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

Washington Monthly, Dec, 1990 by Teresa Simons

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 everywhere, no matter the size of their accounts.

Even if the release of thrift examiners' reports had led to a few runs on S&Ls, it's inconceivable that the result would have been a thrift industry as hurting as the one we've got now. Perhaps if a few more thrifts had gone up in smoke five years ago, there would have been fewer thrift failures today. Public pressure would have forced Congress to supply the money and the regulatory action needed to clean up the mess before it got out of control.

The Keating jive

Instead, FOIA's Exemption 8 and related secrecy laws frustrated attempts by the (all-too-few) journalists, economic researchers, and others who suspected problems at thrifts and were trying to get a handle on the damage. What this official government secrecy bred is demonstrated by the autopsies of the few bank and thrift failures about which considerable information has become public--usually through leaks, subpoenas issued in lawsuits, or congressional testimony. In each case, the after-the-fact release of crucial documents has shown that delays in regulatory action--not likely to have occurred had the facts become public sooner--have cost taxpayers billions.

* When Charles Keating Jr. applied to buy Lincoln Savings and Loan in Irvine, California, he solemnly promised not to change the thrift's primary role, which was to help families buy homes. He wrote thrift regulators that "no changes are expected in the performance by [Lincoln] ... in meeting the credit needs of its entire service area ... including low- and moderate-income neighborhoods." Yet in the first year after he took over the thrift, he made only 11 home mortgages, at least four of them to officials of his parent company, American Continental Corp. So officials of the Federal Home Loan Bank Board knew early on that Keating was not keeping his most basic agreement with them, and by the spring of 1986, an agency examiner in San Francisco wrote a memo to his supervisors saying that Lincoln was a "disaster in the making." By mid 1987, the examiners' files clearly indicated that from Chairman Danny Wall on down, the Bank Board knew that Lincoln was essentially bankrupt and had, in effect, turned itself into a federally-insured casino. Yet Washington regulators, pressured by Keating's friends in the Senate, did not close Lincoln for another two years. In the thrift's final year, regulators sat and watched as 23,000 people walked into Charlie Keating's trap and unwittingly threw away $220 million of their life savings. If the public had access to the government examiners' files, Senators Alan Cranston, Dennis DeConcini, and Donald Riegle would have had a hard time claiming, as they actually did, that bureaucratic reaulators were harassing Keating. Joseph Cotchett, the lawyer representing the 23,000 buyers of Lincoln's now-worthless junk bonds, says most of his clients would probably still have their money had the examiners' reports been public. The taxpayers' bailout of Lincoln is now expected to cost $2.5 billion.