information on any broad-based emergency lending facility one year after the facility is terminated, information regarding discount window lending and open-market operations be disclosed with a two-year lag.

Problem solved. I wish I knew the details of of how the compromise was reached; I don’t. Maybe someday. But some balance has been restored between two historic desiderata – the desire for central bank secrecy in threatening times vs. the wish for transparency in government.  And it will be easier to explain the problem with stigma the next time.

Meanwhile, pursuant to the court’s decision, the Fed in December 2010 made available 29,000 pages of detailed records of its crisis lending, starting in August  2007 – disclosure its critics quickly branded “the dump.” In March 2011 it added the discount window operations that had been required by the court.  Congressman Ron Paul wasn’t happy; he held a hearing: Federal Reserve Lending Disclosure: FOIA, Dodd Frank,and the Data Dump.

And in August 2011, Bloomberg finally got its story: Wall Street Aristocracy Got $1.2 Trillion in Secret Loans.

And the third act?  It turns out that another Bloomberg reporter was involved in the story. That was columnist John Berry, who had gone to work for Bloomberg in 2004, after taking a buy-out at The Washington Post. In his twenty-five years covering the Fed, Berry had won a sterling reputation among bankers, traders and economists. He had attended every Jackson Hole conference of central bankers since the meeting began until he left the Post, and he surely would have won a poll among that lofty crowd as the best in the business.  It is fair to say, I think, that Berry never campaigned for favor among his newsroom peers – he was not the sort who won prizes. But he was highly regarded by his editors at the Post, and he was proud of having convinced his friend and editor William Greider that the Fed was worth a book. (Greider wrote Secrets of the Temple: How the Federal Reserve Runs the Country, a best-seller in 1989.)

Berry was sloughed off by Bloomberg during the crisis. The details do not matter here. His stock fell as Pittman’s rose.  His editors refused to clear his columns as Bloomberg’s special projects team blazed away at the secretive Fed for pandering to the banks.  In April 2009 he resigned.

Eventually he found a way to call attention to what had happened. Last spring, he published “Bloomberg vs. the Fed” (scroll down) as an article in The International Economy, a controlled-circulation magazine widely reads in Washington, D.C. What is known about the problem of stigma and the FOIA owes mainly to him.

As a specialist myself, I’m inclined to take Berry’s side. Last spring, I wrote a somewhat ill-tempered weekly about the episode, In Which the Bloomberg Kids Put on a Show, speculating that Bloomberg had nominated the series for a Pulitzer Prize, a conjecture a Bloomberg spokesman would neither confirm nor deny.  (Bloomberg’s Amanda Bennett had just finished seven years of service on the Pulitzer Board.) I haven’t added much to it that story here. I bring it up in connection with the renewed interest at meetings of the Allied Social Science Association this year in the role of journalists as mediators between experts and the public.  Best practices and all that.

Tensions of the sort that existed between Mark Pittman and John Berry have been a standard feature of newsrooms as long as I have been in the business. Usually the editors know how to cope. Bloomberg News is a somewhat special case, the creation of a  fantastically profitable financial data company, itself a start-up, whose staff has grown in twenty years from scratch to something like  twice the size of The New York Times. In 2009, it added BusinessWeek magazine to its holdings.

These are turbulent times in the news business. I hated to see a reporter who, for a quarter of a century, had set the standard of excellence for inside coverage of the Federal Reserve Board cast aside in favor of a questionable campaign for a Pulitzer Prize.

On the other hand, Pittman’s initiative, Bennett’s instincts, Winkler’s exuberance: they all look pretty useful in the larger scheme of things. If Bloomberg hadn’t tested the applicability of the FOIA, we wouldn’t know about the potentially destructive nature of certain kinds of sensitive information. There wouldn’t have been a statutory modification of FOIA’s limits. Berry’s “Bloomberg vs. the Fed” article would not have been written. And the nature of panics – and leadership in their midst – would be slightly less well understood.  There is more than one kind of best practice

Prepared for a session of the History of Economics Society at the meetings of the ASSA in San Diego.