We’ll Never Know How Bad the Federal Reserve Is
Sen. Rand Paul (R., Ky.) still hasn’t persuaded his colleagues to audit the Federal Reserve’s conduct of monetary policy. Perhaps lawmakers could simply agree that the Fed should stop destroying documents.
“Borrowed Time,” a history of Citigroup publishing today and co-authored by your humble correspondent and Vern McKinley, finds that the bank was in many ways healthier and more stable during the century when it was independent than during the roughly 100 years it has been supported by the federal government. But the government has been working hard to prevent such stories from being told.
Take the early 1990s, when Citi ran into trouble with bad bets on U.S. commercial real estate. To understand exactly what happened, it would be useful to go back and look at the Office of the Comptroller of the Currency’s examination reports from 1991 and 1992. Bank examiners normally put particularly juicy details about what they find in a confidential section that is not shared with the bank, and today this might represent a gold mine for financial historians. Such reports are available going back all the way to the 1860s, and the record lasts into the 1930s. But oddly these examination reports cannot be accessed for later periods due to the Federal Records Act of 1950.
For decades now, the government’s standard practice has been to warehouse individual examination reports for banks like Citi for 30 years while refusing to release them, citing exemptions under the Freedom of Information Act. After 30 years, the feds then destroy the reports. Based on this schedule, at some point during this year, the federal government will destroy the Citibank examination records from 1988. A few years down the line, the records from the early 1990s downturn will also cease to exist. Counter-intuitively, it is much easier for someone researching the history of a big bank to get their hands on an examination report from 1890 than from 1990. It is also certainly easier to repeat history if the lessons of the past are erased.
Fortunately some journalists have occasionally been able to counter the federal effort to destroy historical records in this area. One of the Comptroller of the Currency’s contemporary examination reports was obtained by the New York Times in 1992. The report chronicled the troubles of Citicorp Mortgage, which during 1989 was the nation’s largest mortgage lender. Its operations went south in the ensuing years and it had negative equity capital of $80 million at the end of 1991. Citicorp then pumped $172 million into its mortgage unit, most of which was consumed by additional losses.
When an institution like Citi has problems as it did during the early 1990s, a regulator would normally catalog all the bank’s weaknesses in a written agreement in which the bank promises to sin no more. Citibank was placed under just such a memorandum of understanding. But you can’t read it.
In response to a FOIA request, the Comptroller’s office claimed that “after a thorough search,” staff were “unable to locate the document.” The regulator also said that “memorandums of understanding are not disclosed to the public.” Margaret McCloskey Shanks, Deputy Secretary of the Federal Reserve Board, responded by letter to a FOIA request with the potentially good news that Fed staff had found 13 pages of information responsive to the request.
“I have determined, however, that this information constitutes confidential supervisory information regarding a financial institution,” added Ms. Shanks. The Fed official claimed that the material was therefore “exempt from disclosure.”
It will not be immediately clear to most taxpayers why such information needs to be kept confidential for more than 25 years.
How about a century? Citi’s troubles in the years following the creation of the Federal Reserve in 1913 are especially intriguing. That’s because, for nearly 80 years prior to the creation of a federal backstop, the bank had been rock-solid. Yet by an amazing coincidence the creation of a new government safety net was immediately followed by an era of reckless investment overseas. In early 1917 the institution we now call Citi opened a Russian branch, just months before Soviet communists seized power. It turned out that protecting shareholders of a big U.S. bank was not high on Lenin’s agenda.
Back in the U.S., regulators started to recognize problems in 1919, and the bank became a heavy consumer of government assistance. In 1920 its borrowing from the Federal Reserve Bank of New York surged, according to an examination report. But good luck getting the details on this emergency lending. The New York Fed says it is unable to locate any such records. They were probably destroyed a long time ago.
How will Americans ever fix problems in a federal bureaucracy if we’re never allowed to see them?