Transparency and bank supervision.

AuthorKelly, James E.

ABSTRACT

This article intends to (i) identify the recent rapid development of the transparency phenomenon in the context of financial services, while noting its relative lack of definition and practical application in jurisprudence and regulatory usage; and (ii) focus on select transparency oversight issues and conflicts related to the Treasury (in the administration of the Troubled Asset Relief Program ("TARP")) and to the Federal Reserve (the "Fed"). The article will suggest some possible limits related to transparency expectations.

  1. INTRODUCTION: THE TRANSPARENCY PHENOMENON

    President Obama's first act on taking office on January 21, 2009, was to sign the Memorandum on Transparency and Open Government, launching the President's Open Government Initiative. (1) The Memorandum stated:

    Government Should Be Transparent. Transparency promotes accountability and provides information for citizens about what their Government is doing. Information maintained by the Federal Government is a national asset. My Administration will take appropriate action, consistent with law and policy, to disclose information rapidly in forms that the public can readily find and use. (2) During the financial crisis that first developed in 2007 and continued through 2008-2010, the use of "transparency" in reference to a desirable regulatory quality has multiplied exponentially as the causes of the crisis have been debated and proposals advanced to stabilize, fix, and reform the financial system. The many reform recommendations include repeated calls for "greater transparency" in the operation of the financial markets and the practices of government banking regulators. (3) The speed and force with which transparency has entered the national lexicon has been a phenomenon in itself.

    Transparency is not a traditional legal or business term; however, as it has developed, transparency has a close relationship with the governance and regulatory principles of disclosure and accountability.

    Transparency falls squarely within the disclosure lineage articulated by Justice Brandeis ("[s]unlight is said to be the best of disinfectants"). (4) Usage of transparency, however, has come to encompass and go beyond the established meaning of disclosure, (5) which is associated with highly specific requirements of existing securities and consumer regulation and implies an action taken by a disclosing party to reveal some defined or agreed upon desirable set of information. With transparency, the emphasis shifted to embrace a broader and ongoing state of voluntary disclosure that includes characteristics such as simplicity and understandability, access and availability, and appropriateness, among others. While disclosure is in effect a regulated norm for communicating, transparency, at least at present, implies a more idealized, ongoing state of communicating. There might be limits to such high expectations.

    Transparency is also closely associated with accountability. In 1998, in response to the global Asian financial crisis, finance ministers and central bankers from major countries met and issued a series of reports "to strengthen the architecture of the ... financial system." (6) The report of the Working Group on Transparency and Accountability laid some important groundwork on transparency and accountability:

    Transparency refers to a process by which information about existing conditions, decisions and actions is made accessible, visible and understandable.... Accountability refers to the need to justify and accept responsibility for decisions taken. Accountability imposes discipline on decision-makers, thereby helping to improve the quality of decisions taken. Transparency helps to promote accountability by obliging decision-makers to make their decisions and the reasoning behind them known. (7) Thus, by 1998, international supervisors had begun to speak the language of transparency, but U.S. legislators and market participants had not yet adopted it. (8) That has changed dramatically since 1998.

    In the recent crisis transparency concerns have generally been focused on two groups: (i) financial institutions and markets, where disclosure, efficiency, fairness, and detection of systemic risk are emphasized as benefits of greater transparency, and (ii) the federal government, particularly the Department of Treasury, the Federal Reserve, and the banking supervisors, as stewards and regulators, where fairness, accountability and taxpayer protection tend to be emphasized.

    Financial markets have been found lacking in transparency on many dimensions. For example: hedge funds; derivatives markets; off balance sheet entities; the credit ratings agencies; firms' disclosure of risk, valuation, and compensation policies; securitized and structured products; consumer disclosure of complex mortgage terms; accounting for reserves; and other non-transparent regulatory gaps and flaws. (9)

    In government, the Treasury-run TARP program has been one main focus of widespread calls for greater transparency, and Federal Reserve emergency lending programs and other market interventions have been another. Moreover, early bailout actions, including the Bank of America acquisition of Merrill Lynch, the bailout of American International Group ("AIG"), the rescue of Bear Stearns, and the failure of Lehman Brothers, have all triggered intense retrospective scrutiny and calls for greater transparency.

    As noted above, the transparency movement is much broader than the banking and finance sector and was dramatically accelerated by Barack Obama's successful 2008 presidential campaign based on change and open government, of which transparency is a cornerstone. (10) Transparency has now become nearly ubiquitous and is being used in many areas of our culture. (11) The term was recently referred to as an "apple-pie watchword." (12)

    Transparency is a laudable principle for greater government accountability and public access to information; however, it is ill-defined and carries quite high expectations. From a legal perspective it is likely that transparency will require closer scrutiny and elaboration, including of its limitations and of counter-veiling principles of confidentiality, if it is to become a standard for organizations' behavior in financial services, or generally.

    The focus of the remainder of this article will be on exploring selected issues of transparency and some potential limiting circumstances.

  2. EESA, TARP, AND TRANSPARENCY EXPECTATIONS

    TARP in particular became a beachhead in the movement for greater transparency. First, it was well reported that when Secretary of Treasury Henry Paulson went to Congress in late 2008 with the initial three page plan to address the financial crisis with $700 billion of taxpayer funds, (13) the plan was considered nontransparent and met with stiff Congressional resistance as being what amounted to a "blank check." (14) In reaction, Congress incorporated a series of oversight bodies and transparency provisions into the resulting legislation, the Emergency Economic Stabilization Act of 2008 ("EESA"). (15)

    Then, shortly after the EESA was enacted, deteriorating financial conditions caused the Treasury to shift tactics, abandoning the plan to purchase "troubled assets" from financial institutions in favor of making direct capital investments in large banks to stabilize the system. (16) While this was permitted under the EESA legislation, the sudden change in tactics came as a surprise, causing Congress, the press, the oversight bodies, and the populace to demand even greater transparency and accountability about TARP programs from Treasury. (17)

    It is not surprising that, on the same day President Obama signed the Open Government Memorandum, his nominee for Secretary of Treasury, Timothy F. Geithner, testified during his confirmation hearing about the need for greater transparency in TARP:

    President Obama and I share your belief that this program [TARP] needs serious reform. I know there are serious concerns about transparency and accountability, confusion about the goals of the program, and deep skepticism about whether we are using the taxpayers' money wisely. We have to fundamentally reform this program to ensure that there is enough credit available to support recovery. We will do this with tough conditions to protect the taxpayer and the necessary transparency to allow the American people to see how and where their money is being spent and the results those investments are delivering. (18) A. TARP Oversight

    The EESA provided for extensive oversight of Treasury's use of taxpayer funds, designating four TARP oversight bodies, and heavily supplementing the existing oversight of the various Congressional committees. (19) Three of the oversight bodies are independent of Treasury: (i) the General Accounting Office ("GAO"); (20) (ii) the newly created Special Inspector General for TARP ("SIGTARP");21 and (iii) the newly created Congressional Oversight Panel ("COP") (22) (collectively the "Oversight Bodies"). Treasury and other government agencies sit on the fourth oversight body, the Financial Stability Oversight Board ("FSOB"), which is chaired by Federal Reserve Chairman Ben Bernanke. (23)

    During 2009, the Oversight Bodies issued numerous quarterly and monthly reports, special reports, audit reports and special audit reports, and conducted many public hearings and testified at a series of Congressional hearings. (24) This, coupled with relentless press scrutiny, makes TARP one of the most monitored and closely watched expenditure programs in U.S. government history.

    The EESA also created a separate division of Treasury known as the Office of Financial Stability ("OFS") to design and implement TARP programs. (25) Treasury OFS's statutory reporting obligations include a monthly report (26) and tranche disbursement reports, (27) as well as publication of annual audited financial statements. (28)

    Shortly after the new Treasury took...

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