Public officials in all branches of government have a fiduciary duty to the citizens of the United States. That is the proper context for how we should judge the decision making by our elected and appointed officials in everything they do.
The bailout plan originally proposed by Treasury Secretary Henry Paulson, and then modified and voted down by the House, provides the perfect case study of how shockingly often this fundamental truth is ignored.
The original proposal was only about 850 words in length (roughly 100 words longer than this article), but it speaks volumes about how fiduciary principles were at best neglected.
The most glaring example in the original plan is captured in Section 3, quoted here in its entirety:
"In exercising the authorities granted in this act, the secretary shall take into consideration means for — (1) providing stability or preventing disruption to the financial markets or banking system; and (2) protecting the taxpayer."
The directive is flat-out wrong from a fiduciary perspective. It suggests that the plan should be a balancing act to weigh private and public interests equitably when in fact government officials are obligated to act in the exclusive best interests of the citizens of the United States. It's bad that Mr. Paulson's proposal fails to recognize this singular duty of loyalty; it's worse that he listed the financial markets and banking system first.
While Section 3 is the most misguided part of the plan, Section 8 is the most dangerous:
"Decisions by the secretary pursuant to the authority of this act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."
Faithful adherence to fiduciary principles must be assured by law, not an individual conferred with supreme authority and protected from accountability.
A system that is devoid of meaningful checks and balances is inherently imprudent.
Singling out the flaws of a couple of the key provisions of the Paulson plan is not the point. There also are several inherent fiduciary obstacles to be overcome in implementing a bailout designed to handle the current crisis. Two in particular stand out in my mind.
First is the problem of pricing the mortgage-related assets the government intends to buy. In a Sept. 19 press conference, Mr. Paulson referred to the troubled mortgage loans as "illiquid assets" and noted the "inability to determine their worth." Until now, financial institutions have generally used their own valuations to set the price carried on their books, but true value is determined by the market. Can a fiduciary responsibly buy up assets for which there is effectively no longer a market?
Ordinarily, the answer to this question would be no. At a minimum, rigorous independent analysis will be required to establish the appropriate deep discounts to apply to these toxic assets.
Second is the problem of asking citizens to accept their own future ability to pay taxes as collateral for the debt they are buying. Think about this for a moment. The original collateral was real estate of homeowners. Derivatives were used to protect lenders from normal default rates, but the companies that created the derivatives didn't collateralize the protection. As homeowners defaulted in record numbers, the investment banks and insurance companies behind the derivatives didn't have the money to backstop the losses of lenders. Now the bailout brings the process full-circle. Citizens will both own and owe the debt.
This is creative financial engineering in the extreme. Would a responsible fiduciary decide to commit those he or she serves — multiple generations of citizens in this case — both to buy debt and assume the obligation to pay it?
Ordinarily, the answer to this question also would be no. Giving the public some upside through equity participation in companies saved at the taxpayers' expense is a step in the right direction. The question is, in the next go-round, will the government drive as hard a bargain on behalf of citizens as Warren Buffett did in his investment in The
Goldman Sachs Group Inc. of New York? A good fiduciary would.
These are extraordinary times calling for unprecedented solutions. The likelihood that our elected and appointed government officials are making the best decisions for us as citizens depends upon the depth of their understanding of, and commitment to fulfill, the fiduciary obligations they owe us.
Blaine Aikin is president and chief executive of Fiduciary 360 LP in Sewickley, Pa.
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