So What Exactly is "Systemic Risk"?

A recently-filed lawsuit seeks to an answer to this question. Plaintiff Vern McKinley is suing the FDIC and the Federal Reserve to get answers to his FOIA requests on last year's bailouts. The Wall Street Journal reports on McKinley's efforts:

Last December, Mr. McKinley sent a FOIA request to the Fed to find out what Fed governors meant when they said a Bear Stearns failure would cause a "contagion." This term was used in the publicly-released minutes of the Fed meeting at which the central bank discussed plans by the Federal Reserve Bank of New York to finance Bear's sale to J.P. Morgan Chase. The minutes contained only the vague warning of doom, without any detail on how exactly the fall of Bear would destroy America. Mr. McKinley's request sought the supporting documents for this conclusion.

He also requested minutes of the autumn FDIC board meeting at which regulators approved financing for a Citigroup takeover of Wachovia. To provide this assistance, the board had to invoke the "systemic risk" exception in the Federal Deposit Insurance Act, and therefore had to assert that such assistance was necessary for the health of the financial system. Yet days later, Wachovia cut a better deal to sell itself to Wells Fargo, instead of Citi. So how necessary was the FDIC's offer of assistance?

After Mr. McKinley sued the agency this summer, the FDIC coughed up a previously undisclosed staff memo to the FDIC board. Again, the agency redacted the substance, providing roughly two pages of text from the nine-page original. The section of the memo titled "Systemic Risk" was entirely erased. As for the Fed, it blew off Mr. McKinely's initial request and has since responded mainly with some highly uninformative letters from the Fed staff to Congress.

More here.