Banking on secrecy; with our banks about to go the way of our S&Ls, it's time we made the Freedom of Information Act cover financial institutions too.

• Author: Simons, Teresa

BANKING ON SECRECY

Say your neighbor just cracked up his car. So he asks to borrow your limited-edition 1991 Acura NSX. But he hems and haws when you ask him how his accident happened and if he's had any others. Are you still going to let him borrow the Acura? Well, maybe. But you're pretty whacked if you don't first make him answer your questions. Some people will still think you're crazy for lending the car. But don't worry. You learn a lot faster than Congress.

Congress allowed our friendly neighborhood thrift regulators to hide under the cloak of official government secrecy--lulling the press and public into complacency--as hard-dollar damages grew from an estimated $50 billion in 1987 to nearly $200 billion today. Add another $300 billion or more for interest costs, additional anticipated thrift failures, and recessionary effects. Yet like a car owner who doesn't heed the warning of an earlier crash, Congress is nevertheless allowing confidentiality to frustrate attempts to assess another potential disaster-in-the-making--the one brewing at the nation's banks. The bank regulators are citing the same confidentiality laws touted by the thrift regulators.

It wasn't just fraud, insider abuse, and an unreasonable government-regulated interest rate structure that created the S&L crisis. There was another culprit: official government secrecy fostered by a major exemption in the federal Freedom of Information Act (FOIA).

Edwin Gray, who headed the Federal Home Loan Bank Board in the mid-1980s, says he was frustrated in trying to sound the alarm by his inability to release pertinent information to the press. The law says that doing so could have cost him his job as well as a year in prison. Gray now contends that the S&L losses would never have grown so large had the public been given more information about the problem sooner. "That would have gone a long way to helping," he says.

House Banking Committee Chairman Henry Gonzalez puts it this way: "The savings and loan scandals grew in the dark basements of official government secrecy."

The information blackout on financial institutions has been so severe that even law enforcement officials have had trouble getting the information they need to stop crooks. Jim Watson, one of the California attorney general's top narcotics officers, said that two years ago he couldn't even get the Federal Reserve to tell him whether banks in its Los Angeles region were sending a lot more cash back to the Reserve than they were taking and, hence, possibly laundering drug money. The Reserve now acknowledges that Los Angeles area banks do have large cash surpluses, but it still won't release cash totals for individual banks. Reserve spokesman Ron Supinski says the secrecy stems from "a business relationship. [The banks] don't want that released, and the Federal Reserve does not want it released, so it's not released."

The main culprit for this sanctimonious secrecy is Exemption 8 in FOIA, which says the American public needs to know about nearly all of its government institutions, except its financial ones. Written broadly and interpreted broadly by the courts, the exemption says government officials don't have to release information "contained in or related to examination, operating, or condition reports prepared by, on behalf of, or for the use of an agency responsible for the regulation or supervision of financial institutions." This includes records kept by the Office of Thrift Supervision (OTS), which has replaced the Federal Home Loan Bank Board in regulating thrifts; the Comptroller of the Currency, which regulates nationally-chartered banks; the Federal Reserve, which regulates key state-chartered banks; and the Federal Deposit Insurance Corporation (FDIC), which regulates the state-chartered banks that don't belong to the Reserve.

Former thrift regulator Gray argues that because the United States insures all deposits, "that makes every taxpayer in America a shareholder in every federally insured institution, and if they are shareholders, then it seems to me we at least ought to disclose to taxpayers the same kind of information as shareholders get." But we don't. Few banks and thrifts are public, so for the most part, taxpayers can't even learn if an institution is giving its executives excessive salaries or if its activities have drawn the special attention of regulators.

What information is released is not only difficult for lay people to interpret but also may be based on wildly misleading figures. The nation's banks and thrifts produce their own quarterly reports, which are in turn analyzed for the investment community by financial rating firms. But the firms' analyses rely on figures supplied by the financial institutions themselves. (And occasionally the ratings outfits reaped big bucks for their glowing reports at the very same time regulators were privately noting serious problems.)

The most accurate information often appears in the secret reports and memos generated by the government examiners. This is what the public needs to see: whether the examiners found accounting irregularities, whether property appraisals were missing and borrowers were not credit-worthy, whether borrowers were delinquent in repaying their loans, whether an institution's directors received low-interest loans, and whether an institution's managers withheld information.

Secrecy laws covering financial records emanate from a Depression-era mindset obsessed with the idea that release of "sensitive" financial information would cause consumer panic and a run on banks. That thought is perpetuated today by industry lobbyists and regulators who talk about runs the same way the Pentagon used to bring up threats to national security every time anyone asked for information about a defense contract. But in fact, the establishment of government-backed insurance for every deposit of up to $100,000 has significantly reduced the risk of runs on banks and thrifts. And even depositors with more than the insured amount at risk are in effect covered: When the FDIC decided to bail out Continental Illinois Bank in 1984, it covered even enormous deposits because it said it couldn't let such a large bank go under, thereby setting a precedent that has since led the government to bail out all depositors...