The idiocy of double secret probation

By Felix Salmon
November 9, 2009
Bill Black makes mincemeat of the idea that the government can and should keep a top-secret list of systemically-dangerous institutions which are subject to “heightened prudential standards”:

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Bill Black makes mincemeat of the idea that the government can and should keep a top-secret list of systemically-dangerous institutions which are subject to “heightened prudential standards”:

I’ll put aside for a later time discussing the obscenity of proposing that the American people be kept from learning which banks are SDIs and can secretly tap the U.S. Treasury and the Fed for unlimited funds. I’ll also mention only in passing the hilarity of Congress proposing that we can successfully create a super secret society of those, including some members of Congress, who will know which banks are on the list – and will never leak.

Here, I want to emphasize the investor. The drafters have forgotten that the SEC mandates the disclosure of material information to investors. The fact that a bank is on the secret list is extraordinarily important to investors. So, the bill as drafted would create a system in which the banking regulators and Congress must keep the DOUBLE SECRET PROBATION list secret – but the banks must publicly disclose that they are on the list. Of course, it’s possible that the Treasury and the Fed – you remember, the folks that tell us constantly about their commitment to “transparency” – are actually so insane that they will propose amending the securities disclosure laws and destroy the entire concept of mandating that publicly traded companies disclose material information to investors.

Obviously, there would be a stigma involved were a bank to go onto this list. But equally obviously, the whole point of having this list in the first place is that such banks are too big to fail. Which means that the banks’ investors can have some little faith that they managed to make a moral-hazard play instead of simply investing in a bank going down the tubes.

In any case, as Black says, it’s hardly the job of regulators to keep from investors the fact that their bank is looking shaky. Either banks are small enough to fail, in which case there are no systemic problems if lots of investors try to exit at once. Or else they’re too big to fail, in which case it’s the job of regulators to reassure the markets that a backstop exists — rather than to try to keep those markets in the dark. The plan as it stands is just idiotic.


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Does the SEC not require disclosure–material facts–about the state of a listed comapanie’s operation: off-balance sheet vehicles, potential toxic assets (=NON-PERFORMING ASSETS), derivative trades, margin trading, etc..?

Seems to me another rich lawyer boondoggle in the making, because someone–a lawyer–will sue over this if it comes to pass.

Posted by Chris | Report as abusive

I really like the concept of a “moral-hazard play.” Do you think I could find a mutual fund that might specialize in this sort of investment? There could be a big future in moral-hazard funds!

Posted by infirm | Report as abusive

I am all for a too-big-to-fail list. It would also be known as a ‘companies that must be broken up or shrunk within 5 years list’.

The way forward would involve increasing the reserve requirement percentage as a company approaches very large status. The reserve requirement would be progressive. This provides a profitability motive to smallness.

Posted by Dan | Report as abusive

In the hearing where this was discussed, Geithner agreed that being on the list could not be concealed from a firm’s investors or from analysts and he didn’t expect it to be. He seemed to walk back from the idea that the list is secret. The provision as written seems to imply that the Treasury can’t announce any list however Geithner implied they have no problem with someone else doing it and indeed they hoped that the prospect of having to announce it to investors should make a firm think twice. Both he and Frank said that being on a list should be seen as a bad thing, not a good thing.

Posted by Linda | Report as abusive

Even without the disclosure rules, do they really think that investors aren’t going to notice that some banks have substantially larger liquid asset portfolios and capital buffers than others? That some are pushing harder to increase return on equity than others? It’s truly nuts.

Posted by Ginger Yellow | Report as abusive

There is already precedent for secrecy in that we mushrooms don’t get to know bank CAMELS ratings.

Posted by SP | Report as abusive