Today it was revealed that last week the Federal Reserve rejected Bank of America’s plan to increase its dividend from its token penny a share in the second half of 2011. Clearly, the Fed is sending a message that it does not believe the margin of safety is large enough to warrant such a payout at Bank of America.
What is notable, however, is how this rejection puts the lie to bank claims regarding disclosure of the Fed’s 2008 liquidity provisions. In 2008, the Federal Reserve provided liquidity to many financial institutions in an unprecedented action to prevent a collapse of the financial sector. Subsequently, under the Freedom of Information Act, a number of news agencies sought to ascertain to whom the Fed lent, using what collateral. When the Fed balked, these agencies filed suit. With these suits being upheld by the U.S. court system, the Fed has relented and is due to release more information as directed by the law. Nevertheless, the banks are still fighting this under the following rationale:
Disclosure of this information threatens to harm the borrowing banks by allowing the public to observe their borrowing patterns during the recent financial crisis and draw inferences — whether justified or not — about their current financial conditions.
This rationale for preventing transparency is bogus. We just learned through the second set of stress tests that Bank of America is not adequately capitalized enough to increase its dividend. Isn’t that more relevant real-time information than bailout records from over two years ago? The same type of information can be gleaned from the stress tests regarding other large banks as was true during the first set of stress tests.
In short, there is zero reason not to release the information pertaining to the 2008 liquidity provisions. Banks’ continuing to insist there is a reason only puts them and their motives in a dubious light.