How Secrecy Could Wreck Geithner's Bank-Rescue Plan

The feds need to stop talking over our heads and explain all the uncomfortable details

By SHARE

You don’t need to know the details.

That’s been the paternalistic approach taken by Treasury and Federal Reserve officials since last fall, as they’ve tried one maneuver after another to salvage the financial system and fix the economy. The just-trust-us strategy has backfired, badly. Now we have another major component of the Save America project, Treasury Secretary Tim Geithner's plan to help unwind billions of dollars worth of money-losing bank deals that are at the heart of the problem. It looks to be off to a good start. But if Geithner & Co. continue to conduct bailouts in the shadows, then count on more eruptions like the recent fiasco over bonuses at AIG - with reverberations that could threaten the entire bailout regime.

[See 5 lessons from the AIG and Merrill Lynch bonuses.]

During the first phase of the bailouts, the fear was that too much public information about the government's huge subsidies to endangered banks could stigmatize those firms receiving bailout money. So for awhile the Treasury Dept. wouldn't even say which banks were getting money, fearful, apparently, that any negative publicity could drive depositors and trading partners to stop doing business with the bank, sealing its sorry fate.

Treasury finally gave in to public pressure and started to identify bailout recipients, which organizations like ProPublica have been doggedly tracking. The feds’ fears have turned out to be unfounded. There have been no bank runs. The republic has survived. And any American who’s interested can now see where all that money is going.

[See what’s outrageous about the Merrill Lynch bonuses.]

It’s a bit harder to tell what the money's being spent on, because the government has been sitting on those details, too. Donald Kohn, vice chairman of the Federal Reserve, told Congress recently that if the trading partners for bailout hog AIG were revealed, it could “undermine confidence" in the financial system. (Who knew there was any confidence left?)

Then, when the AIG bonus fiasco exploded, AIG suddenly coughed up a list of trading partners that have basically gotten billion-dollar refunds on derivatives that AIG wrote but couldn’t back up – refunds financed by the $170 billion in federal aid AIG has received so far. None of the big counterparties, including top financial firms like Barclay's, Goldman Sachs, and Deutsche Bank, took a loss on those deals. Why? We don’t know yet. But we sure need to find out. If the answer is unsettling, then it’s a damn good thing we asked the question – so we don’t do it again.

[See 7 surprises buried beneath the AIG bonuses.]

The whole bonus scandal itself is a byproduct of excessive secrecy. It’s self-evident that the poobahs at AIG, Merrill Lynch, and other financial wards of the state thought they were granting megabonuses in a sealed chamber, just as they always had. Their federal overseers may have thought the same thing. If they all knew the details were going straight into a press release, you can bet there would have been some very clever efforts to rein in those payouts.

There’s still a chance to apply these lessons to Part II (or is it Part V?) of the bailout. Geithner’s Public-Private Investment Program is rife with potential scenarios that could turn out as ugly as the AIG bailouts if handled in secret, with a tone-deaf sense of public accountability. Some of the wealthiest private investors will be using cheap, guaranteed government loans to buy distressed assets that could turn a big profit eventually. Some of those investors will probably be the very same banks that have gotten bailout money, which will require some deft explaining. And big-time money managers won’t bother with this if there’s nothing in it for them. The feds will have to allow for upside payouts that could reach seven or eight figures for some individuals, or else those money mavens will deploy their capital someplace else.

[See why the markets hate the idea of bank nationalization.]

If Geithner et. al. can convincingly explain this all up-front, tell Americans what’s in it for them, and live up to President Obama’s call for real transparency, then taxpayers might hold their noses one more time and go along with this. It would help if there was somebody in the room, helping make the deals, who could serve as an ombudsman for Main Street, blowing the whistle when something seems foolish or rapacious.

If, on the other hand, deals continue to get done in sealed rooms at odd hours, with enrichment schemes that are only revealed by accident months later, then the AIG bailouts may turn out to be just a tame whiff of the fury that’s coming. So maybe the government should trust us, instead of the other way around, and spell out how it’s spending our money. We’ll find out one way or the other.

TAGS:
Merrill Lynch
AIG, Inc.
Geithner, Tim
  • Rick Newman

    Rick Newman is the author of Rebounders: How Winners Pivot From Setback to Success and the co-author of two other books. Follow him on Twitter or e-mail him at rnewman@usnews.com.