November 20, 2008, 7:50 a.m.
Where Have All the Dollars Gone?
(With credit and apologies to Pete Seeger's "Where Have All the Flowers Gone?"; and for the title to the line "A billion here, a billion there, and pretty soon you're talking real money" -- attributed, though without substantiation, to former Senator Everett Dirksen of Illinois.)
[Photo credit: Jay Mallin/Bloomberg News]
Somehow, while we were focusing on the $25 billion bailout request from the private-jet-flying Big Three Auto CEOs, roughly 100 times that amount disappeared from this building (the Federal Reserve), notwithstanding the security guard pictured here near the entrance.
That's right. While we were assuming that the debt Secretary Paulson and our frightened elected representatives were handing off to our great grandchildren was limited to Paulson's $700 billion gift to his friends, it turns out that the Fed's Bernanke had friends of his own to whom he was providing another Two trillion dollars!
Now Bernanke is refusing to reveal who his newly-wealthy friends are or what kind of collateral he was willing to accept for these "loans."
It's all reminiscent of another song Pete Seeger made famous that will soon be coming round again, "Banks of Marble":
I've traveled 'round this country
from shore to shining shore
It really made me wonder
the things I heard and saw
I saw the weary farmer
plowing sod and loam
l heard the auction hammer
just a-knocking down his home
[chorus] But the banks are made of marble
with a guard at every door
and the vaults are stuffed with silver
that the farmer sweated for
And so on through "the weary miner, scrubbing coal dust from his back."
It is our money. We have worked for it. We paid it in taxes to support social and other legitimate programs of our federal government. And now it is being given away by the trillions, by two individuals to friends of theirs, friends who bear much to most of the responsibility for the greed that has created our current economic collapse.
In case you missed the details, read on:
The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.
Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn't require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return. . . .
Bloomberg News has requested details of the Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit Nov. 7 seeking to force disclosure.
The Fed made the loans under terms of 11 programs, eight of them created in the past 15 months, in the midst of the biggest financial crisis since the Great Depression.
``It's your money; it's not the Fed's money,'' said billionaire Ted Forstmann, senior partner of Forstmann Little & Co. in New York. ``Of course there should be transparency.''
Federal Reserve spokeswoman Michelle Smith declined to comment on the loans or the Bloomberg lawsuit. Treasury spokeswoman Michele Davis didn't respond to a phone call and an e-mail seeking comment. . . .
The Fed's lending is significant because the central bank has stepped into a rescue role that was also the purpose of the $700 billion Troubled Asset Relief Program, or TARP, bailout plan -- without safeguards put into the TARP legislation by Congress.
Total Fed lending topped $2 trillion for the first time last week and has risen by 140 percent, or $1.172 trillion, in the seven weeks since Fed governors relaxed the collateral standards on Sept. 14. . . .
Before Sept. 14, the Fed accepted mostly top-rated government and asset-backed securities as collateral. After that date, the central bank widened standards to accept other kinds of securities . . ..
Banks oppose any release of information because it might signal weakness and spur short-selling or a run by depositors, said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, a Washington trade group. . . .
The nation's biggest banks, Citigroup, Bank of America Corp., JPMorgan Chase, Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley, declined to comment on whether they have borrowed money from the Fed. They received $120 billion in capital from the TARP, which was signed into law Oct. 3.
In an interview Nov. 6, House Financial Services Committee Chairman Barney Frank said the Fed's disclosure is sufficient and that the risk the central bank is taking on is appropriate in the current economic climate. Frank said he has discussed the program with Timothy F. Geithner, president and chief executive officer of the Federal Reserve Bank of New York and a possible candidate to succeed Paulson as Treasury secretary.
``I talk to Geithner and he was pretty sure that they're OK,'' said Frank, a Massachusetts Democrat. . . .
The Bloomberg lawsuit argues that the collateral lists ``are central to understanding and assessing the government's response to the most cataclysmic financial crisis in America since the Great Depression.'' . . .
``As a taxpayer, it is absolutely important that we know how they're lending money and who they're lending it to,'' said Lucy Dalglish, executive director of the Arlington, Virginia- based Reporters Committee for Freedom of the Press.
Ultimately, the Fed will have to remove some securities held as collateral from some programs because the central bank's rules call for instruments rated below investment grade to be taken back by the borrower and marked down in value. Losses on those assets could then be written off, partly through the capital recently injected into those banks by the Treasury.
Moody's Investors Service alone has cut its ratings on 926 mortgage-backed securities worth $42 billion to junk from investment grade since Sept. 14, making them ineligible for collateral on some Fed loans.
The Fed's collateral ``absolutely should be made public,'' said Mark Cuban, an activist investor, the owner of the Dallas Mavericks professional basketball team and the creator of the Web site BailoutSleuth.com, which focuses on the secrecy shrouding the Fed's moves.
The Bloomberg lawsuit is Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan).
Mark Pittman, Bob Ivry and Alison Fitzgerald, "Fed Defies Transparency Aim in Refusal to Disclose (Update2)," Bloomberg, November 10, 2008.
A trillion here and a trillion there and pretty soon you're talking real money.
# # #
September 15, 2008, 5:15 a.m.
FromDC2Iowa.blogspot.com
Currently Most Popular Blog Entries
"Trials, Business and 'Student Athletes,'" September 11, 2008.
"Reactions to Obama's Telecom Immunity Vote," July 9, 2008.
"Random Thoughts on Law School Rankings," April 29, 2008.
"University of Iowa Sexual Assault Controversy -- 2007-08," July 19-present (incorporating and updating original blog entry, "UI Sexual Assault Update," July 19-August 9).
"A Strategy For PUMAs," September 9, 2008.
"Hawkeyes' Criminal Record Lengthens," February 25, 2008.
"How Much Do You Owe the Chinese?" September 8, 2008.
"Police Accidental Shootings -- Of Themselves," May 9, 2008.
"Rumors, Reporting and Reputations," September 13, 2008.
And see, Database Index of 500-plus blog entries
The Way Free Private Enterprise is Supposed to Work:
Thinking and Acting Globally and Locally
Looks like the taxpayers aren't going to be picking up the losses for the 158-year-old Lehman Brothers, now on its way to bankruptcy. It's not like the Bush Administration (and many Democratic senators and members of Congress) wouldn't like to send us the bill. After all, they had no qualms about having us pay for the JP Morgan Chase takeover of Bear Stearns in March, thanks to the Federal Reserve, and the $200 million or more they asked our grandchildren pay off in order to keep Fannie Mae and Freddie Mac struggling along, since all they otherwise would have had was ownership of half the homes in America, worth over $5 trillion.
Much was made this past week of the government's refusal to have us taxpayers pick up the cost of the U.S. auto industry management's persistent errors of economic and market judgment. The companies wanted some $25 billion from us. But then I read somewhere that the Administration had already given them $25 billion; this was just an additional request for the same amount. (Also in the financial news: the Bank of America has purchased Merrill Lynch (also in trouble and worth $100 billion last year) for $50 billion; and AIG is looking around for someone with $40 billion in spare pocket change to help them out.)
Corporate operations have become a "heads we win, tails you lose" proposition of "socialism for the rich and free private enterprise for the poor" in this country. When a company makes a profit it gets to keep it -- indeed, more and more of it, as tax rates for corporations and the rich have been slashed from what they once were. On the other hand, if it has losses that are big enough, the shareholders can just ask the taxpayers to cover those losses. It's a sweet deal.
So now there seems to be at least one example the Bush Administration can point to when this standard practice was not followed: Lehman Brothers, after reporting a half-billion of income has conceded a $2.8 billion loss one quarter followed by a $3.9 billion loss the next, and without a taxpayer bailout is headed for bankruptcy.
Why the switch? Who knows? Maybe someone in Washington has looked at the books and discovered we're $53 trillion in the hole (debt, plus unfunded future obligations) and decided we just couldn't afford it. Maybe there's a Republican fear of the remote possibility that the electorate will be treated to some discussion of issues other than lipstick on animals before they go to vote -- say, the economy -- in which case it would be handy for the Republican team to be able to cite at least one example of a time when the free private enterprisers didn't send the taxpayers the bill for their losses.
Anyhow, it's lucky Hong Kong's Hang Seng and Tokyo's Nikkei are closed today for national holidays. London's FTSE and Frankfurt's DAX are going to end their trading days down at least 2-3% and it would have been worse if the Asian markets were open. (India's SENSEX index was down over 5%.) Based on the Dow Jones and S&P 500 futures this morning, it looks like the U.S. markets will be down about 3% today.
Meanwhile, a comparable if short-lived burst of sanity has occurred right here in River City, and been memorialized in a Press-Citizen editorial. Editorial, "Center to Open Without Public Assistance," Iowa City Press-Citizen, September 15, 2008, p. A9.
Of course, in a way it's kind of sad. It's like the headline, "Man Bites Dog." The extent to which our public officials let for-profit businesses stiff the taxpayers for start-up costs on the front end and their losses on the back end is so endemic to government these days that "Taxpayers Spared Cost of Starting New For-Profit Business" is news.
But the fact that it's rare doesn't mean it shouldn't be celebrated, and editorialized about.
I have often written of "why business subsidies don’t make sense for any city [and are] especially inappropriate for Iowa City." In one Press-Citizen op ed column I itemized some 11 categories of reasons why this was so. Nicholas Johnson, "Courage, Councilors," October 3, 2007.
Of course there are examples of for-profit companies that, with the generous assistance of taxpayers, have not later gone belly up, or left town, leaving the taxpayers holding the bag. But such examples do not come close to constituting a persuasive case why taxpayers should move their money to the bottom line of for-profit companies. To the best of my knowledge, no one has to this day ever taken on that column's itemization of categories and documented why all of them are wrong.
One of those categories was:
“Need” is impossible to know. Many projects will go ahead without subsidy. If tax breaks are available, of course entrepreneurs will say they won’t act without them. But how can we know when that’s just blackmail?
Today's Press-Citizen editorial involves a case study illustrating this very category:
We're glad that Mercy Hospital and a group of local surgeons have managed to find enough funding to build a new ambulatory surgical center in Iowa City's Northgate Plaza . . ..
But we're even more happy that the Iowa City Council didn't offer any tax incremental financing to help the development of the project. After all, the first question of determining whether a project deserves a TIF should be, "Can it succeed without public financing?" Since the answer in this case was clearly, "Yes," the city was right to deny the request eventually -- although it could have done so much earlier in the process.
Last year, investors for the surgeons' group and Mercy came to the city requesting a $600,000 TIF to help build their proposed 24,000-square-foot facility.
The point is not that we couldn't have known whether the doctors really needed the $600,000 or not. The point is, as I wrote last year, "If tax breaks are available, of course entrepreneurs will say they won’t act without them."
The point is that while I would contend that we can always know that taxpayer funding of for-profit businesses is inappropriate for all the reasons I've itemized, one of those reasons is that we can virtually never know whether more appropriate funding sources could and would be found if taxpayer money was not available.
The paper's editorial doesn't go that far. The editorial board expressly says, "As an editorial board, we've never viewed TIFs as the automatic four-letter word of economic development."
But it's entitled to this blog's "Hat's Off" journalism award anyway for the rest of its conclusion:
[T]the decision on whether to grant a TIF needs to be based on much more than a bottomline explanation on how it offers a win-win arrangement for both the city and the business. Otherwise the city risks granting businesses massive tax breaks for doing simply what their corporate officers and the current market would have them do anyway. . . .
We don't want the city to be hostile to new businesses or expansions . . .. But neither do we want the city to fork over cash every time someone shows there's a little profit to be made.
On behalf of my grandchildren and great grandchildren, I thank you Press-Citizen editorial board -- and, oh yes, you too Federal Reserve Board.
# # #
