naked capitalism

When has a bureaucrat every wanted to give up on a big slush fund? Particularly one with no strings attached?

What is heinous about the discussion of Treasury’s plan to argue that it should have its authority under the TARP extended is the failure to include some of the most basic and troubling issues.

First, there is nary a mention of explicitly excluding from any extension (assuming there is one) the Treasury Secretary being beyond the reach of the law. That is unacceptable in a democracy.

Second, the debate, at least as represented in the Financial Times, focuses narrowly on the TARP, and misses completely all the games the Treasury played with the Fed to make those funds go much further via using the Fed as an unauthorized, and likely unconstitutional, quasi fiscal agent of the Treasury. To quote Willem Buiter:

I have written at length before about the ever-expanding quasi-fiscal role of the Fed. This began as soon as the Fed began to take private credit risk (default risk) onto its balance sheet by accepting private securities as collateral in repos, at the discount window and at one of the myriad facilities it has created since August 2008. It is possible – I would say likely – that the terms on which the Fed accepted this often illiquid collateral implied even an ex-ante subsidy to the borrower. But the Fed is refusing to provide the necessary information on the valuation of the illiquid collateral, interest rates, fees and other key dimensions of the terms granted those who access its facilities, for outsiders, including Congress, to find out what if any element of subsidy is involved.
Should the borrowing bank default and should the collateral offered also turn out to be impaired, the Fed will suffer an ex-post capital loss on its repos and other collateralised lending operations against private collateral. It does not have an indemnity from the Treasury for such capital losses.

The Fed also created the Maiden Lane I (for Bear Stearns toxic assets), Maiden Lane II (for AIG’s secured loans and Maiden Lane III (for AIG’s credit default swaps) special purpose vehicles in Delaware. The losses made by Maiden lane II and III when the Fed paid off the investors (counterparties) of AIG at par, were, however, not booked on the balance sheets of the two Maidens, but were booked on AIG’s balance sheet, keeping Maiden Lane I and II, and the Fed, clean for the time being. The financial shenanigans used by the Fed (in cahoots with the US Treasury) to limit accountability for these capital losses are quite unacceptable in a democratic society. Clearly, the US authorities are using the financial engineering tricks and legal constructions whose abuse by the private financial sector led to our current predicament, to engage in Congressional- and tax payer accountability avoidance/evasion. To watch the regulators engage in regulatory arbitrage is astonishing.

Notice how nary a word is mentioned on these issues in this piece from the Financial Times:

The Obama administration is leaning towards extending the troubled asset relief programme into next year, retaining part of the $700bn war chest …

Although no final decision has been made, officials in the Treasury are wary of letting the fund expire as scheduled at the end of the year and are seeking to allay criticisms and fears about the future use of Tarp…

But the administration is expected to extend its ability to make Tarp investments until October next year – without having to return to Congress – in case of another unforeseen calamity that can be mitigated with government money.

If the administration were to give it up but then try to secure additional investment funds, it would face a potentially hostile Congress. Even extending it as authorised will face resistance…

To try to assuage criticism from both parties, the administration is touting the fact that it now expects “to use significantly less Tarp funding than authorised”. It said last week that $366.4bn had been paid out and $472.5bn of $700bn had been committed. As the expectation for spending comes down, there is a reduction in the projected debt levels and a positive impact on the budget deficit…

He [Jeb Hensarling, a Republican member of the House financial services committee and of the congressional oversight panel that scrutinises Tarp] said he had always doubted that the administration would give up its “$700bn of walking around money” and that he would keep calling for the programme to be wound down.

While the Treasury continues to hedge its bets, there is no doubt among many Democrats that the fund’s extension is an obvious move. “Of course it’s going to be extended,” said one Democratic aide

However, the Democrats are more divided on the issue.

Barney Frank, chairman of the House financial services committee, has introduced a bill that would force the Treasury to transfer $2bn of Tarp and dividends paid by Tarp recipients into programmes for emergency mortgage relief and the redevelopment of foreclosed homes.

Other Democrats have sided with Republicans to call for a quick wind-down of the programme.

Yves here. A $2 billion sop to the peasants? How thoughtful. But I am under the impression that the norms for tithing are more like 10%, so this little gesture is more than an order of magnitude too low.