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Wall Street Bailout - Are the Foxes Guarding the Hen House?

The Emergency Economic Stabilization Act of 2008 (AKA – Wall Street Bailout Act) required that the U.S. Comptroller General (GAO) report every 60 days on various aspects of oversight of Troubled Asset Relief Program (TARP). TARP is the program authorized under the Wall Street Bailout Act. On December 2, 2008, U.S. Comptroller General released his first report on TARP. The report, while cutting some slack to the Treasury Department, is critical of the lack of any oversight policies/regulations relating to the $350 billion (first half of money approved by Congress) of taxpayer money. The lack of any meaningful oversight by Treasury of the $350 billion of taxpayer money is not surprising considering who is doling out the money.

The Wall Street Bailout Act allowed Treasury Secretary Henry Paulson to distribute $350 billion of $700 billion at his discretion subject only to the “purpose” of the Wall Street Bailout Act (that “purpose” can be interpreted to cover everything under the sun). The second half of the $700 billion would require congressional approval. Secretary Paulson allocated $330 billion as November 25, 2008. Of that $330 billion, it seems that approximately $211 billion has actually been spent. That leaves $20 billion that has not been allocated.

Treasury Department has allocated $250 billion to TARPs Capital Purchase Program (CPP). Remember when the initial strategy was to purchase the toxic mortgage backed securities and possible mortgage loans but that changed on October 14, 2009 when the Treasury Department decided to provide direct capital to financial institution by purchasing preferred stock and warrants of those financial institution who applied to CPP. As of November 25, 2008, the Treasury Department has invested (wishful thinking) $151 billion in financial institutions through CPP.

Treasury established another program under TARP called the Systemically Significant Failing Institutions (SSFI). Under this program, Treasury has purchased preferred stock in AIG for $40 billion and Citigroup for $20 billion. AIG was not happy with the deal it got from the Federal Reserve in September so Treasury Department and Fed restructured the deal so that the $40 billion of TARP money that Treasury was investing would be used to pay-off a large portion of the $85 billion loan provided by the Fed in September.

On November 25, 2008, Treasury Department and the Federal Reserve Bank of New York announced the creation of Term-Asset Backed Security Loan Facility (TALF). Treasury allocated $20 billion of TARP money to be used under TALF as credit protection for the Fed who is expected to loan $200 billion to asset-backed security holders. TALF is expected to help provide liquidity to the credit markets particularly the markets for consumer credit (i.e. credit cards).

The GAO report provided nine recommendations to the Treasury that would help promote “the integrity, accountability, and transparency of TARP”. Including a recommendation that went to the heart of taxpayer protection:

work with the bank regulators to establish a systematic means of monitoring and reporting on whether financial institutions’ activities are consistent with the purposes of CPP and help ensure an appropriate level of accountability and transparency.

The purpose of CPP was to provide capital to financial institutions so that they can in turn provide credit (loans) to U.S. businesses and consumers and to encourage financial institutions to work to modify terms of existing home mortgages. The GAO though it would be a good idea to establish a system to determine whether financial institutions were using the TARP money (our money) for the intended purpose.

Treasury Department and the Fed disagreed with the above recommendation of the GAO. Treasury Department actually said it had a “different perspective” on how to evaluate the way financial institutions were using our money. Treasury Department and the Fed said that they were more interested in “general metrics for evaluating the overall success of CPP.” The Treasury and Fed were speaking in code for we gave a flying f**k whether a bank uses several billion dollars to make loans (intended purpose) or make other acquisitions or provide some executive compensation scheme that evades the Wall Street Bailout Law (Treasury Department is not monitoring executive compensation).

Heck, the financial institutions that received money under CPP viewed this capital infusion as “fungible money” meaning they were not treating our money any differently than any other capital infusions. They were not placing any restrictions on the use of the money. The executives of these financial institutions don't care about safekeeping tax payer money. All they are concerned about is protecting their downside risk which they have done successfully with this Wall Street Bailout Act.

After reading the GAO report including Treasury Department and Fed responses to the report, I believe we have been royally screwed. Treasury Department and the Bush Administration are not interested in accountability or transparency. They either have an insane faith in “free markets” and an irrational belief that these financial institutions that got us into this mess will self-regulate themselves properly or they just gave a huge going away present to their friends in the financial services industry.

This whole bailout situation should not be very surprising considering that Secretary Paulson was an executive at Goldman Sachs. He probably will return in some capacity to the financial sector. That Hank Paulson is a sly fox.