Bailout bill’s stealthy authorship potentially problematic

Publication: Medill News Service

Marjorie Korn
October 2, 2008

WASHINGTON – Throughout consideration of Treasury Secretary Henry M. Paulson’s original bailout plan, many congressmen chided regulators, including the Securities and Exchange Commission and the Federal Reserve, for allowing certain sectors of the market to run amok with little oversight and insufficient public disclosure.

Yet a number economists and public advocacy groups have similar concerns with the behind-closed-door dealings that culminated in bringing the bailout bill to the Senate.

“I don’t think having congressional aides leaking information to the press is the best way to have transparency,” remarked Bill Allison, senior fellow at the non-partisan Sunlight Foundation in Washington. He said reports emerged that staffers were forced to surrender their BlackBerrys over the weekend the bill was drafted, prior to its failure in the House of Representatives on Monday.

While a televised Senate Banking Committee meeting held last week offered little in the way of specifics, high-ranking congressmen and administration officials spent a week in closed-door meetings late into the night trying to craft a piece of passable legislation. (Rep. Barney Frank, D-Mass., was conspicuously absent from chairing a House Financial Services Committee meeting Thursday, his stand-in commenting, “I think the whole world knows where he is right now.”)

The 106-page bill was ultimately posted Sunday afternoon on House Speaker Nancy Pelosi’s Web site.

“When there’s a lack of transparency in putting the thing together, the public is skeptical when told it will benefit them,” Allison maintained, calling the process a “confidence trick—if the package itself isn’t going to work, you need the psychological effect of everyone saying it is going to work.”

But Robert McDonald, an economist at Northwestern University’s Kellogg School of Management, said some believe the speed and secrecy of the bill were more a function of bringing a degree of comfort to an emotional and volatile market. “I actually think the reason for a lack of transparency by the Treasury Department is they are afraid of spooking the markets even more than they’re already spooked,” McDonald deduced.

“The Treasury has been vague about what they’re trying to do and I suspect the reason is they’re afraid of inciting asset runs,” McDonald continued, adding, “I think they’re trying to prevent runs on money market funds, uninsured deposits in banks and people generally trying to flee the market all at once.”

In addition to the bailout plan, the Senate planned to vote on a Financial Deposit Insurance Corp. request for a temporary increase in its deposit-insurance limit from $100,000 to $250,000.

McDonald was one of 231 economists who petitioned Congress in reaction to Paulson’s original three-page proposal. The petition urged lawmakers to consider, among other things, the ambiguity in the plan giving the Treasury the green light to buy billions of dollars worth of questionable securities.

Paola Sapienza, an economist at Kellogg and co-author of the petition, said the bill’s current 451-page incarnation is an improvement on Paulson’s original proposal. But Sapienza said the lack of openness invites critics to claim it “proves how much collusion there is: that people being consulted were the Wall Street banks and Paulson comes from Goldman Sachs and that it’s basically a subsidy to large banks that will eventually cost taxpayers, small banks and the economy.”

Already some congressmen are being scrutinized for their position on the bill in light of their relationship with Wall Street. The non-profit Center for Responsive Politics calculated that House members who voted for the bailout “have received 51 percent more in campaign contributions from the finance, insurance and real estate sector in their congressional careers than those who opposed the emergency legislation.”

Though Sapienza does not necessarily adhere to that thinking, she said it would make more sense to have a transparent legislative process.

The rescue plan leaves a myriad of questions yet unanswered, including issues of recovering money for taxpayers and distributing losses, she said.

Sapienza is frustrated because alternatives offered by non-partisan economists are being ignored by Congress and the administration.