Hullabaloo

Sunday, March 08, 2009

 
Misdirection

by digby

I'm sure you all recall congressman Alan Grayson's tough questioning of Fed officials a couple of months ago in which he asked if they would be kind enough to provide taxpayers with a list of the specific institutions to whom the Fed was handing out money. You'll also recall that Fed Vice President Donald Kohn said he didn't think that would be a good idea at all.

Here's the Youtube in case you missed it.



Grayson was early on this. The senate took it up last week and got the same response which was basically, "don't worry your pretty little heads about who's getting the money." Apparently, these institutions will be too embarrassed to borrow what they need and then everything will be ruined.

Now why on earth would any institution be too embarrassed to take needed money from the Fed if their names were made public? Does that make sense to you?

Here's Barry Ritholz:

My recent tirade against bailing out the hedge fund half of AIG makes much more sense when you consider who is actually getting all of the taxpayer largesse: Counter-parties of AIG, especially one Goldman Sachs. Some estimates have been in excess of $25 billion to GS.

As AIG ran into the arms of the Fed for the first of 4 bailouts, Bloomberg reported:

“As much as $37 billion from federal bailout loans to American International Group Inc. has gone to investment banks including Goldman Sachs Group Inc., the firm Treasury Secretary Henry Paulson used to run.

Without the government money, Goldman, Merrill Lynch & Co., Morgan Stanley, Deutsche Bank AG and other firms could have become some of the biggest creditors in a bankruptcy filing by AIG, the world’s largest insurer, because of its billions in losses on subprime bonds and corporate debt. The firms received cash as AIG borrowed from a Federal Reserve credit line endorsed by Paulson, Goldman’s former chief executive. The insurer had borrowed $44.6 billion from the credit line as of Sept. 25, the Federal Reserve reported that day.”

Other rumored recipients of taxpayer dole include Morgan Stanley, Merrill Lynch, and Deutsche Bank.

Why rumored? Because of the infuriating refusal to turn over any information as to who these counter-parties are by the Fed and Treasury:

“The Fed refused yesterday to disclose the names of the borrowers and the loans, alleging that it would cast “a stigma” on recipients of more than $1.9 trillion of emergency credit from U.S. taxpayers and the assets the central bank is accepting as collateral.

Fed secrecy was the focus of a Senate Banking Committee hearing today in which the panel’s top two members said the central bank’s reluctance to identify companies benefiting from the American International Group bailout risks undermining public confidence in the government.

“If the American taxpayer’s money is at stake, and it is, big time, I believe the American taxpayers, the people, and this committee, we need to know who benefited, where this money went,” said Senator Richard Shelby of Alabama, the committee’s top Republican. “There is no transparency.” (emphasis added)

Who is being made whole at the taxpayer expense? The taxpayer isn’t merely getting screwed here, we are taking the royal shaft up the patootie in previously unimaginable ways.

Oh yeah. And it turns out Ritholz was right about the AIG money:

“The beneficiaries of the government’s bailout of American International Group Inc. include at least two dozen U.S. and foreign financial institutions that have been paid roughly $50 billion since the Federal Reserve first extended aid to the insurance giant.

Among those institutions are Goldman Sachs Group Inc. and Germany’s Deutsche Bank AG, each of which received roughly $6 billion in payments between mid-September and December 2008, according to a confidential document and people familiar with the matter.

Other banks that received large payouts from AIG late last year include Merrill Lynch, now part of Bank of America Corp., and French bank Société Générale SA.

More than a dozen firms with smaller exposures to AIG also received payouts, including Morgan Stanley, Royal Bank of Scotland Group PLC and HSBC Holdings PLC, according to the confidential document.”

Nouriel Roubini explains:

“In the meantime, the massacre in financial markets and among financial firms is continuing. The debate on “bank nationalization” is borderline surreal, with the U.S. government having already committed–between guarantees, investment, recapitalization and liquidity provision–about $9 trillion of government financial resources to the financial system (and having already spent $2 trillion of this staggering $9 trillion figure).

Thus, the U.S. financial system is de facto nationalized, as the Federal Reserve has become the lender of first and only resort rather than the lender of last resort, and the U.S. Treasury is the spender and guarantor of first and only resort. The only issue is whether banks and financial institutions should also be nationalized de jure.

. . . AIG, which lost $62 billion in the fourth quarter and $99 billion in all of 2008 and is already 80% government-owned. With such staggering losses, it should be formally 100% government-owned. And now the Fed and Treasury commitments of public resources to the bailout of the shareholders and creditors of AIG have gone from $80 billion to $162 billion.

Krugman argues for formal nationalization:

The benefits from nationalization come from (a) giving taxpayers a share of the upside rather than just a share of the downside, which is where we are now (b) ending the gaming of the system, even looting, that is encouraged by the current system of implicit guarantees (Simon Johnson has been very good on that) (c) making it politically and fiscally feasible to put in enough capital to revitalize the system. These advantages are there whatever you decide to do with junior bank debt.

We are talking about staggering sums here and the complexity of what they are trying to do is far beyond the average citizens' economic knowledge, including mine. But what I do know is that I don't want to hear another word from anyone about deficits and pork and earmarks and how we can't afford unemployment insurance until every last penny of these trillions are accounted for.

This is all taxpayer money that's being spent, it all comes from the same pot --- and as far as I know it may even be necessary spending. But they are hiding the names of the recipients of potentially 9 trillion dollars and when it does slip out who some of them are, it turns out --- again --- that it's same people who perpetrated this crisis. Meanwhile, all day long, I'm watching simpleminded "fleecing of America" stories with some gasbag busybodies looking down their noses at some schmuck who was told that he should lie on the mortgage application for his monstrous tract home in Riverside and has lost everything. Everybody's lecturing everybody else about responsibility. And yet we have trillions going unaccounted for at the Fed and they seem to believe there's absolutely nothing wrong with that.

Something is rotten at the Fed and treasury --- or, at least, it sure smells that way. Maybe nobody would notice the rather shocking lack of transparency if what they were doing was actually working. But it isn't. The system is still in crisis and it's not getting any better.


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digby 3/08/2009 12:00:00 PM