Henry Paulson

Interesting Reading: Paulson's '06 Ethics Agreement And '08 Goldman Waiver

Justin Elliott | August 10, 2009, 6:01PM

Earlier today we told you about the near-constant phone contact between then-Treasury Secretary Henry Paulson and his successor as Goldman Sachs CEO, Lloyd Blankfein, during the height of the financial crisis last September.

Now, we've obtained from the Treasury Department Paulson's ethics agreement, in which he pledged not to participate in matters involving Goldman Sachs, and the waiver to that agreement granted by White House counsel Fred Fielding. You can read the agreement here and the waiver here.

Of the dozens of phone calls between Paulson and Blankfein, 26 occurred before Paulson requested and obtained a waiver to deal with matters relating to Goldman Sachs, the New York Times reported Sunday. The content of the calls is unknown. But two were the morning of Sept. 17, a day after the AIG bailout, which ultimately handed Goldman $13 billion of taxpayers' money -- before Paulson obtained the ethics waiver.

In Paulson's ethics agreement, written after President Bush plucked him from Goldman to be Treasury Secretary, all but two of eight pages mention Goldman. He concludes it by saying "these steps will ensure that I avoid even the appearance of a conflict of interest."

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Henry Paulson

Co-Treasury Secretary Lloyd Blankfein? Paulson And Goldman Exec Talked 24 Times In Week Of AIG Bailout

Justin Elliott | August 10, 2009, 1:20PM

Blockbuster stuff from the New York Times Sunday on stunningly frequent contacts during the height of the financial crisis between Henry Paulson and his successor as CEO of Goldman Sachs, Lloyd Blankfein.

The then-Treasury Secretary and Blankfein spoke by phone two dozen times in one week in September 2008 when AIG was bailed out -- a deal that handed Goldman, a key counterparty of AIG, $13 billion in federal money.

Perhaps the most remarkable thing about the Times' account of the contacts between the two men, for which Paulson belatedly sought and received an ethics waiver, is that the phone calls were often coming from the Treasury Secretary.

In one day, Sept. 17, Paulson called Blankfein four times. Then after taking a call from President Bush in the evening, the Treasury Secretary called Blankfein yet again -- almost as if he felt obliged to keep the Goldman CEO constantly abreast of his progress. He spoke with Blankfein "far more" than with other executives, the Times reports.

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Henry Paulson

The Daily Muck

Moe Tkacik | May 14, 2009, 10:54AM

Henry Paulson

What To Make Of Hank Paulson's "Texan" Threats On Ken Lewis's Job?

Moe Tkacik | April 24, 2009, 4:11PM

It's clear New York Attorney General Andrew Cuomo's probe into the taxpayer-supported Bank of America-Merrill Lynch merger has widened considerably since he began digging into Merrill's accelerated payout of $3.6 billion in bonuses before the disclosure of a devastating fourth quarter loss. But where is it all headed?

Yesterday Cuomo wrote a letter to Congress, the SEC and TARP Oversight chair Elizabeth Warren disclosing a few findings "that raise questions about the transparency of the TARP program, as well as about corporate governance and disclosure practices at Bank of America." But as former Treasury Secretary Hank Paulson once said about such disclosures, the carefully-worded, heavily redacted documents "create more questions than they answer." The most headline-grabbing detail was Paulson's threat to fire Bank of America CEO Ken Lewis if he backed out of the bank's agreement to buy Merrill Lynch at the agreed upon $10 a share; the second was the revelation that the Fed and Treasury had left the SEC "in the dark" throughout the entire process.

The immediate question at hand is whether Lewis broke securities laws or violated his fiduciary duty to protect his shareholders when he went along with Paulson. Certainly many Bank of America shareholders believe so; the news was met with a statement from CtW, the shareholder group campaigning to oust Lewis in a proxy battle declaring that Lewis "violated their legal duties to shareholders in order to protect their own employment interests" when he decided not to invoke the deal's Material Adverse Change clause, which allows companies to get out of merger agreements under some circumstances. Bank of America shares have lost about two-thirds their value since the Lewis announced it was buying the investment bank.

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Bailout

Bush Bailout Architect Lands On His Feet -- Helping Private Clients Adjust To Brave New World Of Finance

Zachary Roth | March 30, 2009, 1:29PM

We should have seen this one coming -- government officials who helped respond to the financial crisis, now cashing in by helping private sector clients "navigate the new world of finance."

That's what David Nason, a former assistant treasury secretary under Hank Paulson will be doing for clients of Promontary Financial Group, which he's joining as a managing director, reports the Wall Street Journal (sub. req.). Nason, who had a major hand in drawing up Treasury's bailout plan last fall, "is expected to advise big financial institutions on everything from how to participate in the government's rescue programs to meeting regulatory requirements."

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Henry Paulson

Hank Paulson To Write Goldman/Bush/Credit Default Swap Tell-All

Moe Tkacik | March 26, 2009, 6:48PM

Hank Paulson has a book deal. And if there is demand in the marketplace for yet another score-settling insider account by a flawed but well-meaning Bush appointee, we guess it is Hank. Since the centimillionaire is generously refusing an advance and donating the proceeds to a hotline that helps homeowners prevent foreclosure -- an endeavor he did not have much time for as Treasury Secretary -- we'll put a copy on hold. But a Hank Paulson book is veritably guaranteed to disappoint, right? Or should we hedge that statement?

After all, Paulson is a competitive guy, and the "Bush Administration Treasury Secretary Tell-All" genre has formidable competition in The Price Of Loyalty, Ron Suskind's account of Paul O'Neill's tenure in that post -- plus Paulson has the advantages of having presided over the spectacular financial crisis that begat the current depression and Goldman Sachs. Paulson doesn't seem to have pent-up literary ambitions -- instituting the short selling ban was his equivalent to "burning books," he told the Post -- but he will undoubtedly submit himself to the editorial judgments of his daughter, a journalist who writes about public education. And in interviews, as his willingness to admit to burning books suggests, Paulson has seemed less of an ideologue than an ambitious business man who had never given ideology much thought -- so we won't be getting Ten Minutes From Normal here. (Although it would be awesome if he ripped off that title.)

On the other hand...

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Ben Bernanke

Report: Bernanke Threatened B Of A Over Merrill Deal

Zachary Roth | February 5, 2009, 11:45AM

We already knew, that, after it got wind of Merrill Lynch's massive fourth-quarter losses back in December, Bank of America had thought about pulling out of its deal to buy the troubled investment bank -- before being talked into it by the federal government.

But today, the Wall Street Journal adds some fascinating detail (sub. req.) about the level of hardball that the government played in making sure the deal went through.

Bush Treasury Secretary Henry Paulson and Fed chief Ben Bernanke reportedly warned B of A CEO Ken Lewis that if his firm pulled out, Merrill would collapse. They added that such a move, in the Journal's words "could undercut confidence in Bank of America, both in the markets and among government officials."

But that was just the start. Two days later, on a conference call, Bernanke told B of A that if it abandoned the Merrill deal, and came back to the Feds in the future seeking more bailout money, the government would consider removing the firm's executives and directors.

The threats, of course, seem to have worked, since Bank of America went ahead with the deal -- getting an additional $20 billion in bailout money to help digest Merrill.

Bernanke and Paulson may have been right to take such a hard line. But the episode suggests the level of control of day-to-day control that the government has had over the financial sector, since stepping in to rescue it last fall. Nationalizing the banks is still seen, in the mainstream debate as an extreme solution. But if the Feds are essentially making major operational decisions for the big banks, some would say they've been nationalized already -- it's just that no one wants to it.

Bailout

TARP: What Did We Get For Our Money?

Zachary Roth | January 16, 2009, 11:54AM

Remember how, back when Congress was negotiating with the Bush administration over the terms of the bailout, one of the major sticking points was Rep. Barney Frank's insistence that taxpayers receive equity in the companies we were saving, so that we could at least get our money back down the road? Well, Frank largely won on that point. We're now all part owners of Goldman Sachs, Bank of America, Citigroup, and all the rest.

But that only leaves more questions. What kind of a deal did Treasury Secretary Henry Paulson strike on our behalf with these firms? And more broadly, given the astronomical amount of money we're talking about and the massive deficits we already face, we need to know how we should think about what we've done. Have we invested the $350 billion that Congress has given so far, with a realistic expectation of at least being re-paid -- as Paulson, who has called it "an investment, not an expenditure," argues. Or is it more accurate to think of that sum as already spent and unrecoverable, simply the cost of preventing financial armageddon?

It's too soon to know how much of that money we'll get back, because the answer depends on the fate of the market -- something we all know better than to try to predict. But it's worth considering some of the key factors that will determine that answer.

In terms of Treasury's investment, it seems clear we got a bad deal.

TARP injected capital into the banks largely by buying preferred stock at a dividend rate of 5 percent per year -- that rises to 9 percent after 5 years -- in return for an equity stake in the companies. We also got warrants to buy common stock in the future at a fixed price.

But given the risk involved in the transaction -- investing in banks that were on the brink of collapse -- experts say we should have gotten more than 5 percent. "We could have gotten better terms," Simon Johnson, the former chief economist for the IMF, and now a fellow at the Peterson Institute for International Economics, told TPMmuckraker.

Demetri Papademetriou, president of the Levy Economics Institute, agrees. He points out that the governments of Britain, France, and Greece all conducted similar stock purchases, and got a dividend rate of 10 percent.

And Bloomberg recently calculated that, although Treasury invested twice as much as Warren Buffett did in Goldman Sachs, it gained only one fourth of the value.

Papademetriou believes that an ideological aversion to anything that smacks, however mildly, of central planning, partly explains why Paulson failed to drive a hard bargain. "There is a reluctance from the US government to be very involved in the private sector," he said.

Barry Ritholtz, the chief market strategist for Fusion IQ, an institutional research firm, says "incompetence" on Paulson's part is as much to blame. "There no such thing as half pregnant, and there's no such thing as half a virgin," he says. "If you're gonna do it, you can't say, we're gonna do it but we're gonna do a shitty job."

Of course, the department has argued from the start that making a good investment wasn't its goal. In a December speech to mortgage bankers, Treasury's bailout czar, Neel Kashkari, declared: "We're not day traders, and we're not looking for a return tomorrow. We are looking to try to stabilize the financial system, get credit flowing again."

But that gets us into the broader question -- for which there's no easy answer -- of how to think about the TARP money.

It's not right, say most experts, to think of this simply as government spending, akin to spending on, say, the Iraq war. The idea, of course, is that once the mortgage market stabilizes, the companies in which we've invested will eventually be able to write down their toxic assets, sell them off, and return to profitability. That will allow them to liquidate -- essentially, to buy back -- the stock we've bought, (something they're required by the terms of the deal to do before they can raise more capital). We'll have profited from the dividends, and will also be able to exercise our warrants to buy more stock at an advantageous price. That's why Frank insisted on equity in the first place.

But some say that may not happen. We simply don't know the true amount of bad debt that these banks have on their books -- and it's not clear that Treasury did either when it struck the deals.

But the signs aren't good. In early December, the Associated Press calculated that the warrants we bought via TARP, valued at a total of $27 billion, are now worth less than $18 billion. So if we exercised those warrants in December, we'd have been out over $9 billion.

And since then things seem to have gotten worse. Bank of America announced this week it needed a second bailout -- in the end, $20 billion -- because it hadn't realized just how toxic were the assets it took on in when it bought Merrill Lynch.

So even though Treasury says its goal wasn't to turn a profit but rather to stabilize the market, it's unclear whether it'll succeed in that -- right now, most signs suggest it hasn't yet. And that's the key question: If that longer-term stabilization doesn't happen, of course, we won't get much of our investment back, because the companies in which we've invested will fail, or be unable to turn a profit.

"These companies are insolvent. They have more liabilities than assets." says Ritholtz. The exact situations differ from firm to firm, but Ritholtz says that Citigroup, for example, in which we've invested $45 billion, "is sitting on tens of billions of toxic assets. So why would stock go up?" Ritholtz calls it "highly unlikely" that Citigroup will eventually have something to pay back. As for AIG, for which we're in $85 billion, he believes it's "inconceivable."

The situation isn't helped by the low level of transparency about their true positions that many of these companies appear to practice. Audit Integrity, which conducts accounting and governance risk analysis for public companies released a report last month finding that many of the big banks we've lent to -- including Citigroup, Goldman Sachs, Bank of America, and JP Morgan Chase -- "are likely in worse condition than publicly disclosed," because of the high likelihood that they'll restate their earnings, or provoke government regulatory action or stockholder litigation.

As if to prove the point, on Tuesday Goldman raised its estimate of expected losses stemming from its toxic assets to $2.1 trillion, up from $1.2 triillon last March.

So where does all this leave us? Congress is getting set to hand over another $350 billion for more bailouts, but this time it's insisting on more help for homeowners facing foreclosure. By stabilizing the mortgage market, that could also help Wall Street -- allowing us potentially to recoup our investment.

So that $350 billion already spent may not be gone. But it's by no means clear what we'll end up getting for it.

Bailout

Have Some Firms Released Bailout Terms In SEC Filings?

Zachary Roth | January 13, 2009, 4:53PM

So we're confused about something.

Yesterday, as we reported, Sen. Carl Levin announced that the Treasury Department had agreed to release the contracts for bailout funds that it signed with 10 firms -- though it remains unclear whether Levin's office will release them publicly.

But at least some of those companies appear to have filed documents with the SEC covering their receipt of the funds. These "Letters of Agreement" are contracts signed by bailout czar Neel Kashkari and firm executives, which spell out in detail the amount of capital the firms are receiving, on what terms, and even cover issues like executive pay limits.

For instance, here's the one for AIG (not technically a part of the TARP program) which seems similar to what Levin has obtained.

And here's the agreement Treasury came to with American Express, signed by the firm's CEO Kenneth Chenault.

And the database appears to contain similar Letters of Agreement for hundreds of other companies that have receive TARP funds -- though it's not clear that it contains such letters for all the firms Levin has asked for.

We called Levin's office to ask whether there's additional information -- beyond what's in the SEC filings -- contained in the contracts Treasury has agreed to hand over, but have not yet received a response.

Late Update: And here's what seems to be Bank of America's "Letter of Agreement" with Treasury, signed October 26. B of A is another firm that Treasury has agreed to release its contract for, according to Levin's announcement. It has received $15 billion in TARP funds.

And here's the same thing for Bank of New York Mellon, which got $3 billion in TARP funds back in October, and is another firm for which Treasury has agreed to its release the contract to Levin.

Bailout

Levin: "My Instinct Would Be To Release" TARP Contracts

Zachary Roth and Elana Schor | January 13, 2009, 1:43PM

After Carl Levin (D-MI), chairman of the Senate subcommittee on investigations, announced yesterday that he is getting copies of the contracts for companies receiving bailout money under the TARP program, we were thrilled to finally see what terms the government insisted on for taxpayer funds. But this morning in the New York Times, a Levin aide was quoted as saying that his office would not publicly release the contracts. And a Levin spokeswoman told TPMmuckraker the same thing in an email.

What gives, we asked.

And it turns out Levin is asking the same question. When we asked why his office would keep the bailout contracts under wraps, he replied simply: "My instinct would be to release them." He pointed out that legal restrictions might limit the dissemination of the info but said he would consult with his counsel on the matter.

We're still waiting to hear the reason why the contracts can't be made public, if indeed they can't. We'll keep you posted.

Bailout

Treasury To Release Some TARP Contracts

Zachary Roth | January 12, 2009, 7:04PM

Looks like the Senate may finally be prying loose a bit more information from the Treasury Department about its bailout spending.

We just received the following statement from Sen. Carl Levin:

The Department of Treasury assured me today that there will be no need to serve a subpoena, because they will provide the documents I have requested, beginning tomorrow," said Levin. "It should not have taken two months and a subpoena threat, but I -- along with Senator Susan Collins who supports obtaining these documents -- look forward to receiving the documents this week."

The Treasury Department has agreed to provide copies of the TARP contracts issued to ten companies: AIG, Bank of America, Bank of New York Mellon Corporation, Citigroup, Goldman Sachs, JPMorgan Chase, Merrill Lynch, Morgan Stanley, State Street Corporation, and Wells Fargo.

Levin, the chairman of the Permanent Subcommittee on Investigations, had said he wouldn't vote for releasing the additional $350 billion in TARP funds requested by the Treasury unless the department revealed more information about the contracts it signed in connection with the first $350 billion.

Bank of New York Mellon has contracted with the treasury to help manage the TARP program.

We've called Levin's office to find out about getting our own copies of these contracts...

Bailout

Who's Running TARP? You Might Not Wanna Know

Zachary Roth | January 12, 2009, 6:35PM

Last week, Congress's oversight panel for the TARP funds confirmed in a report that the Treasury Department essentially has no idea what banks have done with the astronomical sums they've been handed.

Given this lack of information, we figured it might at least be helpful to know a bit about a few of the people at Treasury who are in charge of administering the massive program, and what their backgrounds might tell us about the way they've gone about it.

As the New York Times reported back in October, many of those people are former execs at Goldman Sachs, the Wall Street behemoth that used to be led by Treasury Secretary Henry Paulson.

Most prominent among those is Neel Kashkari, the 35-year old former Goldman VP who was appointed by Paulson in October as the interim head of the Office of Financial Stability (OFS), which is in charge of implementing the bailout. Kashkari's role is said by the Times to have "evolved" after Paulson changed the original bailout plan, so that Treasury would invest money directly in troubled banks.

But less attention has been paid to another Goldman alum, Kendrick Wilson, who was brought in -- after a personal call from his old Harvard Business School buddy, George W. Bush -- to advise Paulson on how to fix the financial markets.

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Henry Paulson

Warren On Tracking Bailout Funds: "This Isn't Rocket Science"

Zachary Roth | January 9, 2009, 3:54PM

During her interview on CNN, Elizabeth Warren got to spend a little less time dealing with inane knee-jerk responses from anchors, and a little more time explaining the crux of the issue: that the Treasury Department isn't tracking its bailout spending.

Some excerpts:

This isn't rocket science. This isn't some strange thing we're asking for. If you're gonna take that much money from American taxpayers, you've gotta have the banks tell what they're going to do with it. We have to have some way of telling if its working. and if you don't have accountability, if you don't have metrics in place, you're really just kind of handing it out there and hoping for the best.

And:

Treasury did not say: tell us what you're going to do with the money. Tell us how you used it. That just hasn't happened. There's no basic accountability in the system.

Warren also laid out the intriguing idea of establishing a product safety commission for financial products, just as we have for toasters, car seats, and other consumer products.

And she ended with an Eliot Ness-like pledge to keep up the fight. Asked by CNN's Tony Harris whether she'd continue to try to track the bailout spending, she replied, with brio: "You bet!"

Here's the whole thing:

Bailout

Warren To Kudlow: No, Tracking Bailout Funds Isn't "Central Planning"

Zachary Roth | January 9, 2009, 3:21PM

Here's Elizabeth Warren's interview with CNBC about her report on the TARP spending.

It's notable mainly for her setting one network anchor straight about the fact that, even though, "money is fungible" it would still be possible to track for Treasury to track its bailout spending.

Warren: You and I could sit here with pencil and paper and come up with a minimum of ten metrics in about ten minutes. If you just hand the money over and say gee moneys money then you won't see whether or not there's been any difference. And if that's the case then it really is just blank checks to financial institutions.

She also has an admirably calm response to Larry Kudlow's sophomoric contention that asking banks to monitor what they're doing with our money is "central planing."

Bailout

Paulson Responds To Stiglitz Criticism

Zachary Roth | January 9, 2009, 2:26PM

We just highlighted a Bloomberg story in which Joseph Stiglitz and other economists story slammed Treasury Secretary Henry Paulson for not driving a hard enough bargain on behalf of taxpayers when investing the TARP funds.

So it's probably only fair that we post Paulson's response, from an interview Bloomberg TV just conducted with Paulson:

Well, what we were looking to do was not to replicate one off private sector deals. The market was under great stress and the private sector was extracting very, very severe terms and what we were attempting to do, which I think we did successfully was design a program that would be accepted by a large group of healthy banks with terms that replicate what you would get in normal market conditions. And the other point I will make here - this is an investment and I find it highly, highly likely that the taxpayer will get this money and get this money back with a profit because these are preferred, these are - as long as the financial system remains intact and stable, which it will, that these will come back to the taxpayer.

And our objective was not to say how tough a deal can we give to the banks because then what we would have is we would have a - not a program for healthy banks. We would have a failing bank program and it would have a much different complexion. And again, I think history will show that the financial system needed a lot of capital and if you leave it to the banks to say I really need capital, what you're going to get is you're only to get them when they're desperate. And otherwise, what they're going to do is shrink and not play the role we need them to play and pull in their horns. And we needed to get a program that would be accepted by a lot of banks and would provide very much needed capital. So that was the philosophy of the program.

Bailout

Stiglitz: Goldman Would Have Fired Paulson For Bailout Investments

Zachary Roth | January 9, 2009, 1:36PM

Lately at TPM, we've been wondering about exactly what kind of deal taxpayers got on that whole $700 billion bailout that the Treasury isn't doing much to track.

And along comes Bloomberg with a report that suggests we might not want to know the answer.

The lead data point:

[Treasury Secretary Henery Paulson] invested $10 billion in Goldman Sachs in October, twice as much as [Warren] Buffett did the month before, yet gained warrants worth one-fourth as much as the billionaire.

So Buffett's investors got a better deal than taxpayers. Bloomberg explains:

Paulson left money on the table in three ways, according to [former IMF chief economist Simon] Johnson: accepting fewer warrants than Buffett did; setting the certificates' price trigger, or strike, above market values; and receiving an annual yield on the preferred shares that is half of what Buffett will get for the first five years.

And Bloomberg has some damning quotes about Paulson's investing. Johnson calls them "just egregious," adding: "You want to do it the way Warren does it."

And according to Nobel prize winner Joseph Stiglitz: Paulson said "he had to make it attractive to banks, which is code for 'I'm going to give money away.'"

Stiglitz continued: "In many ways, it's not only a giveaway, but a giveaway that was designed not to work."

And he added: "If Paulson was still an employee of Goldman Sachs and he'd done this deal, he would have been fired."

Bailout

Warren Panel to Treasury: Do More To Limit CEO Pay

Zachary Roth | January 9, 2009, 1:17PM

As for the issue of limits on executive pay, which Congress insisted on including in the TARP, the Warren report says:

While some executives at some financial institutions have voluntarily reduced their compensation, there is no uniform program in place. Treasury has the power to set the "terms and conditions" of any purchase it makes using the TARP funds.

Treasury had opposed the limits from the start, arguing that they would discourage banks from participating in the program.

Wall Street

Treasury: You Never Said We Had To Make Banks More Consumer Friendly!

Zachary Roth | January 9, 2009, 1:10PM

In places, the panel appears outright angry -- understandably -- at Treasury's stonewalling on key questions:

The Panel's fourth area of inquiry focused on what financial institutions have done with the taxpayer money they received. As indicated in question 1 above, Treasury appears to believe the question is beside the point because their goal for the CPP is to stabilize the financial system and to restore confidence in financial institutions.

This, they believe, will eventually increase the flow of credit. Treasury argues that there are several reasons why the TARP investments will be slow to produce increased lending: (1) The CPP began only in October 2008, and the money must work its way into the system before it can have the desired effect. (2) Because confidence is low, banks will remain cautious about extending credit, and consumers and businesses will
remain cautious about taking on new loans. (3) Credit quality at banks is deteriorating, which leads banks to build up their loan loss reserves. For example, Treasury notes that the level of loan loss provisioning by banks doubled in the third quarter from one year ago. Treasury seems to be suggesting these larger trends may be obscuring the effect of TARP funds. The Panel understands the reasons why measurement of banks' use of TARP funds may be difficult.

Nevertheless, the Panel believes such direct measurements at the level of individual TARP recipient firms are important for determining the extent to which the funds are having a direct benefit to businesses and consumers.

And the report highlights Treasury's amazing unwillingness to require banks that get government money to take actions that are in the public interest:

[T]he Panel asked whether Treasury's actions preserved access to consumer credit, including student loans and auto loans at reasonable rates, and
whether Treasury was taking action to ensure that public money could not be used to subsidize lending practices that are exploitive, predatory, or otherwise harmful to customers. Treasury answered that its TARP programs to preserve access to consumer credit do not involve encouraging or mandating banks to take consumer-friendly actions with respect to credit cards or other consumer loans. (our itals)

Bailout

Oversight Panel Report Slams Treasury, Again, On TARP Funds

Zachary Roth | January 9, 2009, 11:57AM

The panel appointed by Congress to track Treasury's use of the bailout funds has released its second report -- and its conclusions are even more worrying than the first.

One excerpt:

It is not enough to say that the goal is the stabilization of the financial markets and the broader economy," the panel wrote in a monthly report published today. "The question is how the infusion of billions of dollars to an insurance conglomerate or a credit card company advances both the goal of financial stability and the well-being of taxpayers, including homeowners threatened by foreclosure, people losing their jobs and families unable to pay their credit cards.

We'll have many more soon...

Bailout

In Cut and Paste Job, Treasury Admits It Still Doesn't Know What Banks Are Doing With Bailout Money

Zachary Roth | December 31, 2008, 5:13PM

Earlier this month, as we noted at the time, the congressional oversight panel for the financial bailout released a report on how the Treasury is spending the $700 billion in taxpayer money Congress gave them.

In its report, the panel, chaired by Harvard Law professor Elizabeth Warren, asked several basic questions about the Treasury's activities, for which it had not yet been given enough information to provide conclusions. These included "What is Treasury's Strategy?" "Is the Strategy Working?" And "What Have Financial Institutions Done with the Taxpayers' Money?"

Now -- not coincidentally, at a time when most people are distracted by thoughts of cheap champagne and off-key singing -- the Treasury has responded.

The 13-page riposte is, by and large, an impressive example of using up white space while saying absolutely nothing. But a few excerpts stand out as noteworthy.

First of all, in response to Warren's question of whether the strategy is working to stabilize markets, Treasury says, in part:

Treasury is also monitoring the effects our strategy is having on lending, although it is important to note that nearly half the money allocated to the Capital Purchase Program has yet to be received by the banks. Treasury is executing at a rapid speed, but it will take some time to review and fund all the remaining applications. Clearly this capital needs to get into the system before it can have the desired effect. In addition, we are still at a point of low confidence - both due to the financial crisis and the economic downturn. As long as confidence remains low, banks will remain cautious about extending credit, and consumers and businesses will remain cautious about taking on new loans. As confidence returns, Treasury expects to see more credit extended. The increased lending that is vital to our economy will not materialize as fast as anyone would like, but it will happen much faster as a result of deploying resources from the TARP to stabilize the system and increase capital in our banks.

In other words, we originally said this whole bailout was necessary to increase lending, and it hasn't. But it still might "as confidence returns." (The fact that the bailout was supposed to be a key part of restoring confidence doesn't seem to have been considered.)

But now look at this: A few pages later, Treasury responds in part to Warren's question of what the banks are doing with the bailout money by essentially cutting and pasting the very same paragraph:

The CPP began in October 2008 and the money must work its way into the system before it can have the desired effect. Moreover, we are still at a point of low confidence - both due to the credit crisis and due to the economic downturn, during which lending and borrowing levels normally drop. While confidence is low, banks will remain cautious about extending credit, and consumers and businesses will remain cautious about taking on new loans. As confidence returns, we expect to see more credit extended. This lending won't materialize as fast as anyone would like, but it will happen much faster as a result of having used the TARP to stabilize the system and to increase the capital in our banks.

Look closely at those two blockquoted paragraphs. It genuinely looks like someone has gone through the second one and altered a few phrases -- "as long as confidence remains low" becomes "while confidence is low" -- so that it's not a word for word replica of the first.

This isn't just an issue of shoddy writing, or even lazy thinking. It suggests that Treasury was so stumped by Warren's question of what banks are doing with the bailout money that it resorted to copying passages from earlier in the report -- passages that have little direct relevance to the question -- to pad out its answer and obscure the fact that it has no idea.

It comes closest to answering the question in this passage, in which it essentially throws up its hands and confesses ignorance:

As the GAO noted in its report, given the number and variety of financial stability actions being put in place by multiple entities, it will be challenging to view the impact of the Capital Purchase Program in isolation and at the institutional level. Moreover, each individual financial institution's circumstances are different, making comparisons challenging at best, and it is difficult to track where individual dollars flow through an organization.

And as for why Treasury hasn't insisted on more reforms from participating banks:

The CPP is a voluntary program for viable institutions. The program was designed to be attractive to financial institutions of all sizes as a mechanism to increase capital in the financial system while also protecting the taxpayer.

In other words, banks wouldn't have done it if they'd had to agree to more regulation. And we didn't want to make them.

Warren's panel is still slated to release a second report on the Treasury's handling of the bailout money -- though whether it will decide that Treasury has adequately responded to the issues raised in its first remains to be seen.

Bailout

Former FDIC Chair, Now Advising Paulson, Is Looking To Profit From Bailout

Zachary Roth | December 29, 2008, 12:14PM

The New York Times reports that several former government officials who helped organize the savings and loan bailout of the early 1990s are now putting that expertise to use by working as lawyers or lobbyists helping banks get a piece of the financial bailout -- or even by investing in some of the bad assets to be offered for sale.

Much of this, it appears, amounts to little more than an example of the decades-old revolving door between government and private business. But the paper reports that at least one former top government official is advising both the Bush and Obama teams on how to respond to the crisis, while at the same time being involved in efforts to profit from it.

Some of these former federal officials, like L. William Seidman, the first chairman of the R.T.C., are serving as advisers -- sharing ideas with Treasury Secretary Henry M. Paulson Jr. and the transition team for President-elect Barack Obama -- even while they are separately directing investors or banks on how to best profit from this advice.

"It is an enormous market," said Mr. Seidman, who has already joined two such potential money-making efforts and is evaluating proposals to participate in a third. "I am enjoying this."

As the chair of the Resolution Trust Corporation and the FDIC in the early 1990s, Seidman directed the government's disposal of the assets of failed savings and loans. So no one's suggesting that Paulson, and advisers to Obama, shouldn't be able to call on him for advice this time around.

But it would be nice to know more about what kind of ideas Seidman, and others like him, are sharing with current and future policymakers, and how those ideas line up with their own flourishing financial interests. And that's only more true given what we've learned about the inadequate efforts to monitor what the federal government has done with the bailout money and to protect against conflicts of interest.

Bailout

Bailout Bill Loophole Could Render Exec Pay Limits Meaningless

Zachary Roth | December 15, 2008, 2:36PM

When Congress was writing the bailout bill back in September, one of the major sticking points was its insistence on including limits on executive compensation for the banks that were going to be taking taxpayer money. The issue nearly derailed the bill, as Treasury argued that such limits would dissuade banks from participating. But Congress eventually won out.

Or at least it appeared to have. The Washington Post reports today that Treasury succeeded in getting a rather important loophole added in to the bill at the eleventh hour. It said that the pay limits would apply only to banks that participated in the bailout under the original plan in which Treasury would purchase the banks' troubled assets. Since the department quickly switched to a different approach, in which it simply injects equity into banks, the pay limits no longer apply.

"The flimsy executive-compensation restrictions in the original bill are now all but gone," said Sen. Charles Grassley, the ranking Republican on the Senate Finance Committee, told the Post.

Questioned by the Post, Treasury insisted it has "all the remedies available to us for a breach of contract," should banks refuse to abide by the limits.

But legal experts appear to disagree.

David M. Lynn, former chief counsel of the Securities and Exchange Commission's division of corporation finance, said courts have sometimes placed limits on the government's ability to impose penalties if there was no fair warning.

"Treasury might find its hands tied down the road," said Lynn, who is also co-author of "The Executive Compensation Disclosure Treatise and Reporting Guide."

It seems fair to conclude that there is strong internal resistance at Treasury to instituting the pay limits in a serious way. In addition to fighting Congress's efforts to impose them in the first place -- then adding the loophole which the Post highlights, there also some at Treasury who support a voluntary system of compliance, according to a finding of the recently released GAO report on the department's bailout spending, which we highlighted at the time.

And more broadly, Treasury appears uninterested in requiring banks to track what they do with the taxpayer money they're getting. And the House last week passed an amendment to the auto bailout bill that would require banks to say more about what they're doing with the bailout money -- a second bite at the apple after the rush to pass the bailout legislation in September.

Bailout

Bailout Oversight: Too Little, Too Late?

Zachary Roth | December 11, 2008, 5:09PM

Remember back in September when Congress blocked the Bush administration's initial effort to ram through a bailout bill that would have given Treasury Secretary Hank Paulson virtually unlimited authority to spend $700 billion however he saw fit?

Among the measures that Congressional Democrats successfully held out for -- against the wishes of the White House -- were meaningful oversight mechanisms that would allow Congress and others to track what the Treasury Department is doing with all that money.

That seemed like a victory for taxpayers at the time. But now, over two months later, we've learned a bit about what those oversight mechanisms have been able to provide. And there's real reason to question whether in fact they were designed adequately for the task in the first place.

"It's a mess," Eric M. Thorson, the Treasury Department's inspector general, told the Washington Post last month. "I don't think anyone understands right now how we're going to do proper oversight of this thing."

Perhaps the single biggest obstacle to adequate oversight of Treasury is how little oversight Treasury itself is exercising over the bailout funds, whether through indifference or an inability to hire qualified staff. In the first report issued by the Congressional Oversight Panel (COP) -- the main oversight mechanism that Congress fought to include in the bailout bill, over Paulson's objections -- the authors made clear that they were concerned about Treasury's lack of tracking mechanisms: "Treasury cannot simply trust that the financial institutions will act in the desired ways; it must verify." But COP also suggested that it was prevented from going further by the fact that Treasury wasn't keeping extensive enough records of its allocation of funds to be able to provide much more information.

A different overseer, the Government Accountability Office -- which functions as the investigative arm of Congress -- drew similar, albeit somewhat firmer, conclusions about Treasury's handling of the bailout money. Its preliminary report last week found a litany of problems, perhaps most fundamentally that there were no procedures to ensure that bailout funds are used as intended.

Just as important, the system of oversight doesn't appear to have been set up under conditions that would have allowed it to function effectively. With just three paid staff members (who started only this week -- two days before the panel's first report was to be released), COP was still struggling to get office space as it was preparing the report. Warren confirmed in an email to TPMmuckraker that "time constraints" had played a role in limiting the scope of the report's conclusions, saying that the panel met for the first time only two weeks ago.

Congress dragged its feet in naming the panel's members: although the bailout bill was passed in early October, they weren't named until mid-November. And it hasn't helped that Senate GOP leader Mitch McConnell still hasn't named a replacement for Sen. Judd Gregg, who stepped down last week as one the panel's two Republicans, saying he was too busy.

Still, at least GAO and the Congressional panel have been in place long enough to offer those reports. The single person who's most directly responsible for overseeing Treasury's bailout spending, Special Inspector General for the bailout, Neil Barofsky, was only confirmed this week. That's because one unnamed Republican senator -- it now seems all but certain that it was Kentucky's Jim Bunning -- placed a hold on Barofsky's nomination.

Congress may be talking belated steps to fix the problem. The Senate yesterday passed a bill that would let Barofsky investigate any use of bailout funds that he deems questionable, and hire auditors for the job. And the House has passed an amendment to the auto bailout bill that would require banks to say more about what they're doing with the TARP money.

Still, it appears that the rush to take action affected not just Treasury -- which was clearly scrambling to set up the bailout program without adequate record-keeping -- but also Congress, which failed to ensure that the oversight system it set up was designed as effectively as it needed it to be. And much of the damage may already have been done.

Bailout

More Evidence That Bunning Is GOP Senator Blocking Barofsky Nomination

Zachary Roth | December 3, 2008, 11:39AM

It's looking more and more like -- as we suspected -- Kentucky GOP senator Jim Bunning is the guy who placed the anonymous hold on the nomination of Neil Barofsky to the crucial post of special inspector general for the bailout.

Bunning's spokesman, Mike Reynard, wouldn't return any of our several calls on the subject. But the Associated Press appears to have reached him. It reports:

Republican Sen. Jim Bunning of Kentucky, a member of the Senate Banking Committee who opposed the bailout bill, has said he had "serious concerns" with Barofsky's nomination, though he has praised his experience. Bunning spokesman Mike Reynard would not comment on whether Bunning had placed the hold.

We'll let you draw your own conclusions...

Bailout

Top Dems React To GAO Report

Zachary Roth | December 3, 2008, 11:29AM

Looks like top Congressional Democrats didn't find yesterday's GAO report on how Treasury is implementing the bailout program any more encouraging than we did.

In a statement, Speaker Nancy Pelosi said:

The GAO's discouraging report makes clear that the Treasury Department's implementation of the (rescue plan) is insufficiently transparent and is not accountable to American taxpayers."

And Rep. Barney Frank, who chairs the House Financial Services Committee, agreed, saying in his own statement:

The American people received two kinds of news about the TARP program - bad and worse news.

The bad news was confirmation by the GAO in its first report about the program that Treasury has no way to measure whether taxpayer funds invested in banks are being used in accordance with the purpose of the law - to increase lending. The much worse news is Treasury's response that it does not even have the intention of doing so.

Frank added: "A public hearing on the issues raised by the GAO report is now essential."

Bailout

GAO Report: Now It's Your Turn

Zachary Roth | December 2, 2008, 5:10PM

In the sequence of posts below, we've tried to pick out the most interesting parts of the GAO report on the Treasury's administration of the bailout money. But we were working fast, so we might have missed stuff.

So if you feel like it, as usual, please review it yourself and let us know what else you find. It's here...

Bailout

Bailout Contractors Hired By Treasury Not Subject To Conflict Of Interest Rules

Zachary Roth | December 2, 2008, 4:56PM

The GAO report sheds light on another interesting angle to the conflict of interest problem with Treasury's administering of the bailout.

The department has hired outside private contractors to administer parts of the bailout program, notes GAO. Given the reports we've seen about Treasury lacking staff -- and lacking the right staff -- to implement the program, that may be a good move.

But as the report explains, outside contractors aren't subject to the conflict of interest rules that govern Treasury staff. As a result, Treasury asked the contractors to identify potential conflicts. There were many:

From the report:

In their responses to Treasury's requirements, six of the eight service providers selected as of November 25, 2008, identified potential or actual sources of conflict. According to our review, the identified conflicts generally involve organizational conflicts of interest, though some also involve personal conflicts of interest:

Five contractors indicated that they either already had clients or could have clients who were receiving TARP assistance.

• One contractor indicated that a potential conflict of interest would arise if it received information proprietary to multiple clients with competing investment interests.

• One company identified conflicts regarding troubled assets owned either directly by the company or by clients that were eligible for assistance under TARP.

Treasury also asked contractors to explain how they would work with Treasury to avoid such conflicts. And it sounds like some didn't exactly go the extra mile in that regard.

The submitted plans provided few details, however, on how the companies would notify and communicate with Treasury if conflicts were identified during the course of performance:

• Two firms' plans indicated that they would either maintain an "open dialog" or would "work in good faith" with Treasury should conflicts of interest emerge.

• Two other plans did not describe how the firms would address conflicts of interest or how they would notify Treasury.

By comparison, one plan indicated that the company would provide information on conflicts of interest to Treasury in its weekly reports and offer recommendations for addressing each issue.

Treasury relies on its financial agents and contractors to disclose conflicts of interest. Treasury officials stated that while under current procedures, they might not know if an agent or contractor did not disclose a conflict, they believed that the consequences for nondisclosure were sufficiently severe to deter such behavior. Finally, Treasury has noted in its solicitations that it intends to oversee and enforce compliance with conflict of interest mitigation plans. For example, Treasury noted in one of its solicitations for legal services that it would incorporate the offeror's final negotiated conflict of interest mitigation plan into the contract and then oversee and enforce the contractor's compliance with the plan. At the time we conducted our work, however, Treasury was still in the process of developing an oversight mechanism for enforcing financial agents' and contractors' mitigation plans. (our itals.)

Bailout

Regulator: Banks Can Enforce Exec Pay Limits Themselves

Zachary Roth | December 2, 2008, 4:21PM

It looks like the limits on executive compensation that Democrats in Congress fought to include in the bailout bill aren't a top priority for Treasury.

From the GAO report:

[A]t this point, the officials have not determined how Treasury will monitor executive compensation compliance. Bank regulators varied in their views about their oversight responsibilities related to compliance with executive compensation requirements and other required terms of CPP. For example, one regulator noted that it would rely on the institution's board of directors to assess compliance, and another regulator stated that it was Treasury's responsibility to provide such oversight. Without a consistent process for monitoring participating institutions, Treasury's ability to identify and address any potential problems in these institutions' compliance with program requirements will be limited.

In other words, Treasury officials aren't even on the same page with each other about how to enforce the limits -- and some think it can be left to the banks, fox-henhouse concerns be damned.

Bailout

Bailed Out Banks: "Money Is Fungible" So Don't Ask What We're Doing With It

Zachary Roth | December 2, 2008, 3:59PM

Here's a bit more detail, from page 25 of the GAO report, on what seems like the Treasury's utter aversion to requiring banks to offer any information whatsoever on what they're doing with the billions of dollars of taxpayer money they're getting.

[I]t is unclear how OFS and the banking regulators will monitor how participating institutions are using the capital investments and whether these goals are being met. The standard agreement between Treasury and the participating institutions does not require that these institutions track or report how they plan to use, or do use, their capital investments.

...

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.

...

The banking regulators indicated that they had not yet developed any additional supervisory steps, such as requiring more frequent provision of certain call report data for participating institutions, to monitor participating institutions' activities.

So it seems to come down to this: the banks won't say what they're doing with the money, and Treasury is too polite to ask.

Bailout

GAO: Treasury "May Not Be Able To Ensure That Conflicts Are Fully Identified."

Zachary Roth | December 2, 2008, 3:47PM

The authors of the GAO report don't appear impressed by Treasury's efforts to avoid conflicts of interest -- one of the prime concerns raised by some observers, given the number of top Treasury officials who used to work for companies receiving money under the bailout program.

From the report:

Lacking a comprehensive and complete system to monitor conflicts of interest, Treasury runs the risk that it may not be able to ensure that conflicts are fully identified and appropriately addressed.

Bailout

GAO: Treasury Not Ensuring That Bailout Money Is Being Spent As Intended

Zachary Roth | December 2, 2008, 3:39PM

The GAO report makes clear that the urgency of the crisis has meant that oversight procedures have taken a backseat. It concludes in part:

Because TARP is relatively new, and because the crisis makes immediate action imperative, Treasury is operating on a number of fronts concurrently. It is setting up programs and establishing oversight policies and procedures at the same time. As a result, we are seeing some lag in administrative efforts -- for example, internal controls -- as the programs proceed.
...

Treasury has not yet set up policies and procedures to help ensure that [Capital Purchase Program] funds are being used as intended.

And it recommends that those procedures be set up as soon as practicable.

The report is now available online (pdf).

Bailout

Treasury May Not Make Banks Report Back On How They're Spending Bailout Money

Zachary Roth | December 2, 2008, 3:29PM

Check out this nugget from page 15 of the GAO report on how Treasury is spending the bailout money:

[Treasury's Office of Financial Stability] has not yet determined if it will impose reporting requirements on the participating financial institutions that could enable OFS to monitor, to some extent, how the financial institutions are using capital infusions.

More to come...

Bailout

GAO: "Treasury Has Yet To Address A Number Of Critical Issues" On Spending Bailout Money

Zachary Roth | December 2, 2008, 3:19PM

A just-released report by the Government Accountability Office on how the Treasury Department is using the $700 billion allocated to it by Congress for the financial bailout reaches some discouraging conclusions.

It finds that:

Treasury has yet to address a number of critical issues, including determining how it will ensure that CPP is achieving its intended goals and monitoring compliance with limitations on executive compensation and dividend payments. Moreover, further actions are needed to formalize transition planning efforts and establish an effective management structure and an essential system of internal control.

We're looking through the report here at TPMmuckraker and will bring you more detail as we find it...

Bailout

Barofsky Hold: Not Johnny Isakson, And Probably Not George Voinovich

Zachary Roth | December 2, 2008, 10:06AM

A staffer for the Georgia senator says unequivocally that Isakson isn't blocking a vote on the nomination of Neil Barofsky to be bailout IG.

As for Voinovich of Ohio, a reader reports that a staffer in his office "said that he has not done it as far as they are aware and feel that if he had done it he would have announced that he did it. They said he is pro-oversight and just sent a letter to Pelosi and Reid requesting that a bailout overseer be assigned for the auto industry package."

That's 13 out of 49 largely ruled out. Keep making those calls!

Bailout

Barofsky Hold: Not Orrin Hatch, Or Bob Corker...So Where Does That Leave Us?

Zachary Roth | December 1, 2008, 4:05PM

Staffers for both GOP senators have told our readers unequivocally that it wasn't Hatch or Corker that placed the hold on the nomination of Neil Barofsky to be inspector general for the bailout money.

So what have we learned so far?

Seven senators' offices have said unequivocally that they're not responsible: Coburn, Dole, Allard, Coleman, Warner, Hatch, and Corker.

In addition, staffers for four more -- Shelby, Sessions, Inhofe, and Bond -- have given versions of "not to my knowledge", meaning these senators probably aren't prime suspects, though they can't be definitively struck from the list.

That leaves 38 more from whom we've yet to hear anything. (Remember, until January there are still 49 GOP senators.)

Meanwhile, we've left two messages with the office of Jim Bunning, the Kentucky GOP senator who during a recent hearing expressed his opposition to Barofsky's appointment, but have heard nothing back.

Maybe our Bluegrass state readers will have more luck...

Bailout

Law Could Force Disclosure Of Mystery Senator's Identity

Zachary Roth | December 1, 2008, 3:45PM

In response to our quest to figure out which GOP senator is blocking the nomination of Neil Barofsky to be inspector general for the bailout money, Paul Blumenthal of the Sunlight Foundation, a good government organization, provides some key background on how these Senate holds work:

We've had our fair share of experience with secret holds, having fought to reveal the identities of those secretly blocking the Coburn-Obama bill (FFATA) and the campaign finance e-filing bill (S. 223). The first thing of note is that secret holds were, for the most part, abolished during the 110th Congress. The Honest Leadership and Open Government Act mandated the disclosure of the identity of a senator secretly blocking a "measure or matter" "not later than 6 session days" after the initiation of the hold.

The Barofsky nomination provides a good example of the loopholes in this mandate of disclosure. If a bill or, in this case, a nomination comes up prior to a long recess, the disclosure of the offending senator's identity will have to wait until the Senate reconvenes for at least 6 session days, not calendar days. So far, since the nomination was blocked, the Senate convened for two session days. While they are expected to convene tomorrow for a pro forma session, it is unknown whether the Senate will convene for four more days by the end of the year.

In other words, if the Senate does end up convening for four more days this session, we could soon find out the mystery senator's identity -- though how that would actually play out in practice remains unknown.

But if, on the other hand, the Senate doesn't meet for four more days this session, we could never know, and the hold could remain in place at least until the new Congress convenes.

Meanwhile, reports from readers continue to pour in -- more soon.

Bailout

Barofsky Hold: Not John Warner...

Zachary Roth | December 1, 2008, 3:27PM

A staffer for the outgoing Virginia senator confirms to a reader that he didn't put a hold on Neil Barofsky's nomination to be bailout IG.

Bailout

Barofsky Hold: Not Norm Coleman...

Zachary Roth | December 1, 2008, 2:13PM

A staffer for Sen. Norm Coleman unequivocally denied to a TPMmuckraker reader that the Minnesota senator is blocking Neil Barofsky's nomination to be inspector general for the bailout, and said that Coleman wants the appointment to go forward.

Bailout

Barofsky Hold: Not Wayne Allard...

Zachary Roth | December 1, 2008, 1:54PM

A staffer for the outgoing Colorado senator has told a reader that Allard isn't blocking Neil Barofsky's nomination to be inspector general of the bailout.

That's six on the record...