Of Course, Treasury Wants To Hang on to TARP Money

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.

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  1. fresno dan

    I was looking at the graphs of US debt held by foreigners. And Japan holds an astounding amount (second to China) something like 21%. And I was wondering why anyone should worry about Japan running deficits – they could easily pay for their deficits by selling treasuries with our deficits (uh, I mean treasuries). But learned economists would say that such a move would cause treasuries to collapse.

    Modern finance is saying a debt is an asset that can secruitized. You can slice up your debt, and than sell it to someone else. Those people, who now own an asset, can do finance too! If everybody has assets above average, we can all have above average income.

    Thats why we’re so rich…as long as everybody understands we are not going to sell our “assets”

  2. Demented Chimp

    The bananas are all mine, all mine, and im not giving them back. Never ever. I dont care if they were yours to begin with, i dont even believe thats true, just a terrible untruth. Even though i cant eat them all i would rather watch them rot than give them to you. In fact i will take great pleasure in watching you go hungry just because i can.

  3. Demented Chimp

    First i would like to congratulate you Yves on the great work you have done over the last few years and i do hope your book is a success. It is an essential if depressing read.

    I have however noticed that i am becoming worn out by our fight against the animals spirits within and the corrosive influences it brings to bear on our attempts at culture higher conciousness and equality/rule of law. We constantly report the affects of our sickness without attacking the underlying cause which is coded into every cell in our body.

    The principles of the UN convention on human rights and what we aspire too are diametrically opposed to what our instincts tell us to do every day and this isnt healthy and certainly is not sustainable. We cannot be really that surprised that we make the same mistakes over and over again be it wars, irrational/crooked markets and self destructive short term thinking, until we address the DNA.

    I really see it writ large every day i read your posts. We are built to be a nasty little chimp, who now through the wonder of evolution has a barely sane conciousness strapped onto the top of his more primitive desires. Enjoying the ride?

    We cannot expect to counteract so many millions of years of evolution through non DNA targeted cultural brain washing school/ society/ parenting alone. We need to get at the DNA if we want to fulfill the UN charter, and get everyone to behave more altruistically, if that is really what we want. I am not sure Utopia is my cup of tea but then again im a dopamine junkie so it wouldnt be.

    All we are we doing at the moment is trying to treat the secondary affects of a chronic congenital disease. We need to get at the core, either through advanced educational practises and a deep understanding of our genetic past, drugs or gene therapy. If we dont we will just continue to try and put our ever larger bush fires again and again, until we fry. Seeing as some still have a problem with even evolution its hard to see any of this getting very far.

    Yves and the blogging team its an honour to share this rock with you . Cant say i feel the same way about some of the rest of our cohabittees. They cant help it and i dont blame them they just need some some DNA rehab time and selfawarness conciousness lessons.

    Enough of the ramble…..Dopamine does have a good side – time to get another hit.

    N.B.The scariest part is it only takes 1 generation to skip classes and we go back 10,000 years. We are all born acultural and ready to do what our distant hunter gatherer ancestors were built to do. Its why education and the next generation is so damn important.

    1. DownSouth

      Yours seems to be the “red in tooth and claw” characterization of human nature so dear to the hearts of the New Atheists.

      But that characterization is not holding up well. Lots of recent studies and findings contradict it. Heck, even monkey behavior is more nuanced than you posit:


      And as to humans, I don’t really know where to start. There have been so many breakthroughs in recent years, especially in the way of neuroscience, that don’t support the “red in tooth and claw” view of human nature. Here’s an example of just one article that gives an inkling as to what has transpired over the past few years:


      1. LeeAnne

        Skippy, thank you so much for standing up for we humans. Your links never disappoint; I always click on them.


  4. Fu

    This began as soon as the Fed began to take private credit risk (default risk) onto its balance sheet

    The biggest private credit risk the Fed is taking on their balance sheet (illegally I might add) are Fannie Mae and Freddie Mac mortgage backed securities.

  5. demented chimp

    agree that human nature is highly nuanced and includes altruism.

    problem is our genetic altruism circles are not designed for a global world and global problems more the village, tribe level and all our dna weaknesses are targetd in some way to manipulate us….from music, drugs to shopping etc..

    its the denial of human nature that is more dangerous. we are not blank slates or noble savages. what we are is becoming clearer with advances in science and it will not be easy to digest and it will will be complicated.

    look at human history and that is what has shaped our As Ts Cs and Gs. it isn’t pleasant.

  6. Doug Terpstra

    The power grab was inevitable and imminently predictable. Any new bailout bill will trigger electoral suicide if not open revolt, and with the commercial real estate time bomb ticking like a Pink Floyd prelude, Tim must be desperate to retain rolling bailout authority as discretely as possible without any public debate, while he colludes feverishly with Benny to forestall any peek behind the curtain of fraud at the Fed. Knowing what’s really coming, these guys must wear “depends” every day just in case.

    I share chimp’s despair (though I’d rather share his bong), but I also like DownSouth’s optimism. The horror show of creeping fascism—the terminal corruption, decay and collapse of a military-financial empire, may be just what we need to enable a passage of consciousness, an evolutionary shift. Even as we seem trapped in the inexorable spiral of history, this cycle is happening globally in hyperspeed and cyberspace, and as never before, an unprecedented networked web of communities like Naked Capitalism are poised to succeed the arthritic old-school aristocracy.

    This empire and Darwinian, rigged-market capitalism are terminal; let’s pull the plug already. Anyway, the former empires of “old” Europe are encouraging reminders that there is life after the death and liquidation of empire, better life in fact for imperial subjects.

  7. DownSouth

    There’s more evidence emerging today to confirm what you say, Yves:

    Just two days before the New York Fed paid A.I.G.’s partners 100 cents on the dollar to tear up their contracts with the insurance giant, one bank volunteered to take a modest haircut — but it never got the chance.

    UBS, of Switzerland, alone offered to give a break to the New York Fed in the negotiations last November over how to keep A.I.G. from toppling and taking other banks down with it. It would have accepted 98 cents on the dollar.

    But UBS’s good-faith gesture was quickly drowned out by Goldman Sachs and the top French bank regulator. They argued, with others, that it would be improper and perhaps even criminal to force A.I.G.’s trading partners to bear losses outside of bankruptcy court.


    Geithner should be in prison for what he did to the American people.

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