Bailout Secrecy Has Got to Go

Posted by: Matthew Goldstein on February 02

There’s been a lot of talk about the need for more accountability in the bank bailout. But if the Obama administration is serious about achieving that goal it will have to make sure all arms of the federal government are on the same page.

A case in point is the Securities and Exchange Commission’s denial of a recent Freedom of Information request, seeking more information about the federal government’s bailout of American International Group. In December, BusinessWeek, the publisher of this blog, asked the SEC to release an unredacted version of an AIG regulatory filing that contains the names of banks that have benefited directly from the bailout of the insurance giant. Specifically, BW asked the SEC to make public an exhibit to a Dec. 2 regulatory filing that lists the banks that have sold a batch of toxic collateralized debt obligations to Maiden Lane III.

Last fall the Federal Reserve’s New York office set-up Maiden Lane III, as part of a plan to enable AIG to terminate nearly $70 billion in credit default swaps it had written on subprime-backed CDOs. But so far, neither AIG nor the Fed will provide anything but a barebones outline of Maiden Lane III. And the SEC appears bent on protecting that veil of secrecy. In a Jan. 27 letter to BW, the SEC says the requested filing “contains confidential commercial or financial information’’ and releasing it would “cause substantial competitive harm’’ to AIG.

Never mind, that AIG is effectively a ward of the state given all the taxpayer dollars it has received over the past five months. And the CDOs that the banks are selling to Maiden Lane III are not likely to come back onto the market anytime soon. Indeed, the whole rationale for Maiden Lane III is to help the banks rid themselves of some of their toxic assets and eliminate AIG’s ongoing contractual obligation to provide insurance on those ailing securities.

For taxpayers, the issue here isn’t one of trying to pry into AIG’s trading history. It’s trying to keep track of all the money the government is spending and whether taxpayers are getting a fair deal.

To date, Maiden Lane III has purchased CDOs with a combined face value of more than $60 billion. The Fed is providing more than $24 billion in funding. Many of the banks selling CDOs have already obtained billions in dollars in payments from AIG as part of the insurance coverage on those assets. So, in effect, the banks selling CDOs to Maiden Lane III have been largely made whole.

None of this is to say, Maiden Lane III was a bad idea. But the Maiden Lane III transaction may be a model for the Obama administration, which is considering creating so-called “bad banks” to buy rotting assets from financial institutions. (One of the architects of Maiden Lane III was Treasury Secretary Tim Geithner, who was president of the New York Fed when the transactions took place). If taxpayers are going to be on the hook for all those ailing bank assets, taxpayers have a right to know which banks are doing the selling and at what prices.

President Obama is right in calling for more accountability from the Wall Street firms that get bailout money. But accountability doesn’t just stop with the banks. The government doling out the cash needs to be accountable for its actions too.

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BusinessWeek's Adrienne Carter, Jessica Silver-Greenberg, and David Henry deconstruct the mysteries of high finance, Wall Street, and hedge funds for pros and ordinary investors. E-mail them directly if you've got tips about big deals, a hedge fund, or even securities industry gossip.

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