Rush and Shush at the Fed

By David Ignatius
Wednesday, February 11, 2009

The financial rescue program involves "very large numbers," Treasury Secretary Tim Geithner said yesterday in announcing a package that could cost up to $2 trillion. Uh, yeah. . . . His bailout numbers would be equivalent to nearly 15 percent of last year's gross domestic product. And that's not counting the $838 billion stimulus program or the $350 billion we've already spent on the Troubled Assets Relief Program.

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 (popularly known as the "bad bank") that would provide 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 who made this mess. 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 that a financial "catastrophe," to use President Obama's word, 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. For a nonfinancial analogy, think of the "war on terror" decisions made in 2002 and 2003 by a Bush White House that began every morning with hair-raising threat assessments.

What's needed here 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. It was rush-rush, and shush-shush, and 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. The minutes of Fed meetings were once kept secret, on the theory that the markets would be spooked by details of the deliberations. That same mentality prevailed when Bloomberg News filed a Freedom of Information request in November seeking details of more than $2 trillion in emergency loans from the Fed. In December, the Fed rejected Bloomberg's request.

Fed Chairman Ben Bernanke promised Congress yesterday that he would review the Fed's disclosure policies and create a new, improved Web site. But even the limited information on the old, clunky Web site raises some questions about whether Geithner and Bernanke are going farther down a blind alley.

As of last week, the Fed had $1.84 trillion in outstanding credits. Only about $475 billion were in plain-vanilla Treasury securities, of the sort that, until the crisis, made up nearly all of the Fed's portfolio. New items on the balance sheet included a $259 billion facility to backstop the commercial paper market. If that approach has 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 an additional $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?

If you want to get really frazzled about how your money has been used, look at items on the Fed's balance sheet known as Maiden Lane II and III. Those special-purpose vehicles hold $46.4 billion in securities from the ruined insurance giant AIG. (That's in addition to $39 billion in other AIG emergency credit.) Plus, AIG got $40 billion more in Treasury money under a program memorably called "Systemically Significant Failing Institutions." If you ask Wall Street insiders why AIG got all this loot, they say it was to prevent the failure of its counter-parties, the giant investment banks such as Morgan Stanley and Goldman Sachs. That's the sort of chicanery that 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 of this process, 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.

The writer is co-host of PostGlobal, an online discussion of international issues. His e-mail address is

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