All the Money Rich Bankers Could Ever Want

I believe the desire to hold the Federal Reserve Bank accountable to the American people is a major issue that progressives and disaffected right-wing populists, e.g. tea-partiers, have in common. Many do not seem to be aware of this shared interest.

The following is from Alan Grayson, former congressman from Florida. I have reproduced it in its entirety. The original is here. Mr Grayson is campaigning to win back his seat in 2012.

        The Fed Bailouts: Money for Nothing

I think it’s fair to say that Congressman Ron Paul and I are the parents of the GAO’s audit of the Federal Reserve. And I say that knowing full well that Dr. Paul has somewhat complicated views regarding gay marriage.

Anyway, one of our love children is a massive 251-page GAO report technocratically entitled “Opportunities Exist to Strengthen Policies and Processes for Managing Emergency Assistance.” It is almost as weighty as that 13-lb. baby born in Germany last week, named Jihad. It also is the first independent audit of the Federal Reserve in the Fed’s 99-year history.

Feel free to take a look at it yourself, it’s right here. It documents Wall Street bailouts by the Fed that dwarf the $700 billion TARP, and everything else you’ve heard about.

I wouldn’t want anyone to think that I’m dramatizing or amplifying what this GAO report says, so I’m just going to list some of my favorite parts, by page number.

Page 131 – The total lending for the Fed’s “broad-based emergency programs” was $16,115,000,000,000. That’s right, more than $16 trillion. The four largest recipients, Citigroup, Morgan Stanley, Merrill Lynch and Bank of America, received more than a trillion dollars each. The 5th largest recipient was Barclays PLC. The 8th was the Royal Bank of Scotland Group, PLC. The 9th was Deutsche Bank AG. The 10th was UBS AG. These four institutions each got between a quarter of a trillion and a trillion dollars. None of them is an American bank.

Pages 133 & 137 – Some of these “broad-based emergency program” loans were long-term, and some were short-term. But the “term-adjusted borrowing” was equivalent to a total of $1,139,000,000,000 more than one year. That’s more than $1 trillion out the door. Lending for these programs in fact peaked at more than $1 trillion.

Pages 135 & 196 – Sixty percent of the $738 billion “Commercial Paper Funding Facility” went to the subsidiaries of foreign banks. 36% of the $71 billion Term Asset-Backed Securities Loan Facility also went to subsidiaries of foreign banks.

Page 205 – Separate and apart from these “broad-based emergency program” loans were another $10,057,000,000,000 in “currency swaps.” In the “currency swaps,” the Fed handed dollars to foreign central banks, no strings attached, to fund bailouts in other countries. The Fed’s only “collateral” was a corresponding amount of foreign currency, which never left the Fed’s books (even to be deposited to earn interest), plus a promise to repay. But the Fed agreed to give back the foreign currency at the original exchange rate, even if the foreign currency appreciated in value during the period of the swap. These currency swaps and the “broad-based emergency program” loans, together, totaled more than $26 trillion. That’s almost $100,000 for every man, woman, and child in America. That’s an amount equal to more than seven years of federal spending -- on the military, Social Security, Medicare, Medicaid, interest on the debt, and everything else. And around twice American’s total GNP.

Page 201 – Here again, these “swaps” were of varying length, but on Dec. 4, 2008, there were $588,000,000,000 outstanding. That’s almost $2,000 for every American. All sent to foreign countries. That’s more than twenty times as much as our foreign aid budget.

Page 129 – In October 2008, the Fed gave $60,000,000,000 to the Swiss National Bank with the specific understanding that the money would be used to bail out UBS, a Swiss bank. Not an American bank. A Swiss bank.

Pages 3 & 4 – In addition to the “broad-based programs,” and in addition to the “currency swaps,” there have been hundreds of billions of dollars in Fed loans called “assistance to individual institutions.” This has included Bear Stearns, AIG, Citigroup, Bank of America, and “some primary dealers.” The Fed decided unilaterally who received this “assistance,” and who didn’t.

Pages 101 & 173 – You may have heard somewhere that these were riskless transactions, where the Fed always had enough collateral to avoid losses. Not true. The “Maiden Lane I” bailout fund was in the hole for almost two years.

Page 4 – You also may have heard somewhere that all this money was paid back. Not true. The GAO lists five Fed bailout programs that still have amounts outstanding, including $909,000,000,000 (just under a trillion dollars) for the Fed’s Agency Mortgage-Backed Securities Purchase Program alone. That’s almost $3,000 for every American.

Page 126 – In contemporaneous documents, the Fed apparently did not even take a stab at explaining why it helped some banks (like Goldman Sachs and Morgan Stanley) and not others. After the fact, the Fed referred vaguely to “strains in the financial markets,” “transitional credit,” and the Fed’s all-time favorite rationale for everything it does, “increasing liquidity.”

81 different places in the GAO report – The Fed applied nothing even resembling a consistent policy toward valuing the assets that it acquired. Sometimes it asked its counterparty to take a “haircut” (discount), sometimes it didn’t. Having read the whole report, I see no rhyme or reason to those decisions, with billions upon billions of dollars at stake.

Page 2 – As massive as these enumerated Fed bailouts were, there were yet more. The GAO did not even endeavor to analyze the Fed’s discount window lending, or its single-tranche term repurchase agreements.

Pages 13 & 14 – And the Fed wasn’t the only one bailing out Wall Street, of course. On top of what the Fed did, there was the $700,000,000,000 TARP program authorized by Congress (which I voted against). The Federal Deposit Insurance Corp. (FDIC) also provided a federal guarantee for $600,000,000,000 in bonds issued by Wall Street.

There is one thing that I’d like to add to this, which isn’t in the GAO’s report. All this is something new, very new. For the first 96 years of the Fed’s existence, the Fed’s primary market activities were to buy or sell U.S. Treasury bonds (to change the money supply), and to lend at the “discount window.” Neither of these activities permitted the Fed to play favorites. But the programs that the GAO audited are fundamentally different. They allowed the Fed to choose winners and losers.

So what does all this mean? Here are some short observations:

(1) In the case of TARP, at least The People’s representatives got a vote. In the case of the Fed’s bailouts, which were roughly 20 times as substantial, there was never any vote. Unelected functionaries, with all sorts of ties to Wall Street, handed out trillions of dollars to Wall Street. That’s now how a democracy should function, or even can function.

(2) The notion that this was all without risk, just because the Fed can keep printing money, is both laughable and cryable (if that were a word). Leaving aside the example of Germany’s hyperinflation in 1923, we have the more recent examples of Iceland (75% of GNP gone when the central bank took over three failed banks) and Ireland (100% of GNP gone when the central bank tried to rescue property firms).

(3) In the same way that American troops cannot act as police officers for the world, our central bank cannot act as piggy bank for the world. If the European Central Bank wants to bail out UBS, fine. But there is no reason why our money should be involved in that.

(4) For the Fed to pick and choose among aid recipients, and then pick and choose who takes a “haircut” and who doesn’t, is both corporate welfare and socialism. The Fed is a central bank, not a barber shop.

(5) The main, if not the sole, qualification for getting help from the Fed was to have lost huge amounts of money. The Fed bailouts rewarded failure, and penalized success. (If you don’t believe me, ask Jamie Dimon at JP Morgan.) The Fed helped the losers to squander and destroy even more capital.

(6) During all the time that the Fed was stuffing money into the pockets of failed banks, many Americans couldn’t borrow a dime for a home, a car, or anything else. If the Fed had extended $26 trillion in credit to the American people instead of Wall Street, would there be 24 million Americans today who can’t find a full-time job?

And here’s what bothers me most about all this: it can happen again. I’ve called the GAO report a bailout autopsy. But it’s an autopsy of the undead.

Courage,

Alan Grayson

Whitewater, Part II

Cenk Uygur of The Young Turks is spot-on in this clip. He makes almost all the points I myself try to make about the recent Republican accusations of corruption in the White House (no wonder I like him!). Note especially the almost comical position of Congressman Issa, who acknowledges that Bush signed TARP into law, but all that money must surely be corrupting the Obama Administration, so naturally one starts off with well-publicized accusations. The lack of evidence is apparently beside the point. Cenk also speaks of the $ billions that went unaccounted for in Iraq; a fact, not an accusation, of which Issa has nothing to say. 

Readers should note the real reason for Issa's aggressiveness. Republicans are going to do the same thing to Obama that they did to Clinton; endless investigations along with the accusations, the circus atmosphere, and the ample opportunities to implant in the minds of voters that Obama must be stopped. Republicans were able to drag out Whitewater for almost the entire eight years and never found anything. Their objective was to destroy Clinton. Failing that, to embarrass him, undermine his administration, and suggest to voters that the man was tainted, as if mere accusations meant scandals. 

Far more officials in the administrations of Bush the Elder and Reagan went to prison than those under Clinton, a fact almost completely forgotten by voters and our feckless media. But a generation of Americans will forever link Clinton to Whitewater. That, of course, was an objective. To be sure, Clinton created his own mess with Monica Lewinsky, but that was after almost everything else had run its course.

Republicans have shown a determination to set the narrative on Obama through every means possible, and that now includes subpoena and investigatory power. They spent years trying to destroy Bill Clinton, with limited success. They are set to do it again with Obama. They sense weakness, and the political and social climate has become dysfunctional, so the outcome may be different this time.  As Cenk says, "they're coming after you."

TARP Has Worked Out Well

Turns out the Troubled Asset Relief Program, or TARP, has done rather well for the government. People will always debate whether TARP was truly necessary in the first place. Detractors from across the political spectrum will always claim it did not have the desired effect. But one of the biggest gripes about TARP, an argument especially dear to the American Right, was that it was going to add greatly to the national debt. Stop the bailout, they foamed.

Turns out it won't. BusinessWeek, no liberal hotbed, reports that taxpayers are enjoying an 8.2% return on their investment, a far higher return than on 30-year Treasury bonds. And you thought that Marxist from Kenya was just giving the money away. You know, 'cause he wants to destroy America. 

Public perception has yet to catch up with reality. And in this nutty election season, the disconnect is especially wide. The Democratic Party's inability to get its message, and its accomplishments, across to the public is frustrating. Many have emotionally innoculated themselves against reason and evidence, especially those who insist on having their feel-good pout. They are not going to let little things like facts get in the way.

I'm looking at you, teabaggers.

Warren Waits and Waits...Warren Who?

President Obama is still stalling on the Elizabeth Warren nomination to head the Consumer Financial Protection Bureau. Presumably there is a Vegas line on her chances of receiving the nod. Cynics are suggesting the chances are slim and none. For others it is virtual line in the sand: If the President doesn't nominate Warren, who is clearly best-suited for the job, then it is the final proof that the fix is in. Timothy Geithner, Larry Summers and the rich guys on Wall Street don't want her for one simple reason: They are afraid she is incorruptible, meaning she will actually do her job. They want their gravy train to continue and to hell with the rest of us.

Me, I think he will nominate her, though I am far from convinced. One could argue he is dragging this out as long as possible so the public, what with its chronically short memory, will forget why so many wanted her in the first place.

I mean, shit, forgetfulness is a plague on our public discourse.  According to the Pew Research Center, nearly half of Americans think the Troubled Asset Relief Program was Obama's creation. Only 34% realize the massive bank bailout program started under George Bush. I bet Fox News is not going out of its way to point this out to teabaggers.

Poor Babies; Have We Hurt Wall Street's Feelings?

This is rich. Wall Street's hedge fund managers are having second thoughts about President Obama. Not the ones that never did support him, but the Democratic ones that gave big chunks of cash to his campaign. Their sense of upper-class entitlement is nauseating. These are the people who said we were on the brink, the ones who bet big and lost, the ones who gleefully accepted TARP funds, (which in any other context would be called welfare), and now have huge earnings and bonuses to match. Yeah, I know, this applies mostly to the banksters, but everyone in Wall Street has been sucking from the federal milk cow, as Alan Simpson might put it.

According to the Andrew Ross Sorkin at the NY Times, Obama's support from hedge funds and others on Wall Street is drying up, along with donations, because he is actually trying to add some reforms. It's ironic, of course, because so many have urged the President to go much further and stop the ridiculous use of derivatives and the too-big-to-fail banks that have resulted. In our hostile anti-banking climate, especially in Obama's first year, the mood in America was for genuine banking reform, and it still is. Yet Obama gave banks so much, progressive Democrats were again ignored, and a weak financial reform bill was passed. In reality, Wall Street has rolled over Obama, but the millionaires are still not happy. They bitch about what they see as an onerous federal government (darn those regulations) but only after they have pocketed record bonuses.

What is especially revealing is how many of Wall Street's elite were enamored with candidate Obama. Why? As Sorkin says  "The prevailing view is that bankers, hedge fund mangers and traders supported the Obama candidacy because he appealed to their egos...Mr. Obama was viewed as a member of the elite, an Ivy League graduate,... president of The Harvard Law Review — he was supposed to be just like them. President Obama was the 'intelligent' choice, the same way they felt about themselves. They say that they knew he would seek higher taxes and tighter regulation; that was O.K. What they say they did not realize was that they were going to be painted as villains."

Does this not sound like the Republicans of the 1930s when they said FDR was a traitor to his class? The underlying psychological dissonance is unfolding: these are sanctimonious bastards who want money and undying admiration from America. They want to feel envy from us, not disgust. They have clearly convinced themselves they are the masters of the universe and what they do should be applauded. Instead, they see a Democratic President, a well-educated man they thought was enough like them that he could be trusted, publicly chide them. Well, he hurt their feelings, don't you know?

A Little Credit, Please

I see that Jed Lewison over at DailyKos has raised a point shared by quite a few of us. The mainstream media does not have much to say about American automakers' return to profitability and shows reluctance to give much credit to the crucial role played by the Obama administration. As Lewison posted on Friday:

“President Obama is in Motor City today to focus attention on what he feels is an untold success story: the improving fortunes of American automakers thanks to the administration's decision to use TARP funds to bailout General Motors and Chrysler. Since the administration took action, the auto industry has added 55,000 jobs -- the best growth since 1999.”

Detroit's rescue plan cost $60 billion, an amount that is dwarfed by any number of other spending priorities. That amount would not last long in Afghanistan. And it is a tiny fraction of the amount the feds threw at the big banks.

The critics are silent on the number of people employed by the automakers. This means not just the new jobs, but more importantly, the far greater number of jobs that were not lost because Detroit is still in business. Those workers are collecting paychecks, not unemployment. They are paying taxes on that income, a far higher share than most on Wall Street pay.

A relatively high portion of those paychecks goes to main street America. This is an economic reality that Washington's village people ignore. The guy or gal working assembly at one of the myriad Chevy or Chrysler plants receives a paycheck which is then usually deposited in a local bank or credit union, which then loans overwhelmingly to others in that same community. Much of the multiplier effect takes place within the community.

The auto industry also employs many other companies indirectly; e.g., the huge number of component suppliers. These manufacturers are filling orders and maintaining their own employment precisely because Detroit is still in business. Their workers also are paying taxes on their earned income, and they also have multiplier effects that benefit their own communities. It should be obvious that if the automakers went under, many of their component suppliers would have gone under as well.

Those who criticize the White House plan are missing the primary lesson. This is not, and should not be, the subject of an ideological purity test. It was more about doing what you can with what you've got. The benefits to the economy as a whole are direct and profound, for the government's role has returned both GM and Chrysler to profitability, and it has kept many thousands of employees working and not on unemployment.

$60 billion was a bargain.