have never mixed, and never will.
Let’s start with the great bailout of 1789. The Treasury Department was born and its Secretary, Alexander Hamilton, proposed that the new federal government use the Bank of the United States to pay off the Continental Revolutionary War debt at 100% of face value and also bail out the states by paying off their debt at 100%. The notes were trading at 20% to 30% and speculators – many of them Hamilton’s friends – were buying them up furiously. Members of Congress had to approve Hamilton’s plan, which they eventually did, but many bought up notes first.
Senator William Maclay (D –PA) and some other Democrats complained that this entire business was unethical. Maclay recounted in his Journal that Members of Congress and other speculators sent stage coaches all over the West and South with cash to find and buy as many of the notes as possible from farmers and war veterans and bring the notes back to New York to sell as soon as Hamilton’s plan was a done deal. The scheme worked, but Congress responded by imposing a statutory ban on the Secretary of the Treasury or the Treasurer from being “involved” in the purchase or sale of federal or state government bonds while in office. The 1789 statute is still on the books today and incoming Treasury Secretaries are warned to make government bond purchases and sales before taking office. Hamilton’s First Bank of the United States was also plagued by the allegations of corruption. Jeffersonian Democrats in Congress eventually succeeded in denying renewal of its charter in 1811. Congress, however, did nothing to address the trading in government bonds by its own Members.
When I gave a lecture in 2006 on the 1789 bailout plan, I thought government bailouts of this magnitude and the corruption that came with them were an interesting part of legal history. See Ethics and Corruption in Business and Government: Lessons from the South Sea Bubble and the Bank of the United States (University of Chicago Law School 2006 Maurice and Muriel Fulton Lecture in Legal History) (published by the Law School and available on SSRN)
2008 and 2009 brought another series of massive federal bailouts. These bailouts are no more compatible with government ethics than was the bailout of 1789. The fact that we have more rules on the books about financial conflicts of interest and insider trading will make some difference, but probably not much.
There is clearly dissatisfaction with the “Goldman Sachs goes to Washington” phenomenon that has spanned at least two administrations. True, the top Treasury officials who came from Goldman were forced to sell their Goldman stock (the sales in 2005 and 2006 were at high prices compared with what the stock would fetch today and the Office of Government Ethics provided the “certificate of divestiture” needed to defer capital gains tax on the sales). Nobody thus had any more Goldman stock upon reaching the Treasury Department, and in any event I doubt anyone at Treasury consciously intended to help Goldman in any bailout decisions.
It doesn’t matter. Others on Wall Street and elsewhere complained that bailouts were arbitrary. Lehman Brothers, an old Goldman rival, was allowed to fail. AIG, which owed Goldman about $20 billion as counterparty in derivative transactions, was bailed out. When officials left Treasury, some went to banks that also were asking Treasury for bailout money. Actual impropriety I very much doubt; but there were and there will continue to be appearance problems. These problems however were unavoidable if the bailout deal was going to get done.
How do we fix this going forward? First, we can tinker with ethics rules and agency procedures to make things better at the margins. I discuss some of these ideas in my book. There could be quotas on the number of very senior Treasury officials from a single investment bank. Treasury officials could be prohibited from discussing any official matter with a previous employer for a period of two or three years. As I suggested in an earlier post, Treasury officials could be barred from speaking at or even attending political fundraisers where they are likely to be pressured for bailout funds and pumped for inside information about who is going to be bailed out next. Departing Treasury officials for one year could be prohibited from taking a job at a bank that received funds in a bailout which they participated in personally and substantially (similar restrictions are now imposed on some government procurement officials). All of this might make some difference.
A more radical step would be to eliminate the revolving door and staff the senior ranks of government entirely with career bureaucrats. If we are going to have an industrial policy like France where the government chooses winners and losers in the private sector, why not have a civil service like that of France? The American system of political appointments is not well suited for a government that gets into everything, pays for everything and ends up owning a piece of everything. There are simply too many conflicts of interest.
Finally, perhaps because we value the type of government we have and the experience that private sector jobs bring to government, we might consider a radical idea: no more bailouts. We will have to avoid allowing companies to get “too big to fail”, through antitrust laws or otherwise, or alternatively figure out a way to protect the rest of the economic system when a big company does fail. Whatever is done, we cannot escape the fact that bailouts and ethics don’t mix. We found this out in 1789 and we should know this now.