The Dangers in Outsourcing the Bailout
Originally posted at Dirt Digger's Digest on September 23, 2008 -- A number of leading Democrats and Republicans expressed strong
misgivings last Monday about the autocratic plan for bailing out Wall
Street that Treasury Secretary Henry Paulson wants to ram through
Congress. It remains to be seen whether this is mere posturing or
Critics are focusing on vital issues such as cost and oversight, but
a lot less attention is being paid to the mechanics of Paulson's
proposal - specifically, the question of who would carry out the
federal government's purchase of $700 billion in "troubled" securities
from banks. As I noted in my post a week ago Sunday, the draft legislation
circulated over the weekend includes a provision that seems to allow
Treasury to contract out the process. Treasury then put out a fact sheet
making it quite clear it intends to use private asset managers to
manage and dispose of the assets it acquires, though the document does
not specifically allude to the purchasing. Paulson himself referred to the use of "professional asset managers" during an appearance on one of the Sunday morning talk shows.
It amazes me that there is not more outrage over this aspect of the
plan. Paulson seems to be leaving open the possibility that the same
firms that are being bailed out could be hired to run the bailout. This
would mean that institutions receiving a monumental giveaway of
taxpayer money could turn around and earn yet more by acting as the
government's brokers. Aside from the unseemliness of this arrangement,
this would be an egregious conflict of interest.
The alternative proposal
floated by Senator Chris Dodd, which accepts Paulson's language on
contracting out, includes a section on conflict of interest. But rather
than stating what the rules should be, the draft leaves it up to the
Treasury Secretary to do so. There were reports last Monday night that Treasury would go along with the inclusion of a conflict-of-interest provision.
Paulson's approach to the Big Bailout, particularly the insistence
that there be no punitive measures for the banks, shows he is not the
right party to oversee ethical issues. Paulson apparently can't help
himself. He still has the mindset of a man who spent more than 30 years
working on Wall Street, at Goldman Sachs. He is a living example of the
perils of the reverse revolving door: the appointment of a
private-sector figure to a key policymaking position affecting his or
her former industry.
The weak conflict-of-interest provisions Paulson is likely to impose
would probably not address the inherent contradiction in having
for-profit money managers running the bailout program. Even if Treasury
chooses managers whose firms are not getting bailed out, there is still
the danger that they will use their inside knowledge to benefit their
non-governmental clients (and themselves) or will collude with buyers
to the detriment of the public.
A Reuters story of last Monday reported that a leading contender for a federal
money management role is Laurence Fink and his firm BlackRock, which
was involved in managing the portfolio of Bear Stearns when that firm
was sold to JPMorgan Chase as part of an earlier bailout. Last March,
BlackRock, which is 49-percent owned by Merrill Lynch (now part of Bank
of America), announced
it was forming a venture to "acquire and restructure distressed
residential mortgage loans." Will Paulson see that as a conflict of
interest - or more likely as a credential?
Letting financial firms that have profited from the mortgage crisis
manage the bailout gives the impression that we are permanently in the
grip of Big Money. To Paulson's way of thinking, that's not a problem,
but it could make a bad plan much worse.
- 187 Privatization
- 208 Regulation