NEW YORK ( TheStreet) -- The Federal Reserve lost more ground on Friday in its ongoing battle over transparency -- a battle it may have to lose to gain additional powers over financial markets and consumer protection.

Media outlets have been in legal battle with the Fed for months, suing the central bank to disclose more information about how it lends. A federal appeals court on Friday upheld a lower court's decision that would force the Fed to release documents outlining which ordinary banks access its "last resort" funding programs, like the discount window, and how such loans are structured.

Several publications and broadcasters joined in an effort spearheaded by Bloomberg to extract such information from the Fed. At the same time, the public has grown more cynical about the government's use of taxpayer funds, largely due to enormous bank bailouts that haven't seemed to help the average consumer very much.

A Rasmussen poll last July showed that 75% of Americans support auditing the Fed and publicly disclosing results. The next month, in an online Q&A sponsored by The Wall Street Journal and Digg, the most popular questions among Web users had to do with auditing the Fed.

Months later, House lawmakers passed a bill which would do just that -- an auditing effort championed by Rep. Ron Paul (R., Texas). Paul is perhaps the most vocal and longtime critic of the Federal Reserve, and seems to hope that auditing the central bank will serve his ultimate goal of abolishing it entirely.

The Fed argues that disclosing information about its lending programs would put banks' fate in the hands of negative perception: If the Fed discloses which banks request emergency loans, those banks will be perceived as weak. Other banks won't want to do business with them, nor will their customers, and whatever problems they may have will be exacerbated, potentially causing a collapse.

Yet at the same time, the Fed is lobbying for more power to regulate the financial industry, as part of an overhaul of bank regulation. A proposal recently outlined by Sen. Chris Dodd (D., Conn.) would house a consumer-protection agency within the Fed's wings, and allow the Fed to oversee systemic risk and dismantle the largest and most complex institutions if the time came.

Fed Chairman Ben Bernanke seems to be aware of the public's fierce demand for more information, and sensitive to the political calculations involved with requesting more power. He softened his opposition to a Fed audit accordingly last month, saying the Fed is open to a probe of its lending programs, but only "after an appropriate delay."

The Fed may not have much choice in the matter. As the post-bailout era has arrived, the government has fought disclosure of sensitive information in several instances, and only lost more public trust in the process. For instance, the Fed was against disclosing information about how American International Group's ( AIG) bailout funds were dispersed to counterparties. AIG disclosed the information, showing that its taxpayer-funded bailout essentially served as a conduit to transfer funds to big banks like Goldman Sachs ( GS), Bank of America ( BAC), Citigroup ( C), Morgan Stanley ( MS) and JPMorgan Chase ( JPM), as well as big competitors abroad like Societe Generale, Deutsche Bank ( DB) and UBS ( UBS).

As a result, Treasury Secretary Timothy Geithner -- who oversaw that rescue as head of the New York Fed -- received a political black eye.

In another situation, probes by New York Attorney General Andrew Cuomo and the House Oversight Committee unveiled that Bernanke and Geithner's predecessor, Henry Paulson, had pressured Bank of America ( BAC) to move forward with its acquisition of Merrill Lynch, and pledged an additional $20 billion in bailout funds for the two banks to tie the knot.

Geithner, Bernanke and Paulson had an adequate defense: It was a time of crisis and these efforts were necessary to prevent a systemic collapse of the financial system. But since they had fought disclosure in the first place, it made their statements seem less pure and their intentions suspect, in the public view.

Bloomberg & Co. would like the Fed to disclose which banks are using it as a lender of last resort, and what type of collateral it has accepted in exchange for loans as part of its emergency-lending programs to unfreeze the credit markets or rescue troubled banks like Bear Stearns. Bernanke has a point -- the Fed may not help banks, consumers or the financial system by immediately disclosing every detail of every loan. But as shown by the eventual disclosures about crisis-era deals, as well as a report last week on Lehman Brothers' demise , there's not much purpose served by hiding information forever.

The Fed may best serve its own interests, as well as its constituents', by playing offense instead of defense this time around.

-- Written by Lauren Tara LaCapra in New York.