Excessive Secrecy And The Bailout


The hoopla surrounding the presidential election and the promise of a new team in Washington does not change the reality that we are still mired in a seemingly unending financial mess. But, according to New York Times business columnist Gretchen Morgenson, President-Elect Barack Obama needs to signal investors and taxpayers that he will be looking out for them.

Morgenson argues that an essential first step is to insure that the officials in charge of taxpayer finance bailouts operate in the sunshine. It would also be helpful if those same people were more forceful in extracting concessions from the recipients of billions of taxpayer dollars.

In all of the Government’s attempts to deal with this financial mess, major decisions have been made in a hurry, behind closed doors, and with many unidentified participants. Some analysts, financiers, and politicians suspect that special pleaders may be behind the scenes securing special favors.

The secrecy and lack of transparity that have surrounded some of these decisions, such as allowing Lehman Brothers to fail while saving Bear Stearns, do not engender trust. Rather, they create distrust.

Taxpayers, who are financing these bailouts, have the right to know who was in on the decisions, why the decisions were made, and who the prime beneficiaries were. This is especially true when we are watching taxpayer money being doled out to the same cast of characters, commercial banks, and brokerage firms that got us into such a financial mess in the first place.

While the decision to recapitalize the banks was necessary, Ms. Morgenson declared that it was naive and indulgent for the Treasury to have attached no strings to the cash it handed to the big banks. These same banks are now hoarding the taxpayer cash or refusing to pass along to suffering consumers any of the savings reaped by the institutions’ reduced lending costs. Not only is this unjust, but it is a recipe for a taxpayer backlash.

The Treasury could also force the banks to raise additional capital in the markets. Extra capital may make taxpayers less vulnerable to losses in the bailout.

Finally, a discussion is needed of how and when taxpayers will be able to exit the bailout business. Although it is necessary for some of the financing programs to be open-ended, it does make one nervous that there are no time limits on this flood of cash.

As Ms. Morgenson wrote, “taxpayers and investors are paying dearly in this crisis. More transparency, tougher deal terms and clearer exit strategies would do a lot to ease our pain.” Adoption of these suggestions may halt the erosion of needed public support for the bailout.