Panelists Cite Lack of Oversight in Federal Bailout

Panelist William F. Kroener III, co-chair of the ABA Task Force on Financial Markets

2/13/2009

The federal government averted a complete financial meltdown by responding quickly to the banking crisis, yet oversight and accountability continue to be sorely lacking, according to a “Managing the Bailout: Execution and Oversight of the Federal Response to the Financial Crisis” panel discussion sponsored by the Rappaport Center for Law and Public Service at Suffolk University Law School in conjunction with the American Bar Association 2009 Midyear Meeting in Boston. 

Accountability

“People are looking for accountability,” said Cornelius Hurley, Director of the Morin Center for Banking and Financial Law at Boston University. “There is enormous frustration at the lack of indictments. We have all seen crises much smaller than this where people went out in handcuffs.”

For the past three years, these same banking executives have been hauling in $10 million bonuses while selling the high-risk loans that taxpayers are now being forced to bail out, said Hurley.

The panel was moderated by Alasdair Roberts, the Jerome L. Rappaport Professor of Law and Public Policy at Suffolk Law School.

Lack of oversight

Former Massachusetts Attorney General Scott Harshbarger, now a private attorney, took an even dimmer view of the first phase of the bailout, asserting that the federal government “failed big” because of the complete absence of oversight.

Some panelists emphasized that the Treasury Department did an admirable job in slowing a financial avalanche that was building enough momentum to exceed the damage done by the Great Depression.

Response quick but imperfect

“I think it was a good idea to rescue the financial institutions,” said Damon Silvers, of the federal Troubled Asset Relief Program (TARP) Oversight Panel and an attorney for the AFL-CIO. “We were faced with an extraordinary danger, and a revenue infusion was the right way to go. It didn’t solve the systemic problems, but it did get the situation stabilized.”

He said that adequate oversight was virtually impossible due to the speed of the meltdown; on the day his oversight panel began work it had no office, no staff and a report that already was 10 days overdue.

Noting that only 20 percent of the bad loans were given out by traditional banks, Silvers said the crisis was created by unregulated lenders such as credit card companies, mortgage brokers, and companies that borrow directly from capital markets.

According to Hurley, the largest continued threat to our financial system comes from the so-called “systemic risk” institutions – entities so massive that, if they were allowed to fail, would bring the whole system down with them.

Because these institutions cannot be allowed to fail, they have a huge advantage over their competitors in the lending market. Hurley said this lending differential should be taxed as a form of insurance premium, thereby ensuring that the profits from the lending advantage go back to the taxpayers rather than the investors.


 

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