Before reading this blog post it is recommended to read Matt Taibbi’s January 2013 Rolling Stone piece: Secrets and Lies of the Bailout
The Rolling Stone article is lengthy, but informative by offering a scathing rebuke on how the past and current Administrations managed the financial crisis. The article identifies government lying, accounting trickery, and the implicit guarantee of TBTF, among other topics.
For those that choose to skip the recommended reading, highlights are as follows:
It was all a lie – one of the biggest and most elaborate falsehoods ever sold to the American people.
But the most appalling part is the lying. The public has been lied to so shamelessly and so often in the course of the past four years that the failure to tell the truth to the general populace has become a kind of baked-in, official feature of the financial rescue.
“It is the ultimate bait-and-switch,” says former bailout Inspector General Neil Barofsky.
The bailout deceptions came early, late and in between. There were lies told in the first moments of their inception, and others still being told four years later. The lies, in fact, were the most important mechanisms of the bailout. The only reason investors haven’t run screaming from an obviously corrupt financial marketplace is because the government has gone to such extraordinary lengths to sell the narrative that the problems of 2008 have been fixed. Investors may not actually believe the lie, but they are impressed by how totally committed the government has been, from the very beginning, to selling it.
…the bailouts were pushed through Congress with a series of threats and promises that ranged from the merely ridiculous to the outright deceptive. At one meeting to discuss the original bailout bill – at 11 a.m. on September 18th, 2008 – Paulson actually told members of Congress that $5.5 trillion in wealth would disappear by 2 p.m. that day unless the government took immediate action, and that the world economy would collapse “within 24 hours.”
So Paulson came up with a more convincing lie. On paper, the Emergency Economic Stabilization Act of 2008 was simple: Treasury would buy $700 billion of troubled mortgages from the banks and then modify them to help struggling homeowners. Section 109 of the act, in fact, specifically empowered the Treasury secretary to “facilitate loan modifications to prevent avoidable foreclosures.” With that promise on the table, wary Democrats finally approved the bailout on October 3rd, 2008. “That provision,” says Barofsky, “is what got the bill passed.”
But within days of passage, the Fed and the Treasury unilaterally decided to abandon the planned purchase of toxic assets in favor of direct injections of billions in cash into companies like Goldman and Citigroup.
Barofsky, the TARP inspector, asked Treasury to include a requirement forcing recipients to explain what they did with the taxpayer money. He was stunned when TARP administrator Kashkari rejected his proposal, telling him lenders would walk away from the program if they had to deal with too many conditions. “The banks won’t participate,” Kashkari said. Barofsky, a former high-level drug prosecutor who was one of the only bailout officials who didn’t come from Wall Street, didn’t buy that cash-desperate banks would somehow turn down billions in aid. “It was like they were trembling with fear that the banks wouldn’t take the money,” he says. “I never found that terribly convincing.”
This announcement marked the beginning of the legend that certain Wall Street banks only took the bailout money because they were forced to – they didn’t need all those billions, you understand, they just did it for the good of the country.
And in November 2009, Bernanke gave a closed-door interview to the Financial Crisis Inquiry Commission, the body charged with investigating the causes of the economic meltdown, in which he admitted that 12 of the 13 most prominent financial companies in America were on the brink of failure during the time of the initial bailouts.
This early episode would prove to be a crucial moment in the history of the bailout. It set the precedent of the government allowing unhealthy banks to not only call themselves healthy, but to get the government to endorse their claims. Projecting an image of soundness was, to the government, more important than disclosing the truth. Officials like Geithner and Paulson seemed to genuinely believe that the market’s fears about corruption in the banking system was a bigger problem than the corruption itself. Time and again, they justified TARP as a move needed to “bolster confidence” in the system – and a key to that effort was keeping the banks’ insolvency a secret.
What’s most amazing about this isn’t that Citi got so much money, but that government-endorsed, fraudulent health ratings magically became part of its bailout.
The article does mention Fannie and Freddie:
In one of the worst episodes, the notorious lenders Fannie Mae and Freddie Mac paid out more than $200 million in bonuses between 2008 and 2010, even though the firms (a) lost more than $100 billion in 2008 alone, and (b) required nearly $400 billion in federal assistance during the bailout period.
After Mr. Taibbi wrote his article in 2013, details about the government take-over of Fan and Fred came to light. Taibbi evidently conducted additional research and in April 2016 offered a different perspective in Why Is the Obama Administration Trying to Keep 11,000 Documents Sealed?
So consider, if the Government would lie by claiming that TBTF were healthy when in fact many banks were on the verge of collapse, then it is not too much of a stretch to assume the Government would do the opposite with Fannie and Freddie.
Here’s what former FNMA CFO Tim Howard said in his Jacobs Amicus Curiae:
The takeover of Fannie and Freddie was not a rescue. Unlike all commercial or investment bank interventions during the crisis, Treasury’s decision to force the Companies into conservatorship was not a response to any imminent threat of failure. Rather, it was a calculated policy decision by Treasury, made at a time of Treasury’s choosing and with ample advance planning. That decision—which resulted in the effective nationalization of Fannie and Freddie— was made without statutory authority and after Treasury overrode the Companies’ own regulator, the Federal Housing Finance Agency (“FHFA”), which had deemed them to be in compliance with their capital standards and safety and soundness requirements.
Though it’s not always necessary to prove motive when prosecuting a crime, it certainly makes for a stronger case. On the other hand, intent is an important element of any crime, i.e. was the act intentional, reckless or accidental…
It becomes even more important to offer a plausible motive for UST’s illegal actions given their endless spinning of a tangled web of lies, with one lie contradicting another from one lawsuit to the next.
UST’s co-conspirator, the Federal Housing Finance Agency, has always merely followed UST’s directive. So, it is inconsequential to consider motive or intend regarding FHFA’s role in this malfeasance. FHFA’s transgression is that they don’t act independently, as mandated by statute.
One motive for the crimes against Fannie and Freddie is that UST has long wanted to destroy them. Going beyond mere desire, UST has apparently considered for years before the financial crisis on ways to eliminate Fan and Fred according to these theorists.
Close inspection of recently released documents, as well as testimony from Government officials, suggest that UST had been waiting for the right moment to take down Fan and Fred.
Here is how Henry Paulson described his thinking when announcing the conservatorships:
“Our nation has tolerated these ambiguities for too long, and as a result GSE debt and MBS are held by central banks and investors throughout the United States and around the world who believe them to be virtually risk-free. Because the U.S. Government created these ambiguities, we have a responsibility to both avert and ultimately address the systemic risk now posed by the scale and breadth of the holdings of GSE debt and MBS.”
One could argue for or against an ambiguous situation, however it is not the role of the Administration to alter Fannie and Freddie’s role. Only Congress can change the company’s charters.
As with many crimes, there could exist multiple motives for carrying out misdeeds.
Another Consideration: The Debt Ceiling
The following is currently available on UST’s website regarding the debt limit:
The US Government for years has been operating its budget with deficits, i.e. spending exceeding income. Congress sets limits on how much debt the US is legally allowed to carry, but has always been reluctant to do so.
Failing to increase the debt limit would have catastrophic economic consequences. It would cause the government to default on its legal obligations – an unprecedented event in American history. That would precipitate another financial crisis and threaten the jobs and savings of everyday Americans – putting the United States right back in a deep economic hole, just as the country is recovering from the recent recession.
Congress has always acted when called upon to raise the debt limit. Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit – 49 times under Republican presidents and 29 times under Democratic presidents. In the coming weeks, Congress must act to increase the debt limit. Congressional leaders in both parties have recognized that this is necessary. Recently, however, a number of myths about this issue have begun to surface.
That website page was last updated on January 29, 2016, which needs to be considered when reading the passage.
In order to increase the debt level, UST needs to present its case to Congress and, as we have learned from Taibbi’s piece, it’s clear that Treasury has not always been transparent and honest with their dealings with Congress.
UST practiced evil genius when they convinced Congress to raise the debt limit especially with its dealings associated with the conservatorships and the illegal expropriation of both company’s assets, in addition to the bailouts of TBTF.
UST was able to repeatedly request increases to the debt limit in order to “rescue” Fan and Fred, as well as for other rescue efforts. UST convinced Congress that allowing Fan/Fred to fail would be catastrophic to the US… and world economies. So, Congress provided additional funding to UST to “save” the economy – which required increases in the debt ceiling.
That’s called having your cake and eating it, too. The “rescue” actually profited UST and they received several increases to the debt ceiling along the way! Even though UST has profited from various bailout programs, the corresponding debt level increases were never reversed after the bailout money was returned. Neat trick!
The Congressional act that provided the Government with the ability to place Fannie and Freddie into conservatorship is called the Housing and Economic Recovery Act of 2008.
This Act was requested by Hank Paulson and basically raised the debt limit in the event that Fan and Fred needed to be rescued. At the time, Paulson (as well as James Lockhart, then FHFA Director) declared he was not sure that Fan/Fred would need to be rescued, but that didn’t matter – he got his debt limit increase that he requested. Congress raised the debt limit by $800 million.
In an interview on September 8, 2008 on CNBC, Steve Liesman unsuccessfully tried a few times to have Paulson state how much the “bailout” was going to cost.
Liesman: Sorry, but I have to come back to this. There must be some analysis in your mind, is it in the tens of billions, in the hundreds of billions, how much are you prepared to pay?
Paulson: I don’t — there is no specific analysis. This was not — we didn’t sit there and figure this out with a calculator. This was about our financial markets, it was about confidence in the financial markets, confidence in our economy, and the validity of the mortgage finance.
Paulson could not provide a figure and instead said that placing Fan/Fred into conservatorship was more about building confidence. Sound familiar?
“It’s not based on any particular data point,” a Treasury spokeswoman told Forbes.com Tuesday. “We just wanted to choose a really large number.”
It sure appears easier to manage the finances of the US Government when Treasury Secretaries are allowed to receive more and more money to pay the bills. The problem never catches up with the Secretaries… they just blame the past Secretary and pass the problem to the next Secretary. Today, the US Government holds over $19 trillion of debt.
At the end of 2008 before President Obama took office, the national debt was approximately $8 trillion. Obama famously blamed his early problems on his predecessor. Obama is now set to return the favor and pass along nearly 250% more in debt to his successor.
It is clear that the “bailout” of Fannie Mae and Freddie Mac did not cost the US Treasury any money, rather they made billions (and counting) on the scheme. Plus, the Administration received additional debt ceiling increases after the one HERA provided in 2008.
Obviously, all of the debt limit increases were not related to the conservatorships of Fan and Fred. Though it does appear likely that “the most transparent Administration ever” does not want the actual facts behind how they conduct business – including their 10 debt limit adjustments (more that one per year!) – to become public knowledge.
The cover-up can be worse than the crime… perhaps that’s why UST is fighting so hard to delay and conceal!