Bloomberg reports that, in March, the Federal Reserve released a trove of materials that revealed more than $1 trillion in secret lending to banks during the financial crisis. Banks did not disclose these loans at the same time that they were touting strong balance sheets, which raises the question of what securities law disclosure requirements applied to this information. The tension between banking regulation’s safety and soundness focus and securities regulation’s full disclosure goal is a longstanding one. The Fed opposed the release of the information in part because it would stigmatize the banks and hurt their stock price — which is exactly how full disclosure is supposed to work. The Fed was also worried about triggering a run on the banks, which is a different matter.

Exactly why were banks not required to disclose this information under the federal securities laws (or were they)? Could they have hidden the information indefinitely, as the Fed argued should be allowed? What should investors in banks know about information that banks may be keeping from them?

Update: Morgan Stanley Speculating to Brink of Collapse Got $107 Billion From Fed (8/28/11)

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