An audit released Monday by the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) determined that Treasury and Fed officials were not entirely forthright when explaining their decision to inject over $100 billion in capital to nine major financial institutions last fall. As a result, the SIGTARP concluded that these officials have eroded the confidence of the very stakeholders whose support the government needs to effectively stabilize the financial system.
This finding will probably come as little surprise to those who have spent months demanding more transparency from the Treasury and Fed officials who are managing the government’s complex and erratic bailout programs. Last fall, for instance, POGO expressed bewilderment that the government was launching so many bailout programs without explaining them to the public:
"Whether it is the multi-billion dollar bailout of Wall Street giants; the newly created (and ever-evolving) TARP; the Federal Reserve's additional lending of $2 trillion; calls for both a new economic stimulus package; or an additional $25 billion to the auto industry — not one of these steps has been adequately explained, justified, or documented."
But even if the latest SIGTARP audit doesn't contain any shocking new findings, it does do an excellent job of documenting the misleading statements made by government officials at the height of the financial crisis about the Capital Purchase Program (CPP) and other bailout initiatives.
As the audit describes, shortly after the passage of the Emergency Economic Stabilization Act last fall, Treasury injected capital into nine major financial institutions as part of the CPP (documents obtained by Judicial Watch later revealed that the CEOs of the nine big banks didn't exactly have much say in the matter). These nine institutions — Bank of America, Citigroup, Wells Fargo, JPMorgan Chase, Goldman Sachs, Morgan Stanley, Merrill Lynch, State Street Corporation, and Bank of New York Mellon — held more than $11 trillion in assets, and received a total of $125 billion in CPP funds.
The CPP was sold to the public as a program to inject capital into healthy firms that needed a little extra assistance to weather the storm of the financial crisis. Here's Treasury's official description: "Through the CPP, Treasury will invest up to $250 billion in U.S. banks that are healthy, but desire an extra layer of capital for stability or lending." And last fall, Treasury and Fed officials made numerous public statements to reassure the public that the first nine banks to receive CPP funds were in a state of financial health. On October 14, 2008, then-Treasury Secretary Hank Paulson stated that "these are healthy institutions, and they have taken this step for the good of the U.S. economy." A joint statement released the same day by Treasury, the Fed, and the FDIC hammered home the same point: "we appreciate that these healthy institutions are taking these steps to strengthen their own positions and to enhance the overall performance of the U.S. economy."
Over the next few months, however, we would learn that some of these institutions were actually on their deathbed. Bank of America had to come back for an additional $20 billion through the Targeted Investment Program (TIP), and Treasury, the Fed, and the FDIC agreed to provide a backstop for a pool of $118 billion of the bank's assets under the Asset Guarantee Program (AGP). Citigroup also received $20 billion in TIP funds, and the government agreed to provide a backstop for a pool of $301 billion of its assets under the AGP. In addition, one of the nine banks ended up acquiring another in the highly controversial Bank of America-Merrill Lynch merger.
Since that time, Fed and Treasury officials have changed their tune about the reasons for distributing the initial CPP funds to these nine institutions. See if you can reconcile these three statements made to SIGTARP in its latest audit (emphasis POGO's):
1. "...Chairman Bernanke told SIGTARP that there were differences in the nine banks in terms of strength and weaknesses, but that the selection was generalized in order to avoid stigmatizing any one bank as being a weak bank and creating a panic."
2. "For his part, although former Secretary Paulson stated that each of the nine financial institutions was viewed as viable and healthy, he also acknowledged that he was aware of no independent assessment of the conditions of the nine institutions at the time."
3. "Secretary Geithner, who was then President of the FRBNY [Federal Reserve Bank of New York] told SIGTARP that, in selecting the first nine institutions, size and importance were the key characteristics that guided the process, and that no judgments were made as to their strength or weakness."
Over at The Atlantic Business Channel, Derek Thompson defended the actions taken by the Fed and Treasury in response to the massive financial meltdown last fall:
"On the brink of an apocalyptic worldwide financial panic, our economic leaders told us white lies about the banks' health. I'm not surprised. In fact, isn't that the point?...Crisis management is difficult. There's a short-term gain to telling white lies to keep confidence in the system, but a long-term risk, because the revelation of their falseness can destroy that confidence. But I've yet to see a convincing argument that September and October 2008 were anything less than a remarkable, if imperfect, tango of financial improvisation that largely worked to save our financial system."
Even if the bailout programs did bring the economy back from the brink of destruction, I would challenge the notion that withholding information has helped to increase public confidence in the government's actions (the Fed continues to make a similar argument as it tries to block the release of the names of the financial institutions that have accessed more than $2 trillion from the Fed's emergency lending facilities). If anything, the half-truths and misleading statements disseminated by Fed and Treasury officials have fueled the widely held suspicion that decisions are being undermined by favoritism and conflicts of interest. If investors are starting to regain confidence in the nation's banks and financial institutions, they're doing so in spite of, not because of, the government's "white lies."
The next time the Fed and Treasury feel a need to "protect taxpayers" by withholding the full truth about the state of the economy and of the firms receiving assistance from the federal government, we hope they take the SIGTARP's conclusion to heart:
"It is axiomatic that the Government's capacity to address financial crises depends in no small measure on its credibility, both with market participants whose confidence is essential to stabilize the financial system and with the American public whose confidence is essential to underpin the political support necessary to take the difficult (and often expensive) steps that are needed. Accuracy and transparency can enhance the public's understanding of and support for government programs, whereas statements that are less than careful or forthright—like those made in this case—may ultimately undermine the public's understanding and support for those same programs. This loss of public support could damage the government's credibility and have long-term unintended consequences that actually hamper the Government's ability to respond to crises."
-- Michael Smallberg