I am not, on balance, a fan of the proposed megabailout of the financial system. But if it is going to happen, we should require at the very least this — that taxpayers learn immediately what assets they have purchased, from whom, and for how much.

We should tolerate no more of what the Fed did when it bailed out Bear Stearns' creditors. Maiden Lane LLC sits opaque on the Fed's balance sheet, hiding an unknowable book of derivatives and a portfolio of assets valued at about $29B, coincidentally almost exactly what the Fed kicked in to purchase them. If we are going to spend roughly a trillion dollars on assets that self-styled masters of the universe failed to value, we ought at least have the opportunity to take a crack at pricing them ourselves, especially once we've bought them. It will be essential to form opinions about whether the assets Secretary Paulson will purchase from his former colleagues are fairly priced. The possibility of chummy dealing, the near impossibility of avoiding it, is obvious.

Further, the word confidence keeps coming up, we must restore confidence in the American financial system. It is not enough that we hand over our money, we must hand over our trust as well. Surely, then, if this is a new era of trust, there should be no problem with requiring sellers to disclose at precisely what value the assets for sale had been booked on their financial statements, with criminal penalties for misstatement. We should be able to evaluate, in the light of day, how forthright financial institutions have been in representing their true condition to potential investors and the public-at-large. We may find that some have played things relatively straight, while others survived by sleight-of-hand and exaggeration. The former group will have earned our confidence. The latter will have earned something else.

This is not "a modest proposal", presented in irony. If we are going to spend hundreds of billions of dollars, absolute transparency strikes me as a minimal prudential requirement. They say sunshine is the best disinfectant. I'm afraid there is a lot of rot in our financial system. It's time to open up the windows wide.

Update History:
  • 20-Sept-2008, 5:30 p.m. EDT: Changed "to require" to "with requiring".
  • 20-Sept-2008, 5:30 p.m. EDT: Changed "hundreds of trillions" to "hundreds of billions". Many thanks to commenter Alan Brown!

Related Posts (on one page):

  1. Paulson's vacuum cleaner?
  2. Bad.
  3. Truth & Reconciliation
Steve Randy Waldman — Saturday September 20, 2008 at 2:28pm permalink
GaryD (mail):
You don't get it. Hank Paulson and company created this mess with the intention of dumping the consequences on the taxpayer. Paulson was at the helm of Goldman Sacchs when it pushed all asset backed securities garbage out into the market. His job now is to stick the taxpayer with the bill. He is not working for the taxpayers and he never was.
9.20.2008 2:43pm
GS mother ship

something tells me there was increased flow between these non-us and their momma the past days. of course nobody can do anything about it:

“Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”
9.20.2008 3:31pm
Jason Ruspini (mail) (www):
Going forward with such a plan without full transparecy is absolutely unacceptable. We also should have some form of accountability if the Treasury is going to play hedge fund. Maybe the Secretary should receive or personally pay, say, 0.01% of the profit/losses from this trading? I'm not kidding.
9.20.2008 3:44pm
RueTheDay (mail):
This "plan", and I use the term loosely, is a complete abdication of responsibility on the part of our legislators. It addresses none of the core issues - transparency (as you note), excessive leverage, the elimination of the firewall between banking and the securities market due to the repeal of Glass-Steagall, the unprecedented under-pricing of risk over the last few years, the emergence of the shadow banking system, etc. It amounts to a passing of the buck to the experts, of whom the primary expert only has four more months left until this is no longer his problem.
9.20.2008 4:20pm
Lawrence Jay (mail):
Pay for the assets contributed to the RTC using new US Treasury "RTC Notes." Make it known that the RTC will hold the contributed assets to maturity. Pay all principal and interest on RTC Notes with more RTC Notes.

Then, see what happens.
9.20.2008 6:43pm
Alan Brown (mail):
From the post: If we are going to spend hundreds of trillions of dollars, absolute transparency strikes me as a minimal prudential requirement

Hundreds of billions of dollars, right?
9.20.2008 7:49pm
Steve Randy Waldman (mail) (www):
Alan — Thanks! It's fixed now.
9.20.2008 8:06pm
AndrewBW (mail):
Not only absolute transparency, but also genuine oversight. To completely forbid any sort of administrative or judicial review is unforgiveable. I'd oppose this bill on that ground alone, even if every other word in it were absolutely perfect.

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
9.20.2008 10:31pm
RebelEconomist (mail) (www):
This is a brilliant idea! Not only would it provide a check on the work of the TARP (in the regrettable but likely event that it goes ahead), but it would also open discussion about the valuation of such complex assets from which a lot could be learned.
9.21.2008 6:47am
Independent Accountant (mail) (www):
This proposal is not new. It is MLEC, which I wrote about 11 months ago, but nine times as large. I suggest this change to "Super-MLEC": any entity which wishes to use it, must have each of its executives, defined as anyone who made more than $1 million there from all sources, cash, stock option exercises, etc., post a bond equal to the executive's last three years total compensation to cover projected losses from whatever his entity will sell MLEC. You might be amazed to see how quickly the entities desiring to use MLEC will mark their assets to market! The only way "Super-MLEC" can bail out Wall Street is if it pays more for the assets it buys than they are worth.
9.21.2008 9:43am
RueTheDay (mail):
Steve - Thank you for bringing up the subjects of leverage and maturity mismatch.

One thing that really strikes me about the level of the discourse taking place in the country right now is how opinion on the root cause of the problem has bifurcated along party lines, with both parties completely missing the point. Republicans are predictably blaming "irresponsible borrowers", and Democrats are predictably blaming "greedy predatory lenders". Meanwhile, almost everyone ignores that structural issues that allow such mistakes to threaten the entire system.

Let's say you have $1,000. You have the opportunity to buy an asset with a 10 year life that currently yields 6%. If you invest your money in the asset, you make $60/year. You get the bright idea that if you could borrow money for less than 6%, you can make a return that is limited only by your ability to borrow. You search high and low, and find someone willing to lend you $30,000, on a month to month basis, at 4%. You now have $31,000 in assets, $30,000 in liabilities, and $1,000 in equity. Interest income is $1,860, interest expense is $1,200, leaving a cool profit of $660 per year. Much better than the measley $60/year you could make without leverage.

Anyone with a brain can spot the potential problems.

1. You are financing a 10 year asset with 30 day liabilities. If, for whatever reason, you cannot rollover your financing at the end of the month, you're toast.

2. If the yield on your asset decreases, you're toast.

3. If the rate on your borrowings increases, you're toast.

4. If the market price of your asset falls, and your lender demands additional collateral, and that demand exceeds your $1,000 of equity, you're toast.

The proximate cause of the asset dropping in value or reducing its yield is IRRELEVANT.

If we build a bridge and construct the supports out of pot metal instead of structural steel, and the first car that drives across it causes it to collapse, we do not blame the car or its driver. Yet that is exactly what the vast majority of politicians, talking heads on TV, and, quite frankly, the imbeciles that make up the rank and file of this country, want to do.
9.21.2008 11:38am
RueTheDay (mail):
One other point I meant to add to my example above:

Scenarios 2 and 4 unfold, and your asset has declined in both market value and return. Suddenly, your fairy godmother appears and offers to buy it from you. How does this help you? Near as I can tell, it only helps you if she pays you more than you could otherwise sell it for, and even then, depending upon how much the market value has fallen relative to your equity, you may still be toast.
9.21.2008 11:51am
I love the smell of a bailout in the morning:
What were the original estimates for a war with Iraq?

"Sen. Kent Conrad, D-North Dakota, the outgoing Senate Budget Committee chairman, issued a statement Tuesday saying "the reality is no one knows how much it will cost us to wage war with Iraq."

"Mitch Daniels' $50 billion to $60 billion estimate is as viable as Larry Lindsey's $100 billion to $200 billion estimate in September. So much depends on the duration and type of combat forces as well as the presence, duration and size of a peacekeeping force," Conrad said. "

hmmm...somewhere between 50 and 200 billion...

It's highly likely that the trillion dollar bailout will be at LEAST 10 trillion.
9.21.2008 1:38pm
Lin Sherman (mail) (www):
Paulson's demand for lack of oversight or accountability raises the question of what he really intends to do with the money. Frankly, I don't think he knows. For starters, he's an MBA, not an economist or finance guy. I think a bunch of his Wall Street and GOP cronies are whispering in his ear that something must be done! and he's come up with the plan that they've handed him. The WSJ reports industry lobbyists are twisting arms in Congress - what's to think they haven't gotten to Paulson?

Stop the Bailout!
9.21.2008 2:10pm
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