Saturday, March 20, 2010

To disclose or not to disclose-Transparency of the Bailout in USA.

An interesting court battle is being waged in the USA regarding the Freedom of Information Act.

Huge sums of money were disbursed by the Federal Reserve during the Global Financial Crisis in the latter half of 2008 to banks, companies and other financial firms to stem the tide of deteriorating markets and to prevent the US economy from going belly-up.

Apart from the debate about whether this massive rescue effort was undertaken to save a few preferred Wall Street banks (which had its own ex-executives, including the Treasury Secretary, Hank Paulson at key places), there is a tussle going on to find out how exactly the funds were disbursed and who were the recipients of these rescue bailouts.

Bloomberg has filed the case under FOIA. Naturally the Federal Reserve is opposing the release of information. The arguments for release of information is that public money was used and public has a right to know. The opponents say release of such sensitive information will undermine the status of the recipients and there could be negative effect (even a run on them) on the prospects of these firms.

Both arguments are very valid.

Public money was spent so quickly in those turbulent times, even Congress baulked at authorising it at first. There is a story that Paulson went with just a one page proposal to Congress to throw $700 billion at the problem and not enough details were given to make an informed decision. It was pure scare-mongering that got the funds released.

After nearly 18 months of the rescue being in effect, it is still not clear who was saved and whether they were worth saving, because the ground position has not changed much, with the Wall Street bankers (those that are remaining that is) going about their secretive business and controlling the markets as they used to before.

On the other hand, the Fed is right in arguing that it has to conduct its business not in the glare of public light and certain decisions and acts are too sensitive to be released in a volatile market and such release may screw the market further, even risking the bailout money itself.

My view is the Fed was right to keep things secret at that time, but now after so much time has passed, it is not a bad idea to release it. The bailout has worked to the extent it was hoped for and the bankers don'e need continued protection for an indefinite time.

Also many stories are already coming out regularly about the events and players. Lehman's auditors are in the soup for signing off on a fictitious balance sheet and the firm is going the way of Enron with possible criminal charges against the then management.
Books and articles are being released regularly detailing what went on inside these famed institutions, including the Government then.

I recommend reading the book Too Big to Fail by Andrew Ross Sorkin. It is interesting to read about how Lehman was raped individually and in group by the Treasury, Federal Reserve and all the other bankers like Goldman, JPMorganChase, Morgan Stanley etc leading up to its final bankruptcy.

With so much information coming on, it would not be too damaging if the Federal Reserve is asked to release full details of the rescue it undertook along with the Treasury Department then.
In that light, I applaud the latest ruling by the US Court of Appeals in Manhattan authorising the release of the information.

The Public has a right to know, sometimes a little belatedly, because releasing the information as the events are developing may be harmful but that can't be the case forever.

But wait, the battle is not over yet. I expect the case to go to the US Supreme Court and it will be then interesting to see how the whole thing pans out in the next few months.

May be the Congress will legislate a holding period for such information before they are released.