Morganson

More transparency, she says, and i agree.

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new_york_times:http://www.nytimes.com/2008/11/09/business/09gret.html

By GRETCHEN MORGENSON
Published: November 8, 2008
OPTIMISM surrounding last week’s election and the promise of a new crew in Washington ran smack into the reality that we are still mired in a wicked financial mess.
Times Topics: Gretchen Morgenson
The Labor Department reported on Friday that the unemployment rate jumped to 6.5 percent in October. And stocks are now 7 percent lower than they were on Election Day.
Investors are surely eager for change in the stock market and the economy — though, of course, a new team at the White House cannot make either turn on a dime. But President-elect Barack Obama can send a message to investors and taxpayers that he has their best interests at heart.
A strong first step would be to ensure that finance officials in charge of taxpayer-financed bailouts operate them with more transparency. And it would help the Treasury Department regain some public trust if the people running the bailouts were more forceful about extracting concessions from recipients of taxpayer dollars.
In short, the immediate opportunity of a new White House is to make sure that sweeping financial fixes are done properly, not just quickly.
Recall that from the very start of this mess, major decisions have been made in a hurry, behind closed doors, with many of the participants unidentified. This has led to a natural suspicion among some analysts, financiers and politicians that special pleaders may be on the scene in these smoke-free rooms, securing special favors.
The secrecy and opacity that have surrounded some of the trickier decisions — such as allowing Lehman Brothers to fail while saving Bear Stearns — do not engender trust. They create distrust.
Because taxpayers are financing these exercises, it seems only right that they know who was in on the decisions, why the decisions were made and who the prime beneficiaries were. It’s been awfully frustrating to watch taxpayer money doled out to the same cast of characters — commercial banks and brokerage firms — that put the nation in such financial peril.
The decision to recapitalize the banks was wise. It is a necessary evil, alas, because making sure that money is available to finance a small business, buy a home or send a child to college is the best way to mitigate a recession’s impact.
But the fact that the Treasury seems to have attached no strings to the cash it handed to the big banks is inexplicably naïve and indulgent. Now we have the spectacle of banks hoarding the taxpayer cash or refusing to pass along to suffering consumers any of the savings reaped by the institutions’ reduced lending costs. This is both unfair and a recipe for a backlash.
HERE is another way the Treasury should be tougher on the institutions that are holding their hands out: force them to raise additional capital in the markets — and swiftly. It may be bitter medicine to issue shares at depressed levels, but this may also be the best opportunity to do so.
Think back to what happened earlier this year with Freddie Mac, the giant mortgage finance company now being run by the government. In May, when its stock was trading around $27, Freddie Mac said it would raise $5.5 billion by issuing common and preferred shares. The stock rallied on the news because investors recognized that the company’s capital needs were pressing.
But Freddie Mac never did raise the money. And three months later, the government took it over. Had Freddie Mac secured that extra capital, taxpayers would be less vulnerable to the losses they might now face as part of the federal bailout of the company.
Lastly, a discussion is needed of how and when taxpayers may be able to exit the bailout business. Although it is understandable that some of the financing programs instituted by the Federal Reserve Bank of New York are open-ended, setting no time limits on the cash spigot is unnerving.
Consider the Fed’s new commercial paper facility. It was set up on Oct. 20 to free the stalled market for short-term funds on which so many companies rely for their daily operations. Some $243 billion had been lent as of last week. And by all accounts, the program has helped to reduce the costs of borrowing in that market and helped get it moving again.
Clearly the program is necessary now. But it should have some type of maturity date. The problem with an open-ended program is that when interest rates rise, the costs to the taxpayer do, too.
There is a lesson to be drawn from the difficulties that companies experienced before the Fed stepped in, when they couldn’t tap the short-term money market: A commercial economy as large as ours should not be built on a short-term funding apparatus.
Indeed, it’s just as perilous as constructing an enormous mortgage market on adjustable-rate loans. The sooner that companies curtail their reliance on this market to finance their day-to-day operations, the better off they will be.
Taxpayers and investors are paying dearly in this crisis. More transparency, tougher deal terms and clearer exit strategies would do a lot to ease our pain.