Why Should We Be Surprised? (Treasury Conduct Edition)

The New York Times reports that the General Accounting Office is readying to issue a report that will criticize how Treasury has handled its spending under the $700 billion TARP program. The main shortcomings are failure to track how the money is actually being used and inadequate controls to prevent conflicts of interest.

Gee, I thought those supposed failings as features rather than bugs.

From the New York Times:

The first operational audit of the $700 billion financial rescue plan, to be delivered to Congress next Tuesday, is expected to be critical of the Treasury Department’s failure to set up ways to track how its bailout money is being used in the marketplace, according to people briefed on a draft of the report.

The audit, done by the Government Accountability Office, is also likely to call for tighter controls over the conflicts of interest that are arising as financial specialists, institutions and law firms are hired for Treasury work that could later aid their private-sector clients….

The Treasury Department has been criticized already in Congress for not tying more strings to its investments in banks and other financial institutions.

Through its Capital Purchase Program, it has injected $160 billion into the banking system through the purchase of preferred shares. But auditors found that no plan had been put in place to track how, or whether, that money is being put to use by the first eight institutions that received it.

The personnel consequences of the Treasury’s unexpected shift in strategy in the rescue plan — from the purchase of so-called troubled assets on financial balance sheets to the injection of capital directly into financial institutions — also drew attention from the auditors, those briefed on the study said.

The audit team noted that Treasury already had hired staff members for the initial mission, some of whom were not necessary or best suited for the work required under the new strategy.

Note that the article did say the GAO toned down its report out of recognition that the TARP is a new, rapidly implemented program.

However, also note that the Department of Defense has been unable to account for trillions of spending, so the Treasury has plenty of company.

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23 comments

  1. Glen

    …and anyone’s going to be surprised by this? Given the Bush administrations mis-handling of the Iraq budget and the gaping holes that have been conveniently plugged by over charging contractors it’s no wonder that TARP administration is a mess. Consider this the Bush administrations $700 billion parting gift to the banking system that made them all even richer with little accountability to the tax payer.

  2. Anonymous

    Fear the GAO! Its coming back, a bit late though, but never less here it comes. Could be the office of retubution, rather than the AG office. Bad Math Bad Math.

    Skippy

  3. lucifer

    have noticed that many commentators on this site have delusions about understanding the financial world. The reality is that those trained in economics and finance are often the most ignorant of the true nature and scope of their actions.

    What is the purpose of money or economic activity? I am suggesting that the true purpose of such concepts and activity is to prevent people from killing each other. The fringe benefits of money and economic activity such as as trade, “progress” and wealth creation are secondary.

    However many economists and financial types believe that money is real. Though many of them profess to believing that money is merely a medium of exchange and storage of commercial activity, their actions suggest otherwise. It is curious that kids stop believing in santa claus and the easter bunny as they grow up but start believing in the “realness” of money. Money whether gold based or fiat based is not real. Neither is debt, your favorite economic model or theory. Money is worthless if it cannot create new wealth or keep people from killing each other.

    The concept of money, as most people understand it, was created in a feudal and mercantile age when the majority had a subsistence level existence. It is therefore not surprising that it evolved mainly to keep people from killing each other and simultaneously control people (we are just smart apes who seek short term dominance over long term gains).

    However the full fruits of industrialization, various historical events and widespread multi-generational acceptance of concepts like fiat currency have made the consumption of the average person the only dominant driver of the economy (consumer economy). While some people express moral misgivings about such a transformation, the reality is that people who advocate a move away from materialism, towards conservatism, fiscal discipline, frugality are the merely the priests of a new religion. They seek to control and dominate the lives of other people just like the ‘priests’ of every religion from catholicism to environmentalism and “capitalism”.

    Many educated people harbor subconscious fantasies about a return to a world where their less well educated peers are peons, serfs and slaves. The problem with this approach is quite simple- the level of complexity and hidden supports that keep our society functioning will collapse and we will cease to live in a functional society.

    Many educated people also harbor the fantasy that they can return to a medieval age where the level of complexity was “about right” for the “human brain”. This belief is mistaken for a few reasons-

    a] We have no comprehension about the full capability and potential of the human mind. For most of history we have lived in tribes of less than 200 people, however given the right conditions we have been able to repeatedly form large complex societies. The same minds that are supposed to be capable of only forming medieval societies at best also create complex mathematical models that can ruin the world (as you might have heard recently). While our motivations may be base, our ability to perform complex tricks to obtain those base aims is rather surprising. Complex scams are hardly restricted to the financial sectors- the entire medical industry, construction industry and pretty much any regulated/licensed/ union job is essentially based on a complex scam.

    b] Living in medieval society was no picnic. People who visit heritage parks or attend renaissance fairs have a rather incomplete understanding of the hardships in those periods. This situation is not unlike many outdoors enthusiasts who rail against development but who depend on the gear, technology and laws of modern society.

    c] Western (white majority) societies are in decline. Throughout history, the intelligentsia of declining societies have always rationalized their downturns as natural, global , inevitable and understandable. The common thread through such declines has always been the belief that “we have reached the peak of human achievement and it is downhill for every human from here on”. History suggests otherwise. However this phenomenon has never hit western societies on this scale and scope- until now.

    d] Emergent systems guided by chaoas and evolutionary pressures are unlikely to return to their starting point- or even retrace their steps. Much has changed in the 70 odd years since GD1, especially in regards to the permutations and combinations of possiblities.

    I believe that the best way forward for us a species is to think about the following concepts.

    1] What is money? Why should it retain its value? What is the use of money if it cannot buy you wealth. What use is your 1913 pre-fed dollar if it cannot buy you a circa 2008 – 4 dollar walmart prescription for your kids strepthroat. Do you have any clue about how many kids got rheumatoid arthritis or pneumonia from then untreatable strepthroat. Most people who died in the 1918 flu epidemic died from seconday bacterial pneumonia not the virus.

    Gold based or strict credit economies cannot create the infrastructure and technological breakthroughs we are accustomed to. We are quite pathetic at predicting the effects and potential of any any new innovation/ product or service- nothwithstanding the beliefs of of famous and clever white (and asian) men who have proved so wrong about the future of the areas in which they were considered to be experts. Rationing money for innovation would be rather similar to the soviet practise of command economics. In any case it is possible to employ 30-60 people for the total yearly income of an average mid-level investment banker who plays paper games, misjudges opportunities, screws over innovators and also loses your investments.

    2] Do banks have any “real” money in a fiat currency based world. Given that the vast majority of banks are either insolvent, propped up zombies or the walking dead- why do we need them (in their current form)?

    I believe that banks in a fiat currency world are best operated as utilities, not as the fiefdoms and the extortion rackets they have been to date. The biggest problem with this alternative model is that bankers cannot make obscene amounts of money by shuffling contracts and sucking money from the consumer economy.

    I propose that we pay for sending the current crop of bankers on a one way trip to the sun. It would be cheaper to put bankers and their families in launch vehicles directed towards the sun, than bail them out of their fictional mathematical games. The ‘Zenit’ rocket system can put one kg of stuff in orbit for less than three thousand dollars- You could put a family of bankers in orbit for less than a million. Building the launchers for putting bankers in orbit would create more real jobs than the trillions wasted in the futile efforts to make banks lend to consumers.

    3] Large misguided credit expansions, abuses and bankruptcies are inevitable in a species like ours. We like to screw our fellow human for a quick buck. The real question then is how we mitigate the negative effects of such abuses. I believe that any abuses which do not exceed a certain % of GDP should be watched but not intervened in – the dotcom boom created a very good high speed network that we are only now using to it’s full potential. The factors that should prompt intervention are high relative size of the bubble to the GDP) and the low potential to create jobs or useful capabilities (housing- we already had a surplus).

    I, for once, would welcome a bubble in space exploration, engineering, chemistry, biotechnology or anything else that produces lots of jobs with the small prospect of big unexpected breakthroughs.

    4] In a system where the future is unpredictable, can credit be repayed completely or even partially? Given the factors I have listed in 3], periodic widespread debt forgiveness might be necesary to keep the system from collapsing. What do bakers lose anyway? Paper, ink, electrons? They certainly do not lose their previous paychecks, commisions, fees and other assorted loot made from the issuance of bad credit.

    Would 1.2 Trillion to repay credit cards + 1 Trillion to repay student loans + 1.5 trillion to pay other personal debt have stimulated economic growth better than pissing the money in a black hole to honor CDS bets (and keep apperances in this nonsensical paper game). Hell, yes!!

    5] Maybe we should accept that the two major roles of money are 1] keep people employed / civilized 2] create new wealth through innovation in the non-financial world. It might be time to give up on ideas such as full repayment of debt, money having a constant value and paying sociopaths to manage your wealth. Honestly, how many people who invested in the financial world are gonna make more money (inflation adjusted) than they put in- any guesses on gross percentages.

    But first we must put the banksters and their handmaidens into incinerators- heating water in boilers might be the most productive thing they have done in their lives.

  4. Bendal

    Last night ABCNews ran an article on the economy, and pointed out that the Federal Government has spent not $300 billion, but over 5 TRILLION dollars in 22 different economic stimulus programs.

    Were some of these programs in place already and extra money is being allocated for them, or did everything spring into existence just a few months ago?

  5. wunsacon

    lucipher, that is a wonderful post. I hope you’re collecting your thoughts somewhere, such as your own blog (if only just to maintain your own “notebook”).

  6. K T Cat

    The lack of oversight is not surprising. I’ve worked with government agencies in the past where they’ve seen an influx of tens of billions of dollars and they’re never able to spend it properly.

    People assume that once an organization gets a ton of cash, it will spend it with the same efficiency as it has before. That’s not true. Contracting personnel, contract monitors, legal teams, technical experts, all of those are hard to come by and take time to get working together as a cohesive team.

    On my own blog, I predicted this would happen when they first got the money.

    Of course, now I can’t find the link to that post, so maybe I’m just a liar and a windbag. :-)

  7. Kevin Thome

    Great post Lucifer
    Have you been watching ZEITGEIST:Addendum?
    MoneyMasters perhaps?
    Anyone interested in REAL, FUNCTIONAL solutions to what we are going thru should watch those movies on Google video

  8. Anonymous

    “also note that the Department of Defense has been unable to account for trillions of spending”

    Of course, Rumsfeld stated that very fact publicly on 9/10/2001.

    http://www.youtube.com/watch?v=3kpWqdPMjmo

    Of course, after the events of the next day, that subject was never brought up again, except by Ms. McKinney, who shortly thereafter, lost her seat.

    Coincidence or implied threat to some of those who are recipients of the missing trillions?

  9. ndk

    Lucifer, I agree with everyone else that that was a great post. I just need to expand in my own pedantic way on the implications of a few of your suggestions:

    Gold based or strict credit economies cannot create the infrastructure and technological breakthroughs we are accustomed to.

    I very strongly agree. People calling for a remonetization of gold, or the elimination of fractional-reserve banking, are overlooking the real benefits FBR brings. Your defense here is very eloquent, and I’d love to steal it.

    4] In a system where the future is unpredictable, can credit be repayed completely or even partially? Given the factors I have listed in 3], periodic widespread debt forgiveness might be necesary to keep the system from collapsing. What do bakers lose anyway? Paper, ink, electrons? They certainly do not lose their previous paychecks, commisions, fees and other assorted loot made from the issuance of bad credit.

    Remember that in our world, debt is credit is money. If you forgive debt, you also destroy money. Let’s look at the earlier tax rebate stimulus as an example, where 80% of it was saved, by most estimates.

    The Government here issuing 30 year bonds would be withdrawing current money from the system. The Government debits the proceeds to the taxpayer and consumers. The taxpayer uses 80% of the money to pay back their short-term revolving debts removes current money from the system too. You could think of it as the government borrowing $100B, which takes current money out of circulation, and the private money supply contracting $80B as credit cards are repaid. Congratulations: you’ve just created more deflation.

    It would be different if the Fed then monetized the 30 year bonds and took that risk onto its own balance sheet. It’s a lot of term risk for a Fed that already has a badly soiled balance sheet. However, that would be net expansionary. This is actually very similar to the programs the Fed announced yesterday with a couple intermediate steps removed.

    Proximally, it might help. I don’t think it will be enough, but I don’t know. It will absolutely just lead to higher collective debt loads and a worse crisis in the future if it does, so we might hope, perversely, that it fails.

    It might be time to give up on ideas such as full repayment of debt, money having a constant value and paying sociopaths to manage your wealth.

    I think this is quite likely. We really just can’t make good on our promises to ourselves, and that will come out of someone’s hide. Whether the government — read, all of ours — wealthy depositors, corporations, private individuals, or massive inflation — again, all of ours — someone ain’t gonna get paid back.

    It’s the government’s job, as it has been since time immemorial, to decide who gets screwed, and how.

    The bankruptcy courts have been responsible for doing precisely this job since we realized that shackling people to the wall doesn’t improve the situation much. They decide how much creditors get hurt, and how much debtors get hurt.

    We can’t just let all of this go to bankruptcy though, because the problem is too large and severe, and depositors will be harmed as much as anyone. We need to erect the right protections for our society so real people don’t have their health, welfare, or safety threatened by this.

    have noticed that many commentators on this site have delusions about understanding the financial world.

    I beg to differ. I think the commentators here have some of the most open and creative minds of anyone in our economic system. Thank you for helping to raise the overall bar.

  10. doc holiday

    The process of making sausage is often said to be messy, thus treason and the work of usurping constitutional authority from congress, is stuff best left to butchers.

    Paulson never had legal authority to re-engineer constitutional powers, thus congress and the senate are clearly to blame for allowing this mess to accelerate into chaos!

    America has one leader — Paulson!

  11. Anonymous

    Red China is going to forgive our debt…….yeah right.

    Send the bankers into the sun but leave compounding interest behind….pointless.

    Systems function based on confidence….truth really doesn’t enter the picture.

  12. fledermaus

    BREAKING NEWS: Congress discovers that bankers are secretive and greedy. Later, a new report indicates that the sky may be blue.

  13. doc holiday

    US 10-year Treasury note yield falls to 5-decade low
    http://www.reuters.com/article/ m…G00141820081126
    The U.S. 10-year Treasury note's yield dipped to 2.9889 percent, below the 2.9900 percent level hit last Thursday, according to Reuters data, marking the lowest in 50 years.

    > Sort of off topic, but then again, as money is being burned up, accounting does come to mind.

    Long term declines in rates will have a crucial impact on the ability of people to save cash and build accounts for future purchase activity, i.e, if unemployment shoots to 10% and people have no way to receive dividends or collect interest, this will add to deflation, because there will be no way to make money and stimulate the economy (IMHO).

    >> From http://acrossthecurve.com/

    The salient point is that hundreds of billions of these will be issued over the next few months as banks take advantage of cheap funding and replace maturing paper. So there will be a flood of issuance in the 3 year sector from that source.

    The Treasury has reintroduced the 3 year note and it is a monthly issue and not a quarterly issue. Expect $25 billion per month from that source. That is brand new supply. Fresh cash being raised. That will weigh heavily on the sector.

    The funds rate is at or near terminal levels. It has traded recently well below the 1 percent target level. It will not be going much lower. That means that the shorter maturities which are anchored by the cost of funds will not have room to materially appreciate. Another negative for the short end.

    The Federal Reserve program announced yesterday will center on buying longer dated risky assets. $600 billion of them.

    Succinctly stated, you have natural buyers and natural sellers of sectors of the curve. In conjunction with an anchored funds rate the flattening process which is underway should continue and probably with 10 year notes and 30 year bond yields plumbing regions one would have thought unthinkable.

  14. lucifer

    Thanks for the encouraging comments. I have considered the blog option for some time, but I had been fairly busy to take on an additional commitment. But I think I might reevaluate that decision.

    ndk- most of my comments were aimed at people who talk about money as if it is real, like gravity or light.

    for anonymous- China has no option, but to renegotiate debt. The problem is not with compound interest but the belief that money is real, if we accept that money is a creation of human imagination to make society possible, periodic defaults can be seen as a necessary evil. And yes the system functions on confidence, but all the current players have shown themselves to be untrustworthy.

  15. Twenty first century blues

    We live in times of peril because:

    Just as asset classes such as real estate and equities can take on ever greater astonishingly HIGH valuations during a mania, they can also find no bottom during a panic.

    All of us realize this on some visceral level (except for those of us still without guile). And this explains why we crossed a tipping point late this summer when those who believed markets had “bottomed” were outnumbered by those with the vertiginous feeling that happens when you stare into the abyss.

    Lucifer: your posts speak to this phenomenon. The sudden feeling that money has no real value (or stocks, bonds, real estate etc) is an existential moment that can grip people and spread like a virus.

    The Existentialists, Dadaists, Kafka to name a few attest to this phenomenon through the ages.

    The trivial pursuits of daily life seem meaningless when we realize we are all hanging onto a rock in the middle of the limitless, cold void of space. A rock with a core of lava.

    Things are tenuous indeed.

  16. Anonymous

    I beg to differ on bankers. Necessary evil or not, it is the environment they exist under that is the problem.

    You will not get the investment money or funding for your social advancements without them handling the accountings and taking the risks.

    Unfettered, bankers over leverage investments and handout credit like cookies by doing over the counter deals which have no controls but between the parties involved. Where have the checks and balances been? Ask Congress about enforcement, fines, repayment and lack accounting laws. It’s the system that is not trustworthy, not the bankers.

    I would hope you rethink compounding interest. Of and in itself it is a direct drain on anything attached to it except the bankers. (servitude)

    Without currency you have barter which is a survival mode without growth. Currency allows growth, backed by gold (whatever anchor is chosen) prevents runaway growth outside the means.

    A simple example of mind control is: You have to pay taxes and the method of payment is the currency that is issued. From that, it instills value in paper. Add some laws and punishment and you have no other choice except jail time or comply.

  17. satan

    That is because we see banking as an enterprise rather than a utility or welfare program to keep people happy. Look, banks have lost more money than they ever made- even government regulated electric companies are more profitable in the long run.

    //I beg to differ on bankers. Necessary evil or not, it is the environment they exist under that is the problem.You will not get the investment money or funding for your social advancements without them handling the accountings and taking the risks.Unfettered, bankers over leverage investments and handout credit like cookies by doing over the counter deals which have no controls but between the parties involved. Where have the checks and balances been? Ask Congress about enforcement, fines, repayment and lack accounting laws. It’s the system that is not trustworthy, not the bankers.//

    If you have read enough history you will realize that when civilizations collapse, the control mechanisms you describe fail. No civilization has been able to stop the collapse process once it goes beyond a certain point. All the clever shysters (banksters, sophists) end up in the same boat as the plebs.

    //A simple example of mind control is: You have to pay taxes and the method of payment is the currency that is issued. From that, it instills value in paper. Add some laws and punishment and you have no other choice except jail time or comply.//

  18. Anonymous

    Faith is lost in currency when the controls are abandoned or ignored. And I’m guessing it’s due to greed. That’s why systems fail. The top (bankers) abscond with the spoils after converting it to gold because they know they can convert it back to any paper currency they desire.

    What is kool about gold is that it has no debt attached to it unlike paper currency and its promise to pay (IOU) or why else do central banks stock pile gold, why even have it?

  19. Darcy

    Lucifer,

    Good post.

    Only point i would add.

    Water, land and the earths resources are finite. The consumer religion will fail because it does not factor in all its external costs.

    All the various religions need a sustainability audit and we junk the ones that have obvious flaws and try again.

    Its sure getting hot in here.

  20. Anonymous

    the scope of the GAO audit is obviously limited to TARP, but as NYT has related recently: “In the last year, the government has assumed about $7.8 trillion in direct and indirect financial obligations. That is equal to about half the size of the nation’s entire economy and far eclipses the $700 billion that Congress authorized for the Treasury’s financial rescue plan.” this is getting dangerously close to usurping congress’ constitutional prerogative over the purse strings (Article 1, Section 8).

    will ANYone petition the supreme court already!

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