Paulson May Have Overstepped on SIVs
An agreement between the three largest American banks to create a $75 billion "super fund" for troubled structured investment vehicles raises important questions about the role of government.
Several weeks ago, the banks — Citigroup, Bank of America, and JPMorgan Chase — announced the plan to create this fund and negotiated the details among themselves, though the real impetus for the idea came from the secretary of the Treasury, Henry Paulson.
The basic purpose of the proposed super fund is to prevent a fire sale of assets from the banks' off-balance-sheet SIVs. Stripped of technicalities, the SIVs are bank-sponsored funds that purchase mortgages and other debt securities, repackage them, and sell them as securitized bonds in the market. In recent months, SIVs have had few buyers, as investors became increasingly concerned about the value of the SIVs' underlying mortgage-related assets. The total value of these now largely illiquid SIVs is a staggering $400 billion, which might explain Mr. Paulson's deep concern.
Banking experts have criticized Mr. Paulson's plan on the grounds that this super fund would do nothing to restore the long-run value of the SIVs' assets. All it would do, they say, would be to repackage the bad assets, such as portfolios of subprime loans, with all of the risks still there. Many would argue that because the banks were foolish enough to set up the ill-conceived SIVs in the first place, they should suffer the consequences of their misjudgment.
Even Mr. Paulson has conceded such a fund would do little more than help at the "margin." But the three largest banks persevered, partly because they had the most SIV debt and thus the most to gain from a super fund.
Some would say it was also partly because of Mr. Paulson.
Mr. Paulson has long been one of the main pillars of the financial community, capping a distinguished career as CEO of Goldman Sachs before moving to President Bush's Cabinet.
Meeting with financial industry executives and asking them to contribute to a super fund that he claims will stabilize the sector is a reasonable role for the chairman of Goldman Sachs. The other financial executives may say "Yes" or "No," and a negative response would do no more than disappoint Goldman Sachs.
But a clever private citizen is far different than a government official responsible for the smooth operation of the financial sector. The same overture to join a private fund becomes potentially compromising when made by a government official, particularly one who regulates the banks being solicited to join the fund.
The Treasury Department does not have powers to set up private funds, much less to ask for contributions from private parties. But the Treasury Department regulates Citigroup, Bank of America, JPMorgan Chase, and other banks that might participate in the new SIV fund. Banks are free to choose to disappoint the chairman of Goldman Sachs; they are much less free to disappoint their regulator, the secretary of the Treasury.
Mr. Paulson no doubt meant well by asking the industry to set up the fund. But when government officials ask for help with a new program, regulated firms feel compelled to assist, and feel afraid to object publicly. The excessive power of government is most directly measured not by the open resistance it encounters when it operates narrowly within the law, but by the silent cooperation it receives when it operates outside the law.
As evidence of the bad precedent established by Mr. Paulson, consider Governor Spitzer: He recently praised Mr. Paulson's plan and called on financial institutions to create a similar fund to stabilize the New York mortgage market. To make clear the connection between government regulation and the badgering of private firms by high-ranking government officials, Mr. Spitzer at the same time proposed legislation to further regulate the mortgage industry.
In business, CEOs solve all the visible problems facing their firms or, like Charles Prince and Stanley O'Neal, they lose their jobs. In government, responsible officials primarily solve only those problems required by law. Where there is discretion to act, responsible officials will only on rare occasions address problems the private sector cannot solve on its own. Mr. Paulson's SIV super fund falls into neither category.
A former FCC commissioner, Mr. Furchtgott-Roth is president of Furchtgott-Roth Economic Enterprises. He is organizing a seminar series at the Hudson Institute. He can be reached at hfr@furchtgott-roth.com.
