Since the beginning of the financial crisis, the US Government has established policy on a case-by-base basis. Bear, Stearns was forced into the arms of JP Morgan Chase. AIG was bailed out not once, but twice. Lehman Brothers was allowed to fail, while Citigroup has been backstopped using the Treasury’s balance sheet. Worse yet, those providing the funds to implement the Treasury’s policy decisions, the US taxpayers, have largely been kept in the dark as to “why.” Why were certain firms bailed out while others were allowed to fail? Why hasn’t transparency in financial reporting been mandated as part of the myriad bailout programs? Why don’t we know how much money we can expect to commit to an institution or the programs overall? Why are decisions being promulgated by those in highly conflicted positions, raising suspicion as to the purity of their motives? Each of these questions raises a more important issue: Which is the best organization to deal with the financial crisis, to both develop and implement policy? The answer: it does not yet exist.
We, the People, are the owners of the US Treasury, the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and represent the “full faith and credit of the US Government.” Therefore, solutions to the financial crisis that use our money should benefit us, and reflect a risk-adjusted market rate of return for the capital used. The measure should be what a rational, arms-length investor would demand for scarce capital in a time of crisis, not what Treasury Secretary Paulson together with CEO of the bailed out institution deem appropriate. The interests of the US taxpayer need to be represented in an independent manner, free of conflict. The US taxpayer, the Treasury, the Federal Reserve and the FDIC, politics aside, have perfectly aligned motives. In order to de-politicize policy-making and negotiations around the bailout and financial sector reform, I propose the creation of an independent entity called the Stabilization Oversight Council (SOC). The SOC will be accountable to Congress and the US taxpayer, and will be staffed by market practitioners, economists and policy-makers. It will be responsible for developing policy and implementing decisions to address the crisis and stabilize the economy, and will incorporate input from the Treasury, the Federal Reserve, the FDIC and the White House. However, it will neither seek nor require consensus. Mindful of the weight bureaucracy placed on the Reconstruction Finance Corporation in the 1930s, the SOC will be designed to incorporate the best ideas from the brightest thinkers without suffering from decision paralysis. Stronger than the General Accounting Office, more powerful than the Inspector General, but with clear oversight to ensure it remains true to its mission.
We, the People, should benefit from the monies spent to reclaim the US financial sector. SOC will act as the rational businessperson representing US taxpayer interests, not as a Government-sponsored entity providing “sweetheart” deals in the face of purported conflicts of interest. SOC will negotiate directly with financial institutions and other entities receiving aid to ensure that market terms are secured. This would have prevented the kind of deals the Treasury cut with the first $125 billion of TARP, deals that were completely inadequate from the US taxpayer perspective. Further, SOC will act as an independent arbiter of program proposals, and can drive hard bargains in the face of entrenched interests, e.g., would Treasury Secretary Paulson really let Goldman Sachs’ or Citigroup’s stock price go to zero, even if it is in the best interest of the financial markets and the US taxpayer? The fact that nobody can confidently answer this question is unacceptable.
We, the People, deserve transparency from our Government, our financial institutions, and about the process for restoring the health of our financial sector and the economy. Creation of the SOC is a step in the right direction. This needs to be bolstered by strict enforcement of FAS 157, the “fair value” accounting rule. Most financial institutions have been reluctant to mark hard-to-value assets to market. It is this opacity that has kept a dark cloud over both the stocks of these companies and the financial injections into these institutions. If we cannot trust the financial statements of these firms, how can we possibly quantify the depths of their troubles and understand the magnitude of financial assistance needed? Further, the trillions of off-balance sheet assets that largely remain a mystery to investors need to be brought back on-balance sheet so a proper accounting of financial exposures can be made. Like the avoidance of mark-to-market accounting, off-balance sheet assets reduce transparency and obscure the health of our financial institutions. With tougher accounting rules forcing transparency together with the independent and conflict-free leadership of the SOC, US taxpayers and investors will have a much clearer picture of the health and resources required to repair our financial institutions and our economy. This will avoid squandering funds on short-term, patchwork solutions to problems that require radical thinking and even more radical actions.
We are at a critical moment in our nation’s history. We are all custodians for the next generation, one that will face problems and burdens that the Baby Boomers couldn’t possibly imagine. Staggering deficits. Towering entitlement obligations. Crumbling infrastructure. The stakes are enormous. It is time for visionary leadership and hard decisions. Many will get hurt. The goal is to do the best for the most, to be open and honest about it, and to get on with it. But in the absence of transparency, clarity and integrity, the ability to effect real change will be sharply limited.