Dec 22 2008

And what did you do with that money?

A recent op-ed by Frank Rich of the New York Times made me do a little digging this morning into just where our taxpayer money being used to bailout institutions like Morgan Stanley, Citigroup, and Goldman Sachs (to name a few) is going. Unfortunately the picture is not looking too good at the moment.

It seems that along with throwing $700 billion of taxpayer money (Treasury Secretary Henry Paulson asked for the other half of the $700 billion to be released back on Friday, December 19th after originally indicating that he would leave it available for the incoming administration) at these institutions the government (that would be both the current administration and Congress) has failed to conduct the appropriate oversight necessary to ensure that this money was not being used to pay for bonuses and other compensation. The Government Accountability Office (GAO) recently released a report, GAO-09-161 detailing a lack of specific, enforceable methods of ensuring that the money given to banks is used according to the original intent of the Toxic Asset Relief Program (TARP). Specificially, the GAO report notes

We spoke with representatives of the eight large institutions that initially received funds under CPP [Capital Purchase Program — clarification added, ID], and they told us that their institutions intended to use the funds in a manner consistent with the goals of CPP. Generally, the institutions stated that CPP capital would not be viewed any differently from their other capital—that is, the additional capital would be used to strengthen their capital bases, make business investments and acquisitions, and lend to individuals and businesses. With the exception of two institutions, institution officials noted that money is fungible and that they did not intend to track or report CPP capital separately.

(Government Accountablility Office, TROUBLED ASSET RELIEF PROGRAM Additional Actions Needed to Better Ensure Integrity, Accountability, and Transparency, December 2008, p. 25)

By the way, the definition of the word “fungible” is interchangeable (see dictionary.com). As amazing as it may seem the indications are that the money which the U.S. taxpayer has given these institutions to help right themselves after nearly collapsing last September/October can well be used to pay bonuses to managers and executives. How is this possible? Weren’t we assured that this would not happen?

As originally written the bailout bill would have provided for limitations to the compensation given to Wall Street executives who took money from the Troubled Asset Relief Program (TARP) and provided a framework for reviewing and penalizing those institutions that broke the rules in the program. It seems, however, that as the bailout bill was winding its way through the White House a small, one-sentence change was made to the wording in the bill by the Bush administration. According to the Washington Post

The change stipulated that the penalty would apply only to firms that received bailout funds by selling troubled assets to the government in an auction, which was the way the Treasury Department had said it planned to use the money.

(Paley, Amit R., “Executive Pay Limits May Prove Toothless,” The Washington Post, December 15, 2008 )

Now it appears that this little change has provided a huge loophole. Barely a month after the TARP was put in place Treasury Secretary Paulson indicated that the Treasure would not be using the TARP money to buy the toxic assets off the balance sheets of the banks but rather would invest the money in the banks directly. This about face has left the issue of oversight as to how the money is used in a bit of a limbo. As the GAO report notes

it is unclear whether Treasury plans to leverage bank regulators, which in the case of the largest institutions have bank examiners on site, to conduct any oversight or monitoring related to CPP requirements. However, unless Treasury does additional monitoring and regular reporting, Treasury’s ability to help ensure an appropriate level of accountability and transparency will be limited.(emphasis added)

(Government Accountablility Office, TROUBLED ASSET RELIEF PROGRAM Additional Actions Needed to Better Ensure Integrity, Accountability, and Transparency, December 2008, pp. 25-26)

Without transparency there will be no way to know how these banks are using this money and whether it is being used appropriately or not. As the GAO report notes the initial eight institutions that took the CPP money intended to use the funds in “a manner consistent with the goals of CPP” (Government Accountablility Office, TROUBLED ASSET RELIEF PROGRAM Additional Actions Needed to Better Ensure Integrity, Accountability, and Transparency, December 2008, pp. 25). In other words, at this point we are taking them at their word that they’re doing the right thing. However, when asked many of these institutions remain quiet about the specifics of where the money is going (Herman, Charles, Dan Arnall, Lauren Pearle, Zunaira Zaki, “Morgan Stanley Is One Bank That Cites a Loan From TARP Money,” ABC News, December 17 2008 ). It appears that the American taxpayer could well be taken to the cleaners once again. Paul Krugman of the New York Times had it write…it is truly a “Madoff Economy.”

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Nov 21 2008

Scary Times

I’ve stopped paying attention to the stock market these days. Oh, I keep tabs on it frequently but I’ve removed the Windows Vista gadget I used to have in the sidebar that showed me how the market is doing in a “realtime” basis. It’s too depressing. I’ve already done all that I can at this point to shore up my own finances. Back when this plunge was first starting I moved my 401k investments out of stocks and into bonds and money market funds. I’ve moved my wife’s IRA to bonds. Where I can’t do that I’ve left the accounts alone with the hope that when the market rebounds…which it will…I will at least recover my investment (albeit I may be an old man by then) or make good on it in a big way.

What disturbs me is the lack of leadership at the top — both from the White House and from Congress — in addressing this issue. After asking for $700 billion dollars to buy these toxic mortgage backed securities that helped drive this mess, Treasury Secretary Paulson has now decided that doing so is too complicated and would not provide the needed effect of calming the markets and providing some sense of confidence. Instead, he’s investing that money in the banks themselves. Unfortunately, the banks apparently are intent on either sitting on that money (like the American consumer is doing with whatever cash reserves they have) or using it for acquisitions and mergers. That, of course, hasn’t helped at all nor has it resulted in the much needed relaxation in the credit markets. The idea that this money would help cause a “trickle down” effect that would settle the upset American economic market seems to have failed. I, personally, would posit that the Reaganomic idea of “trickle down” has now been clearly shown to be the “Voodoo Economics” that President George H. W. Bush once claimed. Perhaps Secretary Paulson should use the other half of the $700 billion dollars that he’s got in a “trickle up” idea — instead of giving the rest of the bailout money to banks and other financial institutions give every household in the country $100,000 and let them spend it to help jump start the economy. Since “trickle down” doesn’t work…perhaps “trickle up” will.

I read Paul Krugman’s latest op-ed piece in the New York Times and it doesn’t really give me all that much hope. Yet he’s right…we’ve got a complete drift in economic policy due to an administration that is apparently unsure of what to do (or unwilling to do what it needs to do) and a Congress that is biding it’s time…for what I don’t know. What I do know is that the lack of action by the administration (or their claims that they are not sure of what action to take next) as well as the statements made by Congressmembers such as Senator Carl Levin yesterday are going to really drive the American consumer into a bunker mentality that perception will become reality. Consider this statement made by Senator Levin yesterday

We cannot allow the issue of which source of already appropriated funds will be used for the essential purpose of preventing the economy from sliding into a depression, which is a real possibility if one or more of the domestic auto companies goes under, given the impact of the auto industry on millions of jobs, on suppliers that are in most or our states and on all of our communities which have Big 3 auto dealers.

Levin, Carl, “Statement of Senator Carl Levin on Bipartisan Agreement to Support Auto Industry,” November 20, 2008, found at http://levin.senate.gov/newsroom/release.cfm?id=305179

I’m certainly not claiming that Senator Levin is stating that we are already sliding into a depression but such statements can cause real fear in American consumers and they will respond accordingly — by pulling back even further on whatever spending they are already doing and that will, in turn, contribute to the slide into a depression.

What’s happening now is a mess created by this administration with it’s lack of real economic policy, by a Congress that is, and has been for years, truly partisan, and by a Fed Policy Board Chairman that argued too much for allowing the markets to regulate themselves. But, let’s be honest, it’s also caused by an American consumer that bought on credit as far as they could go and by a system that threw all the basics of lending out the window in the pursuit of short term riches. We have forgotten the very basic concepts of economics — you don’t get something for nothing. And now, many more of us may well lose everything.

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