Bailout watchdog Elizabeth Warren warns that the government stress tests of the nation's largest banks, which are set to be made public next week, will do nothing to improve the health of the banks without sufficient transparency.
"If we don't see the details of the stress test, if we don't see the complete details of the stress test, there's a real possibility no one buys any of the outcomes," said Warren, who chairs the Congressional Oversight Panel, monitoring the Troubled Asset Relief Program. "And [if no one buys the results] then we are where we are today. We are in the same place that we are without the information from the stress tests."
In an interview with the Huffington Post, the Harvard Law School Professor laid down four markers for a stable and sufficient recovery, offered support for the prosecution of individuals proven to have committed crimes that contributed to the economic downturn, and criticized bank executives for their rising compensation levels. She also insisted that if Goldman Sachs wanted to pay back the bailout funds it received to get out from under government restrictions, it should have to return all funds, including guarantees and money it receives as a counterparty to AIG.
But it was her broader comments on the Treasury Department's efforts to resuscitate the banks (delivered from the 5,000-foot high vantage point, as she insists) that stuck out as disconcerting. "The answer is still not clear," Warren said, when asked whether the government had secured enough changes in the business and corporate structure at these financial institutions in exchange for the money offered through its bailout program.
"This is the question I asked at the hearing last Tuesday," she said. "This is why I dragged myself out of bed [while suffering from what one staffer called 'nasty cold']. Because this is the question I care a lot about... And I'm not clear on the answer that the secretary gave."
Part of the problem, Warren said, was that there was not enough transparency with the stress tests and their results, which will be made public on Monday. "So far," she said, "we just don't have enough detail." In some respects, she acknowledged, public perception was as important as reality. If no one has confidence that the test was rigorous, it won't work. At the same time, while it would be difficult to have faith in a process that deemed struggling banks like Bank of America and Citigroup solvent, the public had to understand that it was not beyond the realm of reason.
"Like everything, the devil's in the details. It is entirely possible the banks have excess capital as a result of the capital infusion program," she said, in reference to the two aforementioned institutions.
Transparency, however, is just one component of the recovery process. Accountability, clarity and assertiveness were the other three measures that Warren said would determine whether the U.S. economic recovery would mirror Sweden's quick rebound or Japan's lost decade.
To more closely resemble the former, Warren argued that investigations may have to be launched into whether criminal activity contributed to the financial system ending up in its current state.
"The public needs confidence that if there was wrongdoing, it would be prosecuted," she said. "Now that's not the same as saying, there are people who should be prosecuted. That requires knowing that there was an underlying crime... However, I do think that people must have confidence that if there was wrongdoing, it would be prosecuted. We can't survive without that."
As for post-bailout malfeasance, already the Special Inspector General has pinpointed 20 cases of potentially illegal misuse of TARP funds. It is a purview separate from Warren's. But the broader point remains true: The process by which the banks are to be revived is a delicate one, demanding openness to ensure the public's trust even if the information unearthed ain't pretty.
Along those lines, Warren argued that the government had to carefully handle Goldman Sachs' proposal to repay the $10 billion it was given in TARP money -- viewed largely as an attempt to free itself from government intrusion.
"I think the message is powerfully important," said Warren. "If a company doesn't want taxpayer dollars and it's willing to repay in full on ALL outstanding obligations -- and let's be clear, on all outstanding obligations, it means all the guarantees, no government involvement -- then... the case for not accepting repayment of taxpayer dollars is very difficult to make."
Likewise, Warren warned that the rise of compensation at some of the nation's largest financial institutions -- to levels similar to or greater than before the current crisis began -- threatened to tear the already fraying thread of public confidence in the financial sector.
"I think there's a fundamental disconnect between bankers who think its business as usual and the public that believes that when banks use hundreds of billions of taxpayer dollars things should change," she said. "A lot of the people wanted to dismiss the consumer anger over AIG and say 'Oh it's just about a tiny little slice, it doesn't matter.'... And I think its much bigger than compensation, I think its much more powerful. I think many, many people have not yet grasped this, many of the experts, the so-called experts, have not grasped the significance [of this]."
The goal, in the end, was to build a new framework around which the banks would not only be revived but the economy itself would find more stable footing. In this respect, the financial system is just the top of the pyramid, critical in helping other facets of the economy but just one of several metrics in determining the government's success.
"As I see it," said Warren, "unemployment continues to climb, foreclosures are on the rise, uh, consumer spending contracts and uh, credit costs are going up. And that is not a stable situation."