UNMET DUTIES IN MANAGING FINANCIAL SAFETY NETS
Edward J. Kane
Boston College
To re-establish confidence in the federal government's ability to manage financial turmoil, officials must show that they understand why and how the public's confidence was lost. This requires that leaders of the Treasury, Federal Reserve, and the SEC face up to their institutions' role in an uncomfortable sequence of events. First, procedures adopted at private firms and federal agencies for supervising securitization activity at commercial banks, investment banks, and GSEs inappropriately short cut due diligence by outsourcing the monitoring and policing of the safety-net consequences of potential defects in the securitization process to private parties: investment banks, credit-rating organizations, and the accounting profession. Second, when the adverse consequences of this imprudent arrangement began to emerge, officials falsely claimed that the difficulties that short-funded and highly leveraged firms were facing in rolling over their debt reflected a shortage of market liquidity as opposed to a shortage of economic capital at key firms. Among knowledgeable parties, this raised severe doubts about the integrity and competence of the officials that were undertaking to rescue the industry. Finally, the panicky and awkward way that the Treasury and President suddenly recharacterized the nature and extent of the industry's accumulated losses in September 2008 created an atmosphere of extreme urgency that subsequent delays in implementation revealed to have been severely and dangerously exaggerated.