Hello Again... A $1.2 Trillion Slush Fund?

by: Matt Stoller

Wed Jan 14, 2009 at 14:46

Now's as good a time as any to announce that I'm working for Alan Grayson (FL-8) as his senior policy advisor.  

The Financial Services Committee had a hearing yesterday with a variety of witnesses, and one of them was the Vice Chair of the Federal Reserve, Donald Kohn.  The Fed has lent out $1.2 trillion over the last few months in response to the credit crisis, and won't tell anyone who they lent the money to.

If you haven't already, watch this clip, it gets good.

We need your help.  About a half hour after this hearing, I got a call from the VP of Public Policy for a major bank, who assured me that they have taken no capital aside from ordinary discount window financing from the Fed.  

Where do you think this money went?  What kinds of questions should we pursue?  

Matt Stoller :: Hello Again... A $1.2 Trillion Slush Fund?

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Well... (0.00 / 0)

This may be nothing, but it could also be par for the course as well... rich investors getting their money back at our expense.

Question (0.00 / 0)
TPM is reporting that Patrick Murphy attempted (apparently unsuccessfully?) to attach an amendment to the pending bailout oversight bill that would require disclosure by the Fed of how the money in "the Federal Reserve System's Agency Mortgage-Backed Security Purchase Program" was used. Is this the 1.2 trillion you refer to, and is there a possible path to something like this amendment getting passed at some point?

Congratulations Matt! (4.00 / 3)
Alan Grayson seems like one of the few democrats who has the cajones to call out criminal conduct amongst elites for what it is!

I wish you the best of luck and hope the Open Left community can still be of much use to you with this job. The rootsgap needs to be closed, and there probably aren't many better to help close it than with Grayson!

Beyond Iraq: A Time to Break Silence

Questions (4.00 / 5)
1) Given that the actions of the existing Boards of Directors and senior management have plunged these institutions into virtual bankruptcy which now require the infusion of massive tax payers subsidies, is this not sufficient grounds for the government to demand the resignations of all of those officials directly responsible?

2) Now that a large fraction of the assets of these institutions will be supplied by U.S. taxpayers, isn't it appropriate the boards of directors and management be directly answerable to the taxpayer and that the composition of these boards will insure that they will act in the public interest in the future?

3) If it can be demonstrated that senior officials have taken taxpayer funds and used them, against the expressed wishes of this committee, for the purposes of executive and shareholder compensation what punishment do you feel would be appropriate?

I'll think of more.  

I should say that I gave Grayson $200 bucks (as I remember) and had friends and family cough up about a thousand more.  

I feel completely vindicated.  Best money I ever spent.

It's great entertainment if nothing else, though it does come in second to Grayson's previous appearance here.

I'm waiting for things to get to the point where he can again say "We don't need an investigation.  We need punishment."

Contempt of Congress? (4.00 / 3)
I think maybe Donald Kohn could profit from a stay in the slammer if he won't tell Congress WTF is going on.  I know this isn't directly responsive, but it seems to me that the most important thing is to change elite institutional attitudes, STAT.  And I can't think of a better way to do that than to start throwing their asses into jail.

If they start feeling as zealously about the need to protect the public interest as we do, then the ideas about how to protect will fall into place much more easily.  And if their zeal comes in part from a desire to spend more time with their families, and less time with Mafia dons and other federal prisoners, that's a compromise I'm willing to make.

Overstated?  Sure.  But, just trying to drive home a point.

"You know what they say -- those of us who fail history... doomed to repeat it in summer school." -- Buffy The Vampire Slayer, Season 6, Episode 3

Is Obama being too quick in closing Guantanamo? (4.00 / 1)
A long Cuban 'vacation' just might get us some answers.

[ Parent ]
I agree with Paul (0.00 / 0)
Matt, shouldn't contempt and prison be on the table for this kind of evasiveness? They have just looted a trillion dollars from the country, otherwise, with no repercussions. Someone needs to go to jail. Start with those who will not be up front with the American people.

[ Parent ]
Ask Steve Eisman for the right questions. (4.00 / 2)
Although it's flattering for you to solicit advice from le menu peuple, if you really want to ask the right questions, get Steve Eisman to make you a list.  

I like Baker, too. (0.00 / 0)
Dean Baker asks some good questions, for sure:

NPR reported on Representative Barney Frank's effort to ensure that a substantial portion of the money from the second $350 billion in the TARP go toward helping homeowners. The proposals that purport to save homeowners would in fact hand large amounts of money to banks. They involve paying banks far above market prices for underwater mortgages. The benefit to homeowners is that they would be allowed to stay in their homes, possibly with zero equity. (Some proposals also give the homeowner a small equity cushion.)

NPR and other news outlets should be reporting who gets the money under these proposals. In many cases, banks may be paid tens of thousands of dollars to leave a homeowner in a home in which they have no equity. At a time when Congress is debating extending the State Children's Health Insurance Program at a cost of $3,000 per kid, it is not clear how many kids' health care they or the public would be willing to sacrifice to pay a bank to leave someone in a home in which they have no equity.

[ Parent ]
More from Baker about Barney Frank, "the bankers' best friend." (4.00 / 1)
Baker deconstructs a particularly vile proposal from Barney Frank here.

Mr. Frank has endorsed the idea of paying banks considerably more than the market value for bad mortgages in order to allow homeowners to stay in homes in which they will have zero equity. If a bank gets $20k, 30k, or even more, and the homeowner ends up with nothing except a new mortgage that is equal to value of her home, it is difficult to see how this outcome is aiding the homeowner.

It is easy to design measures that would help homeowners without giving taxpayer dollars to banks. For example, the government could temporarily change the rules on foreclosure to require that homeowners facing foreclosure be given the opportunity to rent their home at the market rent for a substantial period of time. Mr. Frank has shown zero interest in such measures.

[ Parent ]
and get financial journalists involved -- it's a good story -- (4.00 / 2)
and they've been speculating on who got what anyway -- and have the industry contacts too.

[ Parent ]
I'd like an accounting (4.00 / 1)
If the markets were recovering, banks were lending to each other and things were looking up then I guess I'd trust them at their word more, however...

The "stimulus" is not working, the economy continues to sink, we have no idea where our money is being "invested" and they keep coming back to the trough asking for more.

If your mechanic tells you your car won't run without a new solenoid (cause you know it's ALWAYS the solenoid) and it'll cost a gazillion bucks in parts and labor, but there's no other mechanic in town and he won't let you look under the hood yourself, then I say it might be time to go to the better business bureau and have the guy's business license revoked...

Matt, the Tarp money "went" nowhere. (0.00 / 0)
It was needed to shore up the capital accounts of the banks.  Not just due to the prior losses on mortgage assets, but to prepare for future write-downs of car loans, credit card loans and other debt.

Without the TARP money, the banks' capital ratios would have (and probably still will) fall under any prudent levels.

How could they lend out the TARP money, when they needed it to absorb existing and future loan losses? (Note, that if Obama eliminates mark-to-market accounting, this will help.)

The questions to ask are:

1.  From 2000-2008, how much did your bank set aside as reserves for loan losses, and do you feel that was a prudent level?  (banks were well under-reserved for a recession).

2.  How much money did you spend on stock buybacks and dividends from 2000-2008 and do you feel those were better uses of your funds than setting aside more reserves?

hes talking about Fed purchases and loans (0.00 / 0)
which is NOT TARP money. This is a very important distinction.

eliminate mark to market accounting right... let them declare whatever phoney baloney values they want right? and while we're at it lets lower lending standards and force banks to lend under loser terms. people on the left have gone insane.

~* the * Will * to go on *~

[ Parent ]
This is very simple re Fed purchases (0.00 / 0)
Banks have these crappy long term mortgage assets on the books that are worth who knows what.  They financed them with short term liabilities.  Well, that game ended last year--there is NO ONE willing to lend to the banks.

So, the Fed is lending to them, and taking as collateral more than they used to.

The new Fed money cannot be used as new lending, since all it is doing is replacing existing debt.

As to mark-to-market, THERE IS NO MARKET for many securities.  This is not like stocks.  Even performing mortgage debt would have a hard time being sold.  So take Bank A, which has no liquidity issues.  Bank B has liquidity problems, so they have to sell some assets are artificially low prices (there is no credit to buy them right now).  So even though they are performing assets, Bank A now has to mark them down to a distressed market sale price. So, now Bank A has problems, even though the assets are money good.  M-t-M is as stupid as original cost accounting.

[ Parent ]
I'd like to understand... (4.00 / 1)
...why Kohn insisted on not revealing which banks were taking the money. He just refused, repeatedly, to answer. Why?

Simple (I think) (4.00 / 1)
The lamb prefers to smell like a lion when there are predators about. These guys are afraid for themselves, and for the institutions which shelter them. Screw the rest of you sounds as sweet and fitting to them now as it did five years ago.

[ Parent ]
use their fear -- have banks come forward to publicly declare (4.00 / 1)
that they didn't take -- or need -- our money --

the ones that aren't gigantic are afraid of publicity and the exposure.

that's very usable, no?

[ Parent ]
Foreign banks and entities? (4.00 / 3)
Specifically, how much of this money went to foreign banks and entities?

Were sovereign wealth funds bailed out?

He goes back and forth between "spending" and "lending" in his testimony.  How much is it reasonable to expect to be repaid, when, and under what terms?

.. congratulations, Matt.  Grayson is lucky to have you.  Do us proud.

That's why they won't tell. (4.00 / 1)
If Americans how much was going to foreign shores, they'd be tarred and feathered.  This deserves a lot of prying in to.  

[ Parent ]
How much of the TARP money (4.00 / 1)
are the banks blowing on a spending spree buying up their competitors? All bank mergers after TARP was signed into law, with any bank that got TARP money, should be retroactively stopped, and mergers funded by TARP money should be banned, until the bank pays back the TARP money it got.

Here's a few off the top of my head (4.00 / 4)
1) A amendment or formal request asking for a breakdown of lending by Consumer, Commercial and Real Estate categories by the Top 25 Borrowers since they began borrowing from the discount benefit
2) Wages, Benefits, Bonuses, T&E expenses and "perks" such as association, club and gym fees, lease payments, mileage reimbursements, etc.    for all employees at the Senior Vice President level or above for the Top 25 Borrowers for the last five years
3) An actual list of the Top 250 borrowers by region and industry
4) Capital leverage ratios for the Top 100 Borrowers for the last five years
5) Any correspondence between elected officials at the federal level and the Fed regarding the Top 100 borrowers outside of normal committee business (you're looking for special asks, recommendations for the bank, the banks CEO, Chair, Board  Members, etc.)
6) Regulatory actions and consumer consumer complaints by year for the last five years for the Top 100 Borrowers
7) Breakouts by occupation and a listing of the Top 10 clients, customers, or business relationships for each Board Member of the Top 25 Borrowers.  

Why is Obama spending so much on his inauguration? (4.00 / 3)
Why Larry Summers, Hillary Clinton, and Tim Geithner?

It isn't looking good so far.

As far as the bailout goes, until Progressives reconcile environmentalism with their economic give-a-ways to the masses it will be a dead movement.

Either we save the Earth or we make Joe Six Pack and Sally Soccer Mom happy: there is no middle ground.

I don't know about choices between the planet and mom, (4.00 / 1)
but I do agree that spending so much on the inauguaration doesn't look good and neither does all the money he is getting from the hot shots at the companies he is bailing out.  

[ Parent ]
Fed Resrv Collateral (4.00 / 3)
This is so fucking simple. Make the Fed disclose the details of what it is pulling onto its balance sheet. Make them proved this information:



note to every one else - this is NOT TARP related! This is the Federal Reserve. Goodness.

~* the * Will * to go on *~

Good video (4.00 / 1)
Good job by Grayson - exactly right questions.

Mr. Kohn can go fuck himself. Grayson is right that Congress has the authority, so Congress should go get the info. Kohn must be held in contempt if he won't give the information. The Fed serves at Congress' pleasure.

~* the * Will * to go on *~

"The ones that have market value are marked to market" (0.00 / 0)
OH MY FUCKING GOD! That is priceless! So they don't mark the value of collateral to market for which there is no market! LOL!!! Of course we knew this was true, but its nice to hear them say it with a straight face. Prediction: that sentence blows up in the Fed's face by mid next week.

~* the * Will * to go on *~

Ow (4.00 / 1)
What is going on in this clip is simply the Federal Reserve behaving as if it isn't politically accountable in the standard way, which it was not designed to be. This was not even an oversight hearing but more of an expertise hearing on what should be done with TARP, as much as I can gather from the witness list. Elected officials can focus on making policy so that the Federal Reserve is not the bailout agency of last resort as it was for many of these financial institutions in case of emergency. Elected officials can also ask questions about how soon the Fed can be paid back and can enforce its debt being reduced.  

Darkness has a hunger that's insatiable, and lightness has a call that's hard to hear.  

Get other Committees involved too -- (0.00 / 0)
They're all in the public eye now, and Congresspeople should be asking all the Cabinet appointees --on TV -- in all areas that get Congressional funding and have Congressional oversight (all Committees that have anything to do with funding, appropriations, IRS, oversight, Treasury, Fed, OMB, labor, housing, etc)

They should use this to get other depts/agencies to swear to not act like this fool -- with our money.

For instance -- a Congressperson at a hearing for the housing guy: "President Obama has sworn that his administration will act transparently in all areas. The Federal Reserve and Treasury refuse -- even now -- to tell us how they're spending billions of the American people's money. Now -- your Department currently receives 22 billion a year from the people -- what will you do to ensure we -- and the people -- know how it's being spent?" (or whatever)

(it'll feed the politicians' egos, and the media is airing the hearings these next few weeks, and paying attention now.)

problem solved (4.00 / 2)
The Federal Reserve Audit Act

Questioning Technique Suggestion (0.00 / 0)
Matt, if Representative Grayson gets another chance, I think it would be effective if he could ask, one by one, about specific financial institutions: "How much has [Bank of America, Wells Fargo, Citibank, Goldman Sachs, UBS, ...] received?" I've seen Pat Leahy adopt this sort of approach, and it's quite effective.

Rep. Grayson (in open session) could ask Chairman Frank for a closed session. I hate closed sessions, but at least the witness could explain why he didn't answer, and then he can answer. Whereupon the committee can go back into open session and Rep. Grayson (or anyone else) can ask questions such as, "Now, concerning the $10B loan to Wells Fargo, and the $5B loan to Goldman Sachs, and the $8B loan to.... who do you think will win the World Series in 2009?"

There are no state secrets, no executive privilege, no nothing here. So pry the information out of the witness in closed session if necessary then just repeat it when the lights come back on.


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