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.
- 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!