Fed's Money Pit

by John M. Curtis
(310) 204-8700

Copyright November 25 2008
All Rights Reserved.                    

          When Congress approved Federal Reserve Board Chairman Ben S. Bernanke and Treasury Secretary Hank Paulson’s bailout plan Oct. 3, it was for a measly $700 billion.  No one, other than Fed officials, could have imagined that the real taxpayer liability was closer to 7.7 trillion, a staggering sum more than half of the 2007 U.S. Gross Domestic Product.  Bernanke and Paulson sold Congress on their “toxic assets relief plan,” something Paulson reneged on Nov. 12.  He claimed the government’s cash was best-spent buying preferred stock, refusing to disclose the institutions to which cash was going.  “Whether it’s lending or spending, it’s tax dollars that are going out the window and we end up holding collateral we don’t know anything about,” said House Financial Services Committee Member Rep. Scott Garrett (R-N.J.).  Garrett sees the Fed operating without accountability.

            Bernanke sees the Fed’s draconic rescue as necessary to prevent a 1929-like depression, where bank and corporate failures snowball around the country.  No one at the Fed or Treasury have any explanation for why the U.S. financial system collapsed.  Blaming the mess on the so-called “subprime” lending crisis doesn’t add up.  Other past real estate meltdowns had comparable default and foreclosure rates.  Federal mortgage agencies Fannie Mae and Freddie Mac, responsible for funding and selling loans as “mortgage-backed securities,” went bankrupt.  While there’s much speculation why, there’s few facts about waste, fraud and mismanagement that led the way.  Despite the failure of both agencies, there’s no explanation for what happened.  Some suspect piracy and greed but no grand juries have been convened to hold former Fannnie CEOs Franklin Raines and Daniel Mudd accountable.

            Before the seizure of Fannie Mae and Freddie Mac by federal regulators Sept. 7, their CEOs extracted massive compensation.  Fannie Mae CEO Daniel Mudd and Freddie Mac CEO collected over $40 million in executive compensation in 2007, while both agencies incurred massive losses.  Freddie Mac’s CEO Richard Syron received $19.8 million while the company hemorrhaged into insolvency.  No grand juries have been convened to investigate the most egregious piracy since Enron filed for bankruptcy Dec. 2, 2001.  Enron was small change compared to the collapse of Fannie Mae and Freddie Mac, costing taxpayers over $200 billion.  Both agencies cover more than $30 trillion in U.S. mortgages.  No one expected the scope of the U.S. financial collapse, causing Bernanke to pony up trillions to keep U.S. banks from the 10,000 failures in the Great Depression.

            Former Fed Chairman Alan Greenspan called the current financial mess a “once in a century event,” far eclipsing the $4.2 billion 1979 Chrysler bailout or $209.5 billion 1990s Savings and Loan fiasco.  He compared the event to the 1907 Financial Panic that led to the 1913 creation of the Federal Reserve.  While President-elect Obama has put his economic team together, including naming New York Fed President Timothy Geithner as Treasury Secretary, there’s no indication his rescue plan differs one iota from President George W. Bush and his Treasury Secretary Hank Paulson.  Both rely heavily on Bernanke to supply endless cash needed to fund destitute financial institutions, freezing assets in recent months.  Bernanke has resisted disclosing the names of financial institutions receiving the Fed’s cash.  Bernanke fears revealing names would weaken bond and share prices.

            When Obama takes office Jan. 20, Bernanke’s job could be on the line.  His refusal to name names belies the promise he and Paulson made to Congress Oct. 3 that they intended to be more “transparent.”  “There’s a lack of transparency here, and given the Fed is taking on a huge amount of credit risk now, it would seem to me as a taxpayer there should be more transparency,” said Paul Kasriel, chief economic at Chicago-based Northern Trust Corp.  As long as the Fed holds taxpayers responsible, the Fed has an obligation to reveal the names and amounts of the cash.  “We think that’s counterproductive,” Bernanke told Nov. 18 the House Financial Services Committee, refusing to divulge the names and amounts of bank borrowing.  If the Fed lent the cash at zero percent, or no new debt to taxpayers, then Bernanke could justify keeping the names and amounts silent.    

             Beranke and Paulson owe the public an explanation how and why U.S. financial markets collapsed.  Blaming the whole mess on faulty mortgage-backed securities doesn’t tell the whole story of how otherwise stable financial institutions became insolvent.  “This is the worst capital markets crisis in modern history,” said Ethan Harris, co-head of Barclays Capital Inc.  “So you have the biggest intervention in modern history,” justifying the Fed’s extreme actions.  No one begrudges the Fed supplying the capital needed to keep financial markets afloat.  Congress and taxpayers simply want to know the names and amounts of capital promised to various financial institutions.  Whether Bernanke admits it or not, depositors, bondholders and shareholders have a right to know the solvency of financial institutions.  Keeping the public in the dark only adds to the economic uncertainty plaguing markets..

John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

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