Never-Before-Released Bailout Documents from FDIC

It took two years, a lawsuit and a ruling from a federal judge, but Judicial Watch finally got hold of a batch of documents from the Federal Deposit Insurance Corporation (FDIC) related to the Citigroup and Bank of America bailouts. (The FOIA lawsuit, you may recall, was filed on behalf of former Federal Reserve and FDIC employee Vern McKinley.)

Specifically, we received the unredacted minutes from FDIC Board meetings during which FDIC officials and staff discussed the rationale for the bailouts which centered on the “systemic risk” of allowing the two financial institutions to fail.

We also received never-before-seen documents regarding the FDIC’s Temporary Liquidity Guarantee Program, which guaranteed unsecured debt of private financial institutions and provided them “full coverage of non-interest bearing [sic] deposit transaction accounts, regardless of dollar amount.”

Here are the highlights:

• FDIC Board Meeting Minutes from approval of Citigroup bailout (November 23, 2008):According to the minutes from the meeting, government officials described in vague terms the consequences of allowing Citigroup to fail, including “the effects on money market liquidity could be expected on a global basis,” “term funding markets remain under considerable stress” and the fact that it would “significantly undermine business and household confidence.” One FDIC Board member who was in attendance, John Reich, cautioned Federal bank regulators and the Treasury Department to “avoid ‘selective creativity’ in determining what constitutes systemic risk and what does not and what is possible for the government to do and what is not.”
• FDIC Board Meeting Minutes from approval of Bank of America bailout (January 15, 2009):According to the meeting minutes, Sheila Bair, Chairman of the Board of the FDIC, admitted the agency “was relying on data analysis by the Federal Reserve” and for that reason the FDIC “very much needs to proceed with a systemic risk determination with respect to [Bank of America].” Chairman Bair characterized the decision to bail out Bank of America as demonstrating that the FDIC, an independent agency, was a “team player along with the Federal Reserve and the Treasury to prove the systemic risk case.” (Translation: Treasury and the Fed really want this so we have no choice but to go along.)

Incidentally, these meeting minutes are consistent with a separate report by the Special Inspector General for the Troubled Asset Relief Program released on January 13, 2011.

According to the report, Chairman Bair admitted: “We were told by the New York Fed that problems would occur in the global markets if Citi were to fail. We didn’t have our own information to verify this statement, so I didn’t want to dispute that with them.”

Regarding the consequences of allowing Bank of America to fail, the arguments noted in the meeting minutes were similar to those articulated during the Citigroup meeting and included the general observation that “both financial stability and overall economic conditions would be adversely affected, and that staff believes the consequences could extend to the broader economy.”

You read that right. The FDIC authorized the radical expansion of its powers because the fall-out from the failure of Citigroup and Bank of America “could” extend to the rest of the economy. How’s that for definitive?

Now, in addition to documents specifically referencing the Citigroup and Bank of America deals, we also got hold of the meeting minutes and a FDIC memo regarding the agency’s Temporary Liquidity Guarantee Program. This is the programmatic umbrella under which these bailouts were made. And it represented a radical expansion of the FDIC’s power, allowing the agency to go well beyond the narrow scope of its lending authority.

To justify this expansion of power, both documents reference a “recent study” by the FDIC on the effect of a run on uninsured deposits and its impact on economic activity. However, to date, this report has not been released to the American people, despite the fact that it is within the parameters of Mr. McKinley’s FOIA request. This program, by the way, continues to insure about $265 billion dollars in debt.

Now let’s backtrack a bit so I can show you how we managed to force the release of these documents.

On March 15, 2010, we filed a FIOA lawsuit on behalf of Mr. McKinley as part of our comprehensive investigation to determine under what lawful rationales the federal government initiated these financial bailouts. We were seeking records related to the FDIC’s decision to guarantee $306 billion of loans and securities held by Citigroup Inc., and $118 billion held by Bank of America. On April 15, 2010, the FDIC provided 101 pages of heavily redacted documents without providing sufficient justification for withholding the information. The agency then concluded this satisfied their legal requirement and filed a motion to dismiss the lawsuit.

But not so fast. On December 23, 2010, while noting the fact that the FDIC “has not fulfilled its obligations under FOIA,” a federal judge rejected the FDIC’s motion to dismiss and ordered the agency to either conduct another search for documents or demonstrate why these documents should be withheld. (Click here for a more complete accounting of the judge’s ruling. It was quite extraordinary…and obviously very effective.)

So here are my three takeaways from these documents: The government’s justification for the bailouts was weak. The decision was rushed. And it appears that the “independent” FDIC, while conducting no analysis of its own, merely bowed to pressure from politicos at Treasury to accept the bailout scheme. All of this, I remind you, happened during the Bush administration. You can see how the Obama administration had an awful framework to push through their socialist takeover of additional industries–cars, student loans, home mortgages, and healthcare.

No wonder it took two years and a lawsuit for Judicial Watch to force the Obama administration to release these documents. They confirm the concerns of the majority of Americans who believe the financial bailouts were unjustified and corrupt expansions of government power.