Geithner’s Duplicitous Efforts to Reinforce the Oligarchy

Bloomberg’s blockbuster story–showing that the Fed was dumping $7.77 trillion into the same banks that Treasury was claiming were solvent to qualify them for TARP–shows a number of different things. It focuses on the $13 billion in profits the banks made off of massive secret loans from the Fed.

The 190 firms for which data were available would have produced income of $13 billion, assuming all of the bailout funds were invested at the margins reported, the data show.

More importantly, IMO, the Bloomberg piece also shows how Ben Bernanke, TurboTax Timmeh Geithner, and Hank Paulson used secrecy to get DC’s bureaucracy–both Congress and Executive Branch officials–to push through his preferred plan to prop up the TBTF banks.

They did this in two ways: first, by keeping details of the Fed’s massive lending secret from the people implementing TARP.

The Fed initially released lending data in aggregate form only. Information on which banks borrowed, when, how much and at what interest rate was kept from public view.

The secrecy extended even to members of President George W. Bush’s administration who managed TARP. Top aides to Paulson weren’t privy to Fed lending details during the creation of the program that provided crisis funding to more than 700 banks, say two former senior Treasury officials who requested anonymity because they weren’t authorized to speak.

This meant the Fed could hide the fact that the six biggest banks were basically insolvent, and should have been wound down rather than propped up with a strings-free TARP.

The Treasury Department relied on the recommendations of the Fed to decide which banks were healthy enough to get TARP money and how much, the former officials say. Read more

Ben Bernanke Prepares to Rob My Mom

My mom’s pretty stubborn (I come by it naturally). So in spite of the fact that I have been warning her to move her primary banking out of Bank of America into a solvent bank for over a year, she has yet to do so.

Which is why I’m so troubled that Bank of America is about to use my mom’s savings to back its derivatives counterparties.

Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation.

The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said the people, who asked to remain anonymous because they weren’t authorized to speak publicly. The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting, said the people. The bank doesn’t believe regulatory approval is needed, said people with knowledge of its position.

Money’s fungible, right? That’s what the anti-choice people say, anyway. So what’s the big deal that BoA has taken Merrill Lynch’s exposure to the European mess and put that risk where mom keeps her retirement? Yves Smith explains. First, this will make it all-but-impossible to unwind Bank of America when it goes under without disrupting the personal accounts of people like my mom. Significantly, if those derivatives pay off (for example, if Greece defaults) or require more collateral (because BoA gets downgraded again), then counterparties would get their money before mom does.

The reason that commentators like Chris Whalen were relatively sanguine about Bank of America likely becoming insolvent as a result of eventual mortgage and other litigation losses is that it would be a holding company bankruptcy. The operating units, most importantly, the banks, would not be affected and could be spun out to a new entity or sold. Shareholders would be wiped out and holding company creditors (most important, bondholders) would take a hit by having their debt haircut and partly converted to equity.

This changes the picture completely. This move reflects either criminal incompetence or abject corruption by the Fed. Even though I’ve expressed my doubts as to whether Dodd Frank resolutions will work, dumping derivatives into depositaries pretty much guarantees a Dodd Frank resolution will fail. Remember the effect of the 2005 bankruptcy law revisions: derivatives counterparties are first in line, they get to grab assets first and leave everyone else to scramble for crumbs. So this move amounts to a direct transfer from derivatives counterparties of Merrill to the taxpayer, via the FDIC, which would have to make depositors whole after derivatives counterparties grabbed collateral. It’s well nigh impossible to have an orderly wind down in this scenario. You have a derivatives counterparty land grab and an abrupt insolvency. Lehman failed over a weekend after JP Morgan grabbed collateral. [Yves’ emphasis]

As Yves points out, this will quickly result in the depletion of FDIC’s deposit insurance to pay my mom back for the money the banksters snatched. She suggests that Congress will quickly vote to fund the Treasury so it can pay my mom–and millions of other Americans–to replace their insured funds.

But it’s even worse than that. During the savings & loan crisis, the FDIC did not have enough in deposit insurance receipts to pay for the Resolution Trust Corporation wind-down vehicle. It had to get more funding from Congress. This move paves the way for another TARP-style shakedown of taxpayers, this time to save depositors. No Congressman would dare vote against that. This move is Machiavellian, and just plain evil.

She’s probably right that even the most Do-Nothing Congress in American history will eventually fund Treasury. I’m just not convinced it’ll happen quickly, or without some really big hostages demanded, first.

Now, mom’s in pretty decent shape for a retiree–between some pensions and other retirement funds, she could wait out the Do-Nothing Congress. And heck, I’m even willing to lend mom a few bob, even if she is so stubborn.

But most Americans are living paycheck to paycheck, and millions of them depend on what they’ve got deposited in Bank of America. It seems to me that Ben Bernanke has just unilaterally decided to make those BoA depositers lend banksters their life savings until such time as the Do-Nothing Congress gets around to fixing what are, as we speak, foreseeable and unacceptable consequences of this move.

Update: Jeebus I had a lot of typos in this. I hope I’ve gotten them all.

Fed Lending: Bailing Out Banks over People

Bloomberg has a good summary and even better visual database of the various forms of Fed lending that have been revealed over the years since the bailout.

I encourage you to go play around in the database. For example, check out this summary of how the Fed lent Hypo Real Estate Holding AG, a German real estate company, $28.7B to keep the German banking system afloat after HRE’s subsidiary Depfa crashed in Ireland. Germany had already given HRE $206B; the Fed’s lending amounted to $21M for each of HRE’s 1,366 employees. And at its height, just the Fed’s lending represented 15,000% of HRE’s market value. And yet all of this remained a secret for three years after the Fed first started lending to HRE.

With the scope of all that in mind–with a way to visualize the incredibly leveraged house of cards this secret lending held up–now read what I consider to be the most important line in Bloomberg’s summary.

By 2008, the housing market’s collapse forced those companies to take more than six times as much, $669 billion, in emergency loans from the U.S. Federal Reserve. The loans dwarfed the $160 billion in public bailouts the top 10 got from the U.S. Treasury, yet until now the full amounts have remained secret

Fed Chairman Ben S. Bernanke’s unprecedented effort to keep the economy from plunging into depression included lending banks and other companies as much as $1.2 trillion of public money, about the same amount U.S. homeowners currently owe on 6.5 million delinquent and foreclosed mortgages. The largest borrower, Morgan Stanley (MS), got as much as $107.3 billion, while Citigroup took $99.5 billion and Bank of America $91.4 billion, according to a Bloomberg News compilation of data obtained through Freedom of Information Act requests, months of litigation and an act of Congress.

“These are all whopping numbers,” said Robert Litan, a former Justice Department official who in the 1990s served on a commission probing the causes of the savings and loan crisis. “You’re talking about the aristocracy of American finance going down the tubes without the federal money.” [my emphasis]

That is, the money the Fed lent out to these highly leveraged risk takers could have paid off (much less merely guaranteed) the 6.5 million delinquent and foreclosed mortgages that are currently dragging down the American economy.

But instead of offering money to homeowners who would have used it to stay in their homes and sustain their neighborhoods, the Fed instead loaned it to the banks that were leveraged to the hilt.

So here we are worried about the moral hazard of modifying principal on loans that were vastly overvalued. Here we are shredding the rule of law to try to let Bank of America (which borrowed $91.4B) off for its crimes for a mere $20B or so.

And, for the most part, all those corporations that secretly sucked of the Fed’s teat are still in business, gleefully lecturing others about moral hazard.

Helicopter Ben Invented Tax Evasion Vehicles for the Real Housewives of Wall Street

Matt Taibbi is out with his take on the Fed’s bailout lending revealed last month. He focuses on how two rich housewives with no apparent business experience got almost a quarter of a billion dollars in the TALF program.

In August 2009, John Mack, at the time still the CEO of Morgan Stanley, made an interesting life decision. Despite the fact that he was earning the comparatively low salary of just $800,000, and had refused to give himself a bonus in the midst of the financial crisis, Mack decided to buy himself a gorgeous piece of property — a 107-year-old limestone carriage house on the Upper BeerEast Side of New York, complete with an indoor 12-car garage, that had just been sold by the prestigious Mellon family for $13.5 million. Either Mack had plenty of cash on hand to close the deal, or he got some help from his wife, Christy, who apparently bought the house with him.

The Macks make for an interesting couple. John, a Lebanese-American nicknamed “Mack the Knife” for his legendary passion for firing people, has one of the most recognizable faces on Wall Street, physically resembling a crumpled, half-burned baked potato with a pair of overturned furry horseshoes for eyebrows. Christy is thin, blond and rich — a sort of still-awake Sunny von Bulow with hobbies. Her major philanthropic passion is endowments for alternative medicine, and she has attained the level of master at Reiki, the Japanese practice of “palm healing.” The only other notable fact on her public résumé is that her sister was married to Charlie Rose.

It’s hard to imagine a pair of people you would less want to hand a giant welfare check to — yet that’s exactly what the Fed did. Just two months before the Macks bought their fancy carriage house in Manhattan, Christy and her pal Susan launched their investment initiative called Waterfall TALF. Neither seems to have any experience whatsoever in finance, beyond Susan’s penchant for dabbling in thoroughbred racehorses. But with an upfront investment of $15 million, they quickly received $220 million in cash from the Fed, most of which they used to purchase student loans and commercial mortgages. The loans were set up so that Christy and Susan would keep 100 percent of any gains on the deals, while the Fed and the Treasury (read: the taxpayer) would eat 90 percent of the losses. Given out as part of a bailout program ostensibly designed to help ordinary people by kick-starting consumer lending, the deals were a classic heads-I-win, tails-you-lose investment.


In the case of Waterfall TALF Opportunity, here’s what we know: The company was founded in June 2009 with $14.87 million of investment capital, money that likely came from Christy Mack and Susan Karches. The two Wall Street wives then used the $220 million they got from the Fed to buy up a bunch of securities, including a large pool of commercial mortgages managed by Credit Suisse, a company John Mack once headed. Those securities were valued at $253.6 million, though the Fed refuses to explain how it arrived at that estimate. And here’s the kicker: Of the $220 million the two wives got from the Fed, roughly $150 million had not been paid back as of last fall — meaning that you and I are still on the hook for most of whatever the Wall Street spouses bought on their government-funded shopping spree.

But the kicker is that these two Real Housewives of Wall Street incorporated their little slush fund … in the Cayman Islands.

Perhaps the most irritating facet of all of these transactions is the fact that hundreds of millions of Fed dollars were given out to hedge funds and other investors with addresses in the Cayman Islands. Many of those addresses belong to companies with American affiliations — including prominent Wall Street names like Pimco, Blackstone and . . . Christy Mack. Yes, even Waterfall TALF Opportunity is an offshore company. It’s one thing for the federal government to look the other way when Wall Street hotshots evade U.S. taxes by registering their investment companies in the Cayman Islands. But subsidizing tax evasion? Giving it a federal bailout? What the fuck?

Back when we had a chance of shaming TurboTax Timmeh Geithner into withdrawing his nomination to be Treasury Secretary, we should have suspected he and his associates had a soft spot for tax havens.

But by that point, it was already too late. Timmeh and Helicopter Ben had been shoveling money into the pockets of rich housewives so they could hide it in the Cayman Islands.

Yet we have to cut aid to poor kids, because we’re broke.

FSOC’s 15 Minutes to Save the World

As I noted, the Financial Stability Oversight Council is meeting today. As announced, they discussed foreclosure fraud and securitization.

For less than 15 minutes.

And then they moved on, without once raising the issue of whether or not the banks’ exposure due to securitization problems posed a systemic risk to our financial system.

As the first order of business in the public session (the Council had an hour of private business before the public session), the departing Michael Barr reviewed what the “foreclosure working group” was doing about the problem. He noted that there seemed to be problems, but described that onsite examiners were collecting information and would not be done doing that until the end of the year; they’d issue a substantive report in January. He did, however, say that there had been significant putbacks and he expected them to continue.

And that was it. Timmeh Geithner asked if anyone had questions. And no one did. No one asked, “What do you expect will happen between now and January?” No one asked, “Do you think this is systemic?” No one asked, “What kind of exposure are we talking about here? Are the banks insolvent?”

No one even pointed out that existing home sales were sliding again, at least partly because the banksters couldn’t sell their foreclosures and partly because consumers weren’t stupid enough to buy them. So no one mentioned that waiting until January may not be so smart, as nothing is getting fixed in the meantime.

Now perhaps they did ask these questions during the hour of private business before the cameras started rolling. Perhaps they spent the hour before we got to watch screaming “hair’s on fire, hair’s on fire, hair’s on fire,” before taking a sip of tea, and then performing a complete lack of concern about this. Perhaps they talked about how serious this might be before we were allowed to watch, not wanting to concern the markets (which are busy freaking out, in any case, about a run on Europe’s banks).

But the optics of it–this apparent lack of concern about the way the banks will postpone admitting to their own insolvency by degrading the private property system in this country at the expense of real people–suck. They sure provide zero confidence that the FSOC intends to do its job to prevent this from becoming a systemic crisis.

Update: Felix Salmon has a good article describing where Michael Barr thinks this is all going.

Me? I’m w/Salmon. This isn’t going to fix things. Note, particularly, that Barr (who is probably one of the more aggressive folks at Treasury on this, at least for the next two weeks) is still just talking about fines, not prison.

Obama Sidles Up to the People Not Creating Jobs

From the Department of reading the wrong message in an election is this news, of Timmeh Geithner meeting with the Chamber of Commerce’s odious Thomas Donohue to talk about international issues (read: “let’s talk about other countries we can ship American jobs to”).

But this week, the Treasury secretary, Timothy F. Geithner, met with the chief executive, Thomas J. Donohue, to discuss international economic issues. In his news conference on Wednesday, Mr. Obama came close to conceding the chamber’s main argument, that American businesses had concluded — wrongly, in Mr. Obama’s view — that his policies were antibusiness.

“I think business took the message that, well, gosh, it seems like we may be always painted as the bad guy,” Mr. Obama told reporters. He acknowledged that a relationship with the business community had not been “managed by me as well as it needed to be.”


“I’ve got to take responsibility in terms of making sure that I make clear to the business community as well as to the country that the most important thing we can do is to boost and encourage our business sector, and make sure that they’re hiring,” Mr. Obama said. “We do have specific plans in terms of how we can structure that outreach.”

The outreach includes the meeting this week between Mr. Geithner and Mr. Donohue, according to an administration official briefed on the discussions. The pair talked about the president’s coming Asia trip, including issues relating to the Group of 20 economic meeting, China and South Korea, said the official, who spoke on the condition of anonymity to discuss the private meeting.

Now, on its face, this is about Obama’s renewed push to sign a Free Trade agreement with South Korea, a country with no intention of engaging in Fair Trade with us.

But the Administration appears to want it to symbolize something larger–outreach to the people who have to start creating jobs to get our economy running again.

There’s a problem with that.

First of all, there’s the problem of the national Chamber’s increasing irrelevance to real American businesses. Individual companies are finding the Chamber’s willful ignorance to be detrimental to their business interests and general grounding in reality. Local Chambers are making an explicit point of distinguishing themselves from the national Chamber. And it’s not really clear whether the US Chamber of Commerce represents American companies more generally, or rather foreign business.

So at a time when both local Chambers of Commerce and individual corporations are signaling the national Chamber does not represent their interests, then why choose the Chamber as target for outreach? Why not reach out to those splintering from the Chamber’s explicitly anti-Democratic stance?

Furthermore, the companies whose interests the Chamber largely did boost this election have no interest in hiring. With money so cheap (thanks Helicopter Ben), they’re better off just playing more financial games than actually making something someone wants to buy.

Sure, Obama needs to listen to businesses to learn a little something about what will keep or create jobs in this country. But talking to Thomas Donohue about how to ship jobs away is not the way to do that.

Obama Has Made Civil Liberties AND Foreclosures Worse

Greg Sargent and Steve Benen have interesting taxonomies of the Democrats who should buck up and clap louder. I think both bring some needed nuance to the discussion. As part of that, both include some kind of category of lefties who oppose Obama to defend important principles. Sargent doesn’t limit that category to any one policy issue.

The second group on the left constitutes high-profile commentators, such as Rachel Maddow and Glenn Greenwald, who are mounting a detailed, substantive policy critique of the Obama administration on issues that are important to them. These folks see their role as advocates for a particular policy agenda, and they don’t hesitate to whack the White House when it commits what they see as grave policy missteps. For them to hold their fire because the White House wants them to would be an unthinkable betrayal of the role they’ve carved out for themselves. This is the “professional left” Robert Gibbs sneeringly alluded to — even though Obama himself has said he craves such criticism.

But Benen does (and he cites a Kevin Drum post in the same vein):

Kevin Drum notes, “If you’re, say, Glenn Greenwald, I wouldn’t expect you to buy Obama’s defense at all. All of us have multiple interests, but if your primary concern is with civil liberties and the national security state, then the problem isn’t that Obama hasn’t done enough, it’s that his policies have been actively damaging. There’s just no reason why you should be especially excited about either his administration or the continuation of the Democratic Party in power.”

Right. Glenn not only has a legitimate beef, I honestly can’t think of anyone who’s offered a persuasive argument to counter Glenn’s criticism. I don’t know, however, how large a group of voters we’re talking about that disapproves of the president based primarily (but not exclusively) on concerns over the national security state.

I’d argue that if Glenn’s contingent represents one group of the disaffected, the other two general groups of center-left critics are (2) those who believe the president’s accomplishments have been inadequate; and (3) those who are struggling badly in this economy, and expected conditions to be better than they are under Obama.

And note that both Benen and Drum make a clear distinction between those (like Glenn, and I assume they’d include me in that camp) have a legitimate gripe, and those who are unhappy with the state of the economy.

I disagree with their argument–that Obama could not really have done much more with the economy–but I think they present it in good faith.

But on one area, their claim that Obama couldn’t do more is absolutely false: on foreclosures.

The Administration has had no requirement to get Congress’ approval for their HAMP program. They have the money sitting, unused, at Treasury. Yet long after it became clear that HAMP was not only not helping, but was actually making things worse, after it became clear that other restructuring programs were much more successful, the Administration made little more than tweaks to the program. And then, as the number of people actually harmed by HAMP piled up, they claimed that the program had succeeded because it helped them get away (thus far) with the Extend and Pretend strategy.

But that introduces another problem with the taxonomies that make a distinction between those with a real gripe and those unfairly holding Obama responsible because the economy has not gotten better.

The failure to do something effective to prevent foreclosures–that is, being satisfied that HAMP helped Extend and Pretend rather than making a sustained effort to help actual homeowners stay in their homes–has made the economy worse. That’s by no means the biggest cause of the ongoing crappiness of the economy. But it is one cause.

So even if you buy the argument that Obama couldn’t have gotten more stimulus passed, even if you forgive Larry Summers for his “insurance policy,” and even if you ignore Obama’s decision to renominate Helicopter Ben in spite of his unwillingness to do anything about the full employment part of his job description, you still have to give Obama some of the blame for the economy. Middle class homeowners all over the country are seeing their home values continue to fall, and that’s something that the Administration could have at least tried to alleviate.

But they didn’t.

This Fed Chief Brought to You by Enron

EnronJust wanted to throw two tidbits into the debate on Ben Bernanke’s reconfirmation. First, this quote, which needs no explanation.

In the event that Bernanke isn’t confirmed, several sources say, Federal Reserve Board Vice Chairman Donald Kohn likely would be elevated to acting chair of the U.S. central bank. Bernanke would be entitled to stay on the board until his term as a Fed governor expires in 2020, but the sources said Bernanke could instead return to a professorship at Princeton University.

Possible successors to Bernanke include three people currently advising Obama on the economy, former Fed chief Paul Volcker, Larry Summers and Christina Romer.

Kohn was traveling in Europe at the end of the week on Fed business, but strategy on the Bernanke confirmation was being led by former Enron lobbyist Linda Robertson, who is viewed as an effective advocate for the banking chief on Capitol Hill. [my emphasis]

And then there’s this:

The effort to secure Mr. Bernanke’s confirmation, which had intensified after two Democratic senators announced their opposition on Friday, continued through Saturday and included calls to senators by both Mr. Obama and Mr. Bernanke. By late afternoon, senators began issuing statements of support

White House and Congressional Democratic leaders say they now believe that they have the 60 votes needed to block a filibuster of Mr. Bernanke’s reappointment. They expect some Democrats will oppose him on the confirmation vote, but that requires only 50 votes.

This implies that Harry Reid is demanding party discipline on the procedural cloture vote on Bernanke, but allowing Senators to vote no on the confirmation itself. That’s the way it often works on such issues, of course. Unless it’s health care.

Nice to see that when the party wants to protect the guy who refuses to work for full employment, they can enforce party discipline, but not when the party could offer better health care options to voters.

Bernanke Confirmation Hearing, Two

Picture 161Follow along on CSPAN3.

Nothing terribly exciting from Corker or Menendez. But Bailout Ben keeps talking about the stress tests as if they’re something worth bragging of.

DeMint: We never bought one toxic asset and the entire banking system did not collapse. The precise we used to create TARP was never followed through on so it’s difficult for me to believe we saved the economy.

Bernanke: To fix TBTF: tougher regulation, a resolution regime that will allow govt to wind down, allow creditors to take losses.

I guess Glass-Steagall isn’t an issue.

Tester: Dodd’s regulatory reform bill?

Bernanke: Disagree about Fed’s role. Regulatory expertise and need to know.

Tester: Taking turf issue off table, does it address TBTF.

Bernanke: Not a turf issue.

Judd Gregg giving Bernanke a big smooch. Along the way he says, “You could be in a Dan Brown novel,” trying to push back against suspicion of Fed.

Bernanke Hearing Liveblog

Picture 161Follow along on CSPAN3.

This will be a half-assed liveblog, but it has already proven more interesting than I thought. Chris Dodd has basically said, “Fed screwed up prior to the crash” but then said, “but I support your reapproval anyway.”

Then, he just raised Nouriel Roubini’s read that people are borrowing dollars to buy assets, which is making those assets overvalued. Dodd said he wasn’t sure if he pronounced Roubini’s name correctly (!?!?!?!). And Bernanke said he doesn’t think assets are overvalued.

That, by itself, should cause Bernanke to lose his job.

Bailout Ben says BoA will pay us back immediately. Now boasting of stress tests. Claims that the holding companies are perfectly healthy.

Bailout Ben pushing getting healthcare under control. Apparently doesn’t know that health care reform cuts the deficit.

Please fire this arsehole now!!

He apparently hasn’t heard about the two wars we’re fighting.

Bailout Ben is really focused on restoring securitization markets. That’s nice.

Jim Bunning beating up on Bernanke for being too captive to derivities. Says he’s worse than Greenspan.

Bunning: You are the definition of a moral hazard.

Bunning: I will do everything I can to stop your nomination and drag out this process as long as I can.

Dodd: I don’t understand guaranteeing at 100%. Hard to accept notion that we had no leverage.

Bernanke: We had no leverage.

Dodd: Counterparties would have been in trouble too. You’re the Chairman of the Federal Reserve.

(But Dodd will still support Bernanke.)

Bayh: I’m struck that Bunning and Sanders find themselves in agreement.

Bayh: What would you have done differently?

Bernanke: Slow to do anything on consumer protection.

Bernanke: Liquidity is to be distinguished from bailouts.

[Except for the fact that they made a bunch of insolvent firms “liquid” last year]

Schumer: You’re a victim. Action was needed and was needed quickly. I talked to Warren Buffet, govt deserves high grade. You played a major role. Now onto consumer issues.