Addendum to
Bailout Briefing #8 – Courts Recognize Bank Secrecy Must End, Does Congress?
1. Bloomberg LP v. Board of Governors of the Federal Reserve System, Case No. 08-9595, U.S. District Court, Southern District of New York (Manhattan)
The Federal Reserve has invested or committed, at a minimum, $2 trillion in emergency loans during this financial crisis, without having to disclose to whom and why these investments were made. The Federal Reserve has loaned a half trillion dollars to foreign banks, without having to answer to anyone. As Rep. Alan Grayson has noted in his heated questioning of Ben Bernanke, that amounts to ten times the budget of the U.S. State Department. When two Bloomberg reporters requested access to information about Fed transactions under the Freedom of Information Act, the Fed denied them. The reporters then sued for the information. Chief District Judge Loretta Preska of the federal court in Manhattan ruled that the Federal Reserve’s rationale for keeping the names of the banks it has rescued a secret does not hold up.
In the decision, Judge Preska wrote: "The board essentially speculates on how a borrower might enter a downward spiral of financial instability if its participation in the Federal Reserve lending programs were to be disclosed. Conjecture, without evidence of imminent harm, simply fails to meet the board's burden."
Taxpayers should applaud Judge Preska’s initial attempt to hold the Federal Reserve accountable by asking for names and documents surrounding the dramatic intervention over the past two years. However, she granted the Fed a delay in the proceedings, as the Fed considers appealing the ruling.
The banks that received emergency loans, in particular, should be made known to lawmakers and administration officials charged with bailout oversight. There is a danger that those banks in a particular hurry to return TARP funds may be feeding from the Fed trough behind the scenes.
To date, 290 members of the House of Representatives, including conservatives, progressives and Blue Dogs, support H.R. 1207, which calls for an audit of the trillions of taxpayer-backed dollars invested in big banks. In addition, research shows that 75 percent of Americans support auditing the Fed. A diverse coalition of taxpayer, citizen and government watchdog groups continues to push for legislation to increase transparency within the Fed. House Financial Services leadership has indicated that a hearing will be held on this issue on September 25. Hopefully, Congress will heed Judge Preska’s initial ruling when considering legislation to increase accountability and transparency within the Federal Reserve.
2. Securities and Exchange Commission v. Bank of America Corp., Case No. 09-cv-06829, U.S. District Court, Southern District of New York (Manhattan)
U.S. District Judge Jed Rakoff, in what has been deemed an unusual ruling to force a trial between a private company and the government, has refused to allow the SEC to settle its claim with Bank of America. BoA was charged with misleading investors regarding bonuses paid to miserably failed executives of Merrill Lynch just before BoA bought Merrill. The judge determined that the proposed settlement was "neither fair, nor reasonable, nor adequate,” and that it would be unfair to ask shareholders to pay the $33 million fine when they were allegedly the victims here. The executives at BoA claimed that their lawyers handled the language of the November proxy vote that misled the shareholders regarding the payment of Merrill bonuses.
This ruling makes the SEC look like it dropped the ball (again) and calls into question all of the hasty actions taken last fall as the financial sector neared collapse. The rejection of the settlement also makes BoA look like they were trying to get out of a messy situation by hiding behind lawyers and paying a fine that is tantamount to a mere fraction of the $3.6 billion in Merrill bonuses. It also calls into question the amount of pressure BoA may have been under to acquire Merrill Lynch. Hats off to Judge Rakoff for wanting names and calling out both the SEC and BoA on their lack of accountability. Backed into a corner and appearing weak, the SEC has been shamed into pressing BoA and now claims that it may broaden the scope of their investigation. Congress continues to hold hearings on the Bank of America evolution, with the next one scheduled for September 30.
3. United States of America v. UBS AG, Case No. 09-20423-CIV-GOLD/MCALILEY, U.S. District Court for the Southern District of Florida (Miami)
The settlement of the case between UBS and U.S regulators, which forces UBS to release nearly 4,500 names of suspected tax dodgers to the United States, represented a small step in bringing the issue of offshore tax secrecy to light. It only scratches the surface considering the initial summons was for 52,000 names, but the stiff penalties (up to 50 percent of the value of the individuals’ accounts for each year they failed to file proper reports) should send a message to those who want to continue to hide assets. And should send a message to Congress and to the President that reforms to end practices that hurt taxpayers, ship jobs overseas and support the culture of secrecy that contributed to the economic downturn are long overdue.
It’s been estimated that the U.S. loses $100 billion per year in revenues – money it cannot afford to lose. Over 80% of the largest U.S. companies use offshore tax havens - including all the largest bailout recipients. In fact, Citigroup, Morgan Stanley and Bank of America have over 800 offshore subsidiaries between them in tax haven countries. The Government Accountability Office (GAO) describes tax havens as places with no or nominal taxes and little if any reporting requirements.
This case demonstrates the need to address sham transactions, tax avoidance and tax evasion on a permanent basis. When banks help to hide billions of dollars for tax dodgers, the rest of the taxpayers must ultimately pick up the tab.
Back to Bailout Briefing # 8
