Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Governments can keep secrets if they want

Governments can keep secrets if they want

Writing about the takeover of Fannie and Freddie in his Infectious
Greed blog
, Paul Kedrosky says: “Apparently the government
is better at keeping secrets than anyone else in the capital
markets. I’m not sure if that’s reassuring, or
frightening.”

Kedrosky has a point. If the stories in the New York
Times
(“As Crisis Grew, a Few Options Shrank to
One”, September 8, 2008) and the Wall Street
Journal
(“Mounting Woes Left Officials With Little Room
to Maneuver”, September 8, 2008) are right, the decision to take
a drastic action was taken more than a week before the
announcement. The New York Times says that Treasury
Secretary Paulson briefed President Bush over secure video on August
26, while the Wall Street Journal reports that the
decision on conservatorship was taken on August 30/31 (the Labor day
weekend). Yet, the markets did not get even a whiff about it until the
government informed Fannie and Freddie about the decision on Friday,
September 5 and asked them to get their boards to accept the terms of
the rescue. From that point onwards, the media knew the broad contours
of the rescue package and the announcement on Sunday morning was
largely a formality.

In India also, we observe that the government is able to keep
secrets if it wants to. Budget proposals are a wonderful
example. Sometimes, the budget speech reserves its sting for the tail
and then one an observe that until the closing minutes of the speech,
the market has no clue about what is to come. And then within seconds,
the market tanks as the finance minister reads out the nasty proposal.

The private sector by contrast finds it very difficult
to keep secrets. It is very difficult anywhere in the world to even
begin a merger discussion without the news leaking to the media.

Evidently, the incentive structures that the government can bring
to bear are far more severe than anything that the private sector can
muster. To answer Kedrosky’s question, I personally find it more
frightening than reassuring – it suggests that governments
simply cannot be trusted because their secrecy processes allow them to
get away with blatant lying if they choose.

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