Step back and put bright light on bailout plans
The financial-rescue program involves "very large numbers," said Treasury Secretary Tim Geithner Tuesday in announcing a new package costing up to $2 trillion. Uh, yeah. ... his bailout numbers would equal nearly 15 percent of last year's GDP, not counting the $838 billion stimulus program, or the $350 billion we've already spent on TARP.
Geithner's three-pronged plan shows just how worried government officials are about the frailty of the financial system. He proposed a "financial stability trust" to provide new capital for banks that fail government "stress tests" of their balance sheets; a new public-private investment fund providing up to $1 trillion to buy toxic real-estate assets; and a $1 trillion program to rescue frozen credit markets that trade securities backed by student loans, credit-card receivables, auto loans, commercial real estate and such.
Nobody likes rescuing the Wall Street rascals. But financial experts paint a frightening picture of what could happen if normal credit doesn't start flowing again soon. We're talking about a squeeze that could cut off municipal bonds that finance state and local governments, halt the commercial paper that finances inventories and trade, and even undermine the lending that finances our credit-card system. Geithner's package makes sense if you think a financial "catastrophe" may be approaching. But it's possible that Geithner, after spending the past year imagining worst-case scenarios as president of the New York Fed, may be shellshocked. Think of the "war on terror" decisions made by a Bush White House that began every morning with hair-raising threat assessments.
What's needed is more transparency so a broader group can think about whether the bailout policies are working. That was a big problem with the first round of TARP bailouts last fall. It was rush-rush, and shush-shush as we poured huge sums into crisis loans and subsidies. It's hard now to follow just where this money went. Transparency is not a natural instinct for those who regulate financial markets. Fed Chairman Ben Bernanke promised Congress Tuesday to review the Fed's disclosure policies and improve the Web site. But even the limited information on the old, clunky Web site raises questions. As of last week, the Fed had $1.84 trillion in outstanding credits. Only about $475 billion were in plain-vanilla Treasury securities that, until the crisis, made up most of the Fed's portfolio. New balance sheet items included a $259 billion facility to backstop the commercial paper market. If it's been working, why do we need a new facility? If it hasn't, why add more money?
Then there are Fannie Mae and Freddie Mac. As of last week, the Fed had outstanding credits of $29 billion for Fannie-Freddie securities and another $7 billion for mortgage-backed securities they hold. Under the new rescue plan, those numbers could jump to $100 billion and $500 billion. Does that increase make sense? Look at the Fed's Maiden Lane II and III balance sheets, special-purpose vehicles holding $46.4 billion in securities atop $39 billion in emergency credit to ruined insurance giant AIG. Wall Street insiders say it was to prevent the failure of AIG's counter-parties, giant investment banks like Morgan Stanley and Goldman Sachs. That's the sort of chicanery Geithner must avoid.
Wall Street's problems have stemmed partly from the secrecy in which its cockeyed financial schemes were hatched. Treasury and the Fed have been enablers with their fetish about not "stigmatizing" institutions that receive bailouts. That has to stop. If Geithner wants our money for this new rescue package, he has to give the public more details about how it's being spent. This is an area where sunlight really is the best disinfectant.
© 2009, Washington Post Writers Group