Government Rescue Spending: Clear or Cloudy?
Critics Question Transparency of the Treasury Dept., Federal Reserve on Rescue Effort Spending
How much will the AIG bailout ultimately cost? What are the banks
applying for the government's $250 billion capital purchase plan? Who
is the Federal Reserve lending to and how can taxpayers be assured
they'll get their money back?
After weeks of sometimes frenzied efforts by the federal
government to rescue the financial system, and on the heels of the
government's latest move -- the announcement of a new $40 billion infusion
to the ailing insurance giant American International Group -- critics
say there are many questions but few answers about the work performed
by the Treasury Department and the Federal Reserve.
"The bailout, the Treasury, the Federal Reserve -- it's like a
three-card monte game, you don't know where the money's coming from,
you don't know who it's going to, and I think the public has every
right to be outraged by this," said Bill Allison, a senior fellow at
the Sunlight Foundation, a government transparency watchdog group.
Gerald O'Driscoll, a former vice president at the Federal
Reserve Bank of Dallas and a senior fellow at the Cato Institute, a
libertarian think tank, said he worried that the failure of the
government to provide more information about its rescue spending could signal corruption.
"Nontransparency in government programs is always associated with
corruption in other countries, so I don't see why it wouldn't be here,"
Federal officials, however, have touted their commitment to transparency.
"We want to inform the public as much as possible about our
operations, so we have posted an abundance of information on the
Treasury Web site to allow everyone to have insight into our actions,"
interim Assistant Treasury Secretary Neel Kashkari, the official in
charge of the government's $700 billion rescue package, said in remarks
delivered at a securities summit Monday.
"Transparency will not only give the American people comfort in
our execution, it will give the markets confidence in what form our
action will take," he said.
Federal Reserve Chairman Ben Bernanke last month noted the importance of transparency
with respect to mortgage-backed securities, investment instruments that
have played a key role in the country's financial crisis.
Because of the complexity of mortgage-backed securities --
swaths of mortgages bundled into single investments -- "transparency
about both the underlying assets and the mortgage-backed security
itself is essential," Bernanke said in a speech at the University of
California at Berkley.
The Fed's Mysterious Borrowers
But questions about transparency at the Federal Reserve, in
particular, have prompted a lawsuit: Bloomberg L.P., which operates the
news agency Bloomberg News, is suing the Fed for the release of
information on its lending to private financial institutions.
The amount of money the Federal Reserve regularly lends to
private institutions has increased exponentially since the start of the
financial crisis and the creation of new Fed lending programs.
"We really don't know anything," Matthew Winkler, the
editor-in-chief of Bloomberg News, told ABCNews.com. "All we know is
something close to 2 trillion is being used and that money is the
taxpayers'. ... We don't know whom it's being lent to and for what
purpose because we can't see it because it isn't disclosed."
The Bloomberg lawsuit specifically requests information on what
assets the Fed is taking as collateral in return for its loans.
According to the Federal Reserve Web site, the Fed accepts collateral
in the form of mortgage-backed securities along with other assets.
"Taxpayers are entitled to understand and assess the decisions
by the Fed on the valuation of the collateral it accepts as security
for public money being lent to private institutions," the lawsuit
Supporters of the Fed's work counter that it shouldn't reveal
the identities of the banks that borrow from it - and, accordingly,
what collateral they use - because that could attach a stigma to
borrowing from the Fed and could discourage the use of Fed lending
A Federal Reserve spokeswoman declined to offer comment on the suit.
While the Fed faces questions about its lending practices, the
government as a whole is facing questions about whether its latest
multibillion-dollar attempt to bolster AIG has even a remote chance for
Months earlier, the government had announced that the Federal
Reserve would lend the troubled insurance company $85 billion. Later it
announced it would lend an additional $37.8 billion.
The government said Monday that it was restructuring its AIG
plan to include a total of $97.8 billion from the Federal Reserve and a
$40 billion infusion from the Treasury Department. The Treasury
Department would, in return, receive a stake in AIG in the form of
preferred shares. The money for the government's investment would come
from the $700 billion financial rescue plan approved last month.
More Money for AIG?
The problem, critics say, is that it's unclear exactly how much
money AIG actually needs because there is no certainty about how much
the insurance giant will ultimately lose as a result of its credit
default swaps -- insurance contracts that kick in when investments such
as mortgage-backed securities fail.
"Not only do people not understand what's on the books, it's
impossible to put a fair valuation on them," said Barry Ritholtz, the
author of "Bailout Nation: How Easy Money Corrupted Wall Street and
Shook the World Economy" and the CEO of the institutional research firm
Critics question whether the government will have to provide even more money to AIG.
Brookly McLaughlin, a spokeswoman for the Treasury Department,
said she wouldn't speculate on whether the recently-restructured AIG
package was enough.
But, she said, "we think that the steps taken today are
important to giving them a more sustainable capital structure and
helping them to be better able to execute their asset disposition."
Which Banks Get the Bucks
Under the government's $700 billion rescue package, $250 billion is supposed to be allocated directly to banks.
By infusing banks with capital, the program aims "to increase
the flow of financing to businesses and consumers to support our
economy," Kashkari said at the securities summit.
The Treasury last month named nine big banks that would receive
funding through the program - known as the Capital Purchase Program -
and how much money each would receive. (A list is available here.)
Kashkari said Monday that hundreds of other financial institutions have
applied for the funds and that "a number of them" had been granted
But the Treasury isn't revealing which banks have applied and
which have received preliminary approval. McLaughlin said that the
department would only provide information on banks that have already
received money from the program.
When "everything is finalized, that's when it's appropriate to post that information," she said.
Some say the Treasury should be disclosing the names of the institutions that have applied for its help.
"I think that any time you're asking for money from the government, it should be a matter of public record," Allison said.
Will the Government Lose Money?
Still, others, including O'Driscoll, say they understand why the Treasury would want to guard such information.
"It's legitimate to say, 'If we tell you everybody who needs
money, all it's going to do is cause a run on the banks, and that
defeats the purpose,'" O'Driscoll said.
Deborah Lucas, a finance professor at Kellogg School of
Management at Northwestern University, said her gripe about the
Treasury Department's disclosure practices revolved around the true
value of the Treasury's investments in banks participating in the
Capital Purchase Program.
In return for its investments in banks, the Treasury is receiving preferred shares in the banks.
In a statement issued last month, Treasury Secretary Henry
Paulsen said the program was "an investment, not an expenditure" and
said there was "no reason to expect this program will cost taxpayers
But Lucas said that the market rate for the shares is lower than what the Treasury is paying for them.
Under fair value accounting principles, Lucas said, the Treasury
should be reporting the actual value of its stakes in the bank - but
"I think that they were trying to do things very quickly
because they felt there was a crisis so that was sort of an excuse to
not look too closely at how much things are really costing," she said.
Asked about Lucas' concern, the Treasury Department did not immediately provide a response.
With reports from ABC News' Charles Herman.