The Bank Bailout: A License for Sovereign Securities Fraud

Unaddressed by Congress or the Treasury is the potential for the Treasury to rely on material, nonpublic information when disposing of securities purchased in the Bank Bailout of 2008. Insider trading by the Treasury should be constrained. Allowing the Treasury to trade on inside information would undercut the bailout’s goals of promoting overall faith in the markets and buttressing bank stock prices. The potential for increased profits for the taxpayers does not outweigh the cost of decreased public confidence in the markets. Multiple potential solutions are available, including nationalizing the banks, prohibiting the Treasury from using inside information when making investment decisions, and imposing a “disclose or abstain” rule on the Treasury. The best solution, however, is two-part and includes: (1) the imposition of an ethical wall between the persons making the investment decisions and the Treasury; and (2) the establishment of an investment plan that divests the Treasury of discretion over investment decisions. Part II of this article details how the bank bailout affords the Treasury the motive and the opportunity to engage in insider trading on behalf of the taxpayers. Part III examines previous bailouts in order to place the bank bailout in historical context and to exemplify the potential for insider trading. Part IV analyzes whether the current legal and regulatory system imposes restrictions on insider trading by the Treasury, and Part V argues that, despite the lack of current checks on governmental insider trading, insider trading by the Treasury should be inhibited. Part VI examines multiple possible solutions and recommends the combination of an ethical wall and an investment plan