November 04, 2008
David Nason Meet Louis Brandeis
Posted by Mike Guttentag

In an earlier post I suggested that a disclosure regime similar to the one imposed on public companies might be appropriate for the US government’s foray into the investment of public funds in private firms.  Today, through New York Times reporters, we get the response from the inner circle deciding how to allocate the TARP funds.

According to these reporters, David Nason, one member of the inner circle, explains that: “Even to disclose the selection criteria could quickly destabilize banks perceived to have the wrong profile.”  This is a pretty weak rationale for non-disclosure, and is especially surprising coming from someone who previously worked at the SEC.  Why should an investor be sensitive to the possibility of a government equity injection that is supposedly being made at approximately market rates?  If the problem is sending a potentially negative signal, isn’t this simply a question of delaying an inevitable disclosure? If we can determine which banks would fail to meet the criteria, what is the additional negative information that disclosing the criteria provides?  If we can’t determine which banks would fail to meet the criteria, what is the harm in disclosing the criteria?  By the way, aren’t all depositors now insured anyway? 

The folks at Treasury probably feel overwhelmed and don’t want to be burdened by disclosure obligations, but there is a strong argument for more disclosure in this context.  Louis Brandeis was a big fan of the disinfecting power of sunlight, and maybe the decisions makers at Treasury should show less hubris and more faith in a tried and true approach.

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