Wednesday, January 21, 2009

Transparency at issue in bank system fix

The New York Times writes about the Obama administration's options in dealing with the ongoing banking crisis.  The story notes that one of the main differences among options being discussed is the level of transparency about the ultimate cost to taxpayers and the degree to which banks would be required to disclose the true magnitude of likely losses.  

According new analysis by the Congressional Budget Office, costs to taxpayers are highest when bailouts involve opaque transactions that are difficult to understand.  TARP is the poster child for a program with limited transparency.  The CBO estimates that taxpayers will end up absorbing 26% of $247 billion in disbursements to financial institutions through December.  The AIG bailout, another complex program, is estimated to cost taxpayers more than $20 billion.  November's decision to guarantee $306 billion of toxic assets on Citgroup's books is estimated to cost the public $5 billion.  

The new administration must do a better job in disclosing the real costs and real value behind its plans for the banking system.  More transparency and better communication with voters and the media are needed to both ensure the best solution is reached and help stabilize reeling bank stocks.  In addition, more transparency will increase the likelihood that hedge funds and other private investors buy some of the assets in question and invest in the banks themselves.

The Times notes, however, that "banks may not want that kind of openness, because accurately valuing the toxic assets could force many to book big losses, admit their insolvency and shut down."

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