12/08/2011 04:55 pm ET Updated Feb 07, 2012

The Fed's Secrets and the Unfinished Work of Financial Reform

Right after Thanksgiving, Bloomberg News broke a very big story that didn't get nearly the attention it deserved: In late 2008, at the same time the controversial TARP bank bailout was happening, the Federal Reserve was lending trillions of dollars to many of the very same institutions, helping them make roughly $13 billion in extra profits due to the Fed's below-market-rate lending.

And because the details were kept from Congress (and only came out now due to a Freedom of Information Act lawsuit), lawmakers didn't have a true picture of the state of our financial system when they were debating the details of the financial regulatory reform bill that ultimately became the Dodd-Frank Act.

This has huge implications, but got relatively little media play while cable news was busy giving wall-to-wall coverage to assorted sex scandals.

The banks have tended to act like they were doing the government a favor by taking the TARP money and paying it back with interest, when in fact they profited on the deal, gaining from government intervention in ways ordinary citizens can't. One thing they didn't do to any great degree was use that money to ramp up lending to people and communities in need.

The results of the Fed's secrecy may be most visible in the financial reforms Congress didn't enact: It didn't break up the "too big to fail" banks. And it didn't reinstate the Glass-Steagall Act, which for decades had kept consumers' bank deposits separate from riskier investment banking activities. Opponents of such changes successfully made the case that they would be "punishing success."

Except that "success" was illusory. Congress had no clue how fragile the biggest banks were. They didn't know, for example, that even as Citigroup and Bank of America were getting $45 billion each from TARP, they were also getting just under $100 billion each from the Fed. Former Sen. Ted Kaufman, a Delaware Democrat who introduced legislation to limit bank size, told Bloomberg that such information "could have changed the whole approach to reform legislation."

As of this September, the six biggest U.S. banks were over one third bigger than they were at the peak of the housing boom in 2006, and their employees' compensation has risen faster than that of the average American worker.

Funny how when stuff like that happens, ordinary people think the system is rigged against them. Go figure.

There are some rather obvious lessons here:

First, the Fed needs to be much less secretive. Yes, there may be legitimate reasons for short-term secrecy at moments when there's real danger of a financial panic, but the default assumption should be that secrecy is an aberration, not the norm, and temporary. The Fed was apparently prepared to keep the details reported by Bloomberg secret forever.

Second, the work of financial reform is far from done. Knowing now what they should have known a couple of years ago, Congress should revisit major structural reforms like restoring Glass-Steagall. There's a strong case to be made that we haven't done nearly enough to avoid the need for a future bailout.

Alas, the current Congress seems more likely to grow wings and fly to Mars.

Third, congressional Republicans seem intent on de-clawing the most important reform that was included in Dodd-Frank, the new Consumer Financial Protection Bureau, with GOP Senators continuing to block approval of Richard Cordray, President Obama's nominee to run the bureau, unless the White House agrees to changes that will greatly weaken consumer protections. Until a director is confirmed, CFPB can't regulate many financial businesses, such as payday lenders, that have operated in an unregulated shadowland, or ban abusive or deceptive credit card fees. That fight may come to a head momentarily, with a vote to try to overcome the Republican filibuster potentially coming as soon as Dec. 8. If you haven't called your Senator in support of Cordray, this would be a good time to do so.

It's hard to imagine a situation that better sums up the grievances of Occupy Wall Street. Huge financial businesses get all the help they need, shrouded in secrecy lest the details upset anyone, while strapped consumers get little. Meanwhile, crucial reforms aimed at helping the little guy either don't happen or get obstructed.

The American people are howling mad, and with good reason. It's long past time for Congress to start listening.