$700B Scam

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Bailout managers may be buying own securities

WASHINGTON – The government's plan to make sure private managers of a $700 billion bailout plan are free of conflicts of interest is weak, according to some critics, and allows too much room for abuse.

The law allows the department to offer contracts that are not governed by federal procurement regulations, but requires it to draw up conflict-of-interest guidelines.

Interim guidelines released last week require applicants to disclose "any actual or potential conflicts of interest" that may come into play. Applicants must submit a plan to show how they will "avoid, mitigate or neutralize" such conflicts.

While Treasury employees will oversee the plan, there does not appear to be anything in the rules that requires the government to make sure the applicants are being truthful.

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White House overhauls rescue plan

WASHINGTON – As international leaders gathered here on Saturday to grapple with the global financial crisis, the Bush administration embarked on an overhaul of its own strategy for rescuing the foundering financial system.

Two weeks after persuading Congress to let it spend $700 billion to buy distressed mortgage-backed securities, the administration has put that idea on the back burner in favor of a new approach, which would have the government inject capital directly into the nation's banks – in effect, partially nationalizing the industry.

While the Treasury Department says it still plans to buy up distressed assets, the scope of that plan is unclear. And the federal government, meanwhile, has directed Fannie Mae and Freddie Mac, the government-controlled mortgage giants, to ramp up their purchases of troubled mortgage bonds, in what could be a speedier and less formal process than the reverse auctions proposed by the Treasury.

The new plan to buy stock in banks, which has become the administration's primary focus, comes closer to a partial nationalization of the banking system than at any time since the Depression. In exchange for providing capital, the government would demand some kind of nonvoting minority stake.

The surprising turnaround, announced Friday as part of a coordinated plan to rescue the financial industry, has raised questions about whether Treasury Secretary Henry Paulson squandered valuable time by trying to sell Congress a plan that he and other administration officials had failed to think through in advance.

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Bush to announce expanded bank bailout details

While the administration refused to provide details in advance, industry and government officials with knowledge of the plan said it would include billions of dollars in spending by the government to purchase stock in banks as a way of providing them desperately needed money so they could resume more normal lending. The industry and government officials spoke on condition of anonymity because the details were yet to be formally released.

The administration will use $250 billion of the bailout program recently passed by Congress to buy into U.S. banks, the officials said. The government initially will purchase stock of nine large banks, but the program is expected to be expanded to many others. Among the initial banks participating will be all of the country's largest institutions, including Citigroup Inc., Wells Fargo & Co., JPMorgan Chase & Co, Bank of America Corp. and Morgan Stanley, said one official, who added that administration briefers did not provide any amounts that would be received by individual banks.

The administration expects to spend the $250 billion buying bank stock before the end of this year, this official said. Bush will certify on Tuesday that another $100 billion is needed from the $700 billion rescue program. That would leave the final $350 billion to be spent.

In addition to the stock purchases, the Federal Deposit Insurance Corp. will temporarily provide insurance for loans between banks, charging the banks a premium for doing so.

This FDIC program would take the form of providing insurance for new "senior preferred" debt that one bank would lend to another. This debt would be insured by the FDIC for three years, helping to unlock bank-to-bank lending, which has fallen dramatically because of fears about repayment in the face of billions of dollars of bank losses because of bad loans, primarily in mortgages.

The $700 billion rescue program that Congress passed on Oct. 3 will continue to feature the purchase by the government of banks' bad assets but will now devote a significant part of the effort to direct government purchases of stock in banks, an idea that Paulson brought up only last week.

Democrats in Congress, while supportive of Paulson's desire to expand the program, complained earlier Monday that not enough strings were being attached, such as restricting excessive compensation for Wall Street executives who raked in millions of dollars in bonuses by pursuing risky investment strategies that have now helped push the U.S. financial system to the brink.

The government should purchase only stock in financial firms that agree to cut dividends paid to shareholders, adhere to strict limits on executive compensation and curb their use of exotic investment strategies, said Sen. Charles Schumer, D-N.Y., chairman of the Joint Economic Committee.

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How the Banksters are Making a Killing Off the Bailout

The U.S. Treasury Secretary, Henry Paulson’s, $700 billion bailout plan to buy up distressed mortgage assets has spun off its own $250 billion subsidiary plan (skipping that pesky detail called taxation with representation) to inject $125 billion in equity capital into 9 of the biggest commercial and investment banks in the country.  Another $125 billion may possibly go to smaller regional banks and thrifts, assuming they will sign on to the deal.

And what will taxpayers get for their investment in these financial firms whose stock prices are getting hammered as the public recoils in revulsion at what they have done to our financial system?  The taxpayers, who were not invited to send their own legal representative to the negotiating table, will receive a paltry 5% dividend, exactly half of what Warren Buffett received for his recent investment in General Electric, a company that actually makes something real, like jet engines and light bulbs.

What most Americans do not understand, because mainstream media rarely explains it, is the incestuous relationship between the U.S. Treasury and this small band of financial marauders who busted the entire financial system with insane levels of leveraged derivative bets.

The bulk of the $125 billion will be dispersed among Uncle Sam’s own brokers, or in street parlance, Primary Dealers. Primary dealers are those financial firms anointed by the Federal Reserve to participate in the Fed’s open market activities and are required to participate to a significant degree in buying up Treasury securities at every Treasury auction.  In other words, without these firms, the U.S. Government would have no means of financing its own funding needs.

Treasury, therefore, has an obvious conflict of interest in keeping these firms alive, even when they are the walking dead.

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Mortgage firm arranged stealth campaign

WASHINGTON – Freddie Mac secretly paid a Republican consulting firm $2 million to kill legislation that would have regulated and trimmed the mortgage finance giant and its sister company, Fannie Mae, three years before the government took control to prevent their collapse.

In the cross hairs of the campaign carried out by DCI of Washington were Republican senators and a regulatory overhaul bill sponsored by Sen. Chuck Hagel, R-Neb. DCI's chief executive is Doug Goodyear, whom John McCain's campaign later hired to manage the GOP convention in September.

Freddie Mac's payments to DCI began shortly after the Senate Banking, Housing and Urban Affairs Committee sent Hagel's bill to the then GOP-run Senate on July 28, 2005. All GOP members of the committee supported it; all Democrats opposed it.

"If effective regulatory reform legislation ... is not enacted this year, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system and the economy as a whole," the senators wrote in a letter that proved prescient.

Unknown to the senators, DCI was undermining support for the bill in a campaign targeting 17 Republican senators in 13 states, according to documents obtained by The Associated Press. The states and the senators targeted changed over time, but always stayed on the Republican side.

In the end, there was not enough Republican support for Hagel's bill to warrant bringing it up for a vote because Democrats also opposed it and the votes of some would be needed for passage. The measure died at the end of the 109th Congress.

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So When Will Banks Give Loans?

“Chase recently received $25 billion in federal funding. What effect will that have on the business side and will it change our strategic lending policy?”

It was Oct. 17, just four days after JPMorgan Chase’s chief executive, Jamie Dimon, agreed to take a $25 billion capital injection courtesy of the United States government, when a JPMorgan employee asked that question. It came toward the end of an employee-only conference call that had been largely devoted to meshing certain divisions of JPMorgan with its new acquisition, Washington Mutual.

Which, of course, it also got thanks to the federal government. Christmas came early at JPMorgan Chase.

The JPMorgan executive who was moderating the employee conference call didn’t hesitate to answer a question that was pretty politically sensitive given the events of the previous few weeks.

Given the way, that is, that Treasury Secretary Henry M. Paulson Jr. had decided to use the first installment of the $700 billion bailout money to recapitalize banks instead of buying up their toxic securities, which he had then sold to Congress and the American people as the best and fastest way to get the banks to start making loans again, and help prevent this recession from getting much, much worse.

In point of fact, the dirty little secret of the banking industry is that it has no intention of using the money to make new loans. But this executive was the first insider who’s been indiscreet enough to say it within earshot of a journalist.

(He didn’t mean to, of course, but I obtained the call-in number and listened to a recording.)

“Twenty-five billion dollars is obviously going to help the folks who are struggling more than Chase,” he began. “What we do think it will help us do is perhaps be a little bit more active on the acquisition side or opportunistic side for some banks who are still struggling. And I would not assume that we are done on the acquisition side just because of the Washington Mutual and Bear Stearns mergers. I think there are going to be some great opportunities for us to grow in this environment, and I think we have an opportunity to use that $25 billion in that way and obviously depending on whether recession turns into depression or what happens in the future, you know, we have that as a backstop.”

Read that answer as many times as you want — you are not going to find a single word in there about making loans to help the American economy. On the contrary: at another point in the conference call, the same executive (who I’m not naming because he didn’t know I would be listening in) explained that “loan dollars are down significantly.” He added, “We would think that loan volume will continue to go down as we continue to tighten credit to fully reflect the high cost of pricing on the loan side.” In other words JPMorgan has no intention of turning on the lending spigot.

It is starting to appear as if one of Treasury’s key rationales for the recapitalization program - namely, that it will cause banks to start lending again - is a fig leaf, Treasury’s version of the weapons of mass destruction. In fact, Treasury wants banks to acquire each other and is using its power to inject capital to force a new and wrenching round of bank consolidation. As Mark Landler reported in The New York Times earlier this week, “the government wants not only to stabilize the industry, but also to reshape it.” Now they tell us.

Indeed, Mr. Landler’s story noted that Treasury would even funnel some of the bailout money to help banks buy other banks. And, in an almost unnoticed move, it recently put in place a new tax break, worth billions to the banking industry, that has only one purpose: to encourage bank mergers. As a tax expert, Robert Willens, put it: “It couldn’t be clearer if they had taken out an ad.”

Friday delivered the first piece of evidence that this is, indeed, the plan. PNC announced that it was purchasing National City, an acquisition that will be greatly aided by the new tax break, which will allow it to immediately deduct any losses on National City’s books.

As part of the deal, it is also tapping the bailout fund for $7.7 billion, giving the government preferred stock in return. At least some of that $7.7 billion would have gone to NatCity if the government had deemed it worth saving. In other words, the government is giving PNC money that might otherwise have gone to NatCity as a reward for taking over NatCity.

I don’t know about you, but I’m starting to feel as if we’ve been sold a bill of goods.

There are lots of reasons the markets remain unstable — fears of a global recession, companies offering poor profit projections for the rest of the year, and the continuing uncertainties brought on by the credit crisis. But another reason, I now believe, is that investors no longer trust Treasury. First it says it has to have $700 billion to buy back toxic mortgage-backed securities. Then, as Mr. Paulson divulged to The Times this week, it turns out that even before the bill passed the House, he told his staff to start drawing up a plan for capital injections. Fearing Congress’s reaction, he didn’t tell the Hill about his change of heart.

Now, he’s shifted gears again, and is directing Treasury to use the money to force bank acquisitions. Sneaking in the tax break isn’t exactly confidence-inspiring, either. (And let’s not even get into the less-than-credible, after-the-fact rationalizations for letting Lehman default, which stands as the single worst mistake the government has made in the crisis.)

Late Thursday afternoon, I caught up with Senator Dodd, and asked him what he was going to do if the loan situation didn’t improve. “All I can tell you is that we are going to have the bankers up here, probably in another couple of weeks and we are going to have a very blunt conversation,” he replied.

He continued: “If it turns out that they are hoarding, you’ll have a revolution on your hands. People will be so livid and furious that their tax money is going to line their pockets instead of doing the right thing. There will be hell to pay.”

Let’s hope so.

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Waxman tells banks to justify bonuses

Congressional investigators demanded State Street Corp., Citigroup Inc., and seven other banks justify billions of dollars in pay and bonuses after they accepted $125 billion as part of a taxpayer-funded bailout.

In letters to the nine firms yesterday, Representative Henry Waxman, the chairman of the House Committee on Oversight and Government Reform, said they collectively will pay $108 billion in employee compensation and bonuses in the first nine months of 2008, almost the same amount as last year.

"I question the appropriateness of depleting the capital that taxpayers just injected into the banks through the payment of billions of dollars in bonuses, especially after one of the financial industry's worst years on record," Waxman wrote.

The letter was also sent to Bank of America, Bank of New York Mellon, JPMorgan Chase & Co., Merrill Lynch & Co., Morgan Stanley, Goldman Sachs Group, and Wells Fargo & Co. Waxman asked the firms to supply the information by Nov. 10.

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Spending $700 Billion: Is the Bailout Fund Running Out?

The Treasury Department is quickly running out of money to invest in troubled banks. A TIME.com analysis of public records shows that nearly a third, or $216 billion, of the $700 billion that Congress approved to be spent just six weeks ago has already been spent or will soon be sent to just 67 banks. That's a small fraction of the up to 1,800 financial firms that are expected to apply for government assistance.

On Monday, Randal Quarles, a managing director at The Carlyle Group and a former Treasury official, told an audience at a conference on the Treasury's bailout fund, which is called the Troubled Asset Relief Program (TARP), that he thought the fund could need to double in size. "The amount of assistance provided so far is not enough," Quarles said. "The losses out there are materially larger than TARP, and will likely require more support than the current $700 billion."

While the Treasury still has about $480 billion to spend, it's not clear how much of what is left will be used for direct investments into banks. Shortly after the Emergency Economic Stabilization Act was passed by Congress, the Treasury said $250 billion was going to be used to buy shares in banks. That left $450 billion to buy up troubled mortgage bonds.

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Paulson says troubled assets will not be purchased

WASHINGTON – Urgently shifting course, the Bush administration is abandoning the centerpiece of its massive $700 billion economic rescue plan and exploring new ways to shore up not only banks but credit-card, auto-loan and other huge nonbank businesses. Democrats are pressing hard to include a multibillion-dollar bailout for faltering automakers, too — over administration objections.

Unimpressed by any of the talk on Wednesday, Wall Street dove ever lower.

"The facts changed and the situation worsened," Treasury Secretary Henry Paulson said at a news briefing, explaining the administration's switch from its original plan to help financial institutions by buying up troubled assets, primarily securities backed by bad home loans.

Despite its new flexibility, the administration remained opposed to using the rescue fund to bail out the ailing auto industry or to provide guarantees for home loans, an idea that supporters contend offers the greatest hope for helping legions of Americans who are facing foreclosure.

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Dennis Kucinich (D-OH) - "Racketeering On A Scale This Country Has Never Seen Before!!!"

Darrel Issa (R-CA) - Domestic Policy Committee meeting with Kashkari

Ellijah Cummings (D-MD) - How are you measuring success of lending from TARP?

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Lawmakers blast shifts in financial bailout plan

"It's very clear that Treasury cannot and will not make the effort to keep people in their homes," said Rep. Darrell Issa, R-Calif., top Republican on the House Oversight and Government Reform subcommittee on domestic policy.

Rep. Dennis Kucinich, D-Ohio, chairman of the panel, said the Treasury Department had "abdicated its responsibility" to prevent home foreclosures.

He said the change in implementing the bailout announced by Treasury Secretary Henry Paulson this week "breaks with congressional intent, contradicts public assurances previously made by Treasury and leaves the federal government without an adequate mechanism to stem the tide of home foreclosures."

Kucinich and others also expressed concern that the bailout money was being used indirectly to fund the payment of bonuses, compensation and dividends by financial firms. Similar concerns were expressed at a Senate Banking Committee hearing Thursday where committee chairman Sen. Chris Dodd, D-Conn., stressed that "hoarding capital and acquiring healthy banks are not ... reasons why Congress authorized $700 billion in emergency funding."

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A Champion of Wall St. Reaps the Benefits

WASHINGTON — As the financial crisis jolted the nation in September, Senator Charles E. Schumer was consumed. He traded telephone calls with bankers, then became one of the first officials to promote a Wall Street bailout. He spent hours in closed-door briefings and a weekend helping Congressional leaders nail down details of the $700 billion rescue package.

The next day, Mr. Schumer appeared at a breakfast fund-raiser in Midtown Manhattan for Senate Democrats. Addressing Henry R. Kravis, the buyout billionaire, and about 20 other finance industry executives, he warned that a bailout would be a hard sell on Capitol Hill. Then he offered some reassurance: The businessmen could count on the Democrats to help steer the nation through the financial turmoil.

The message clearly resonated. The next week, executives at firms represented at the breakfast sent in more than $135,000 in campaign donations.

Senator Schumer plays an unrivaled role in Washington as beneficiary, advocate and overseer of an industry that is his hometown’s most important business.

An exceptional fund raiser — a “jackhammer,” someone who knows him says, for whom “ ‘no’ is the first step to ‘yes,’ ” — Mr. Schumer led the Democratic Senatorial Campaign Committee for the last four years, raising a record $240 million while increasing donations from Wall Street by 50 percent. That money helped the Democrats gain power in Congress, elevated Mr. Schumer’s standing in his party and increased the industry’s clout in the capital.

But in building support, he has embraced the industry’s free-market, deregulatory agenda more than almost any other Democrat in Congress, even backing some measures now blamed for contributing to the financial crisis.

Other lawmakers took the lead on efforts like deregulating the complicated financial instruments called derivatives, which are widely seen as catalysts to the crisis.

But Mr. Schumer, a member of the Banking and Finance Committees, repeatedly took other steps to protect industry players from government oversight and tougher rules, a review of his record shows. Over the years, he has also helped save financial institutions billions of dollars in higher taxes or fees.

In an interview, Mr. Schumer said that until the recent market turmoil, he did not fully appreciate how much risk Wall Street had assumed and how much damage its practices could inflict on ordinary Americans. “It is a learning process, no question about it, an evolution,” he said, adding that he now believed that investors and homeowners must be better protected.

But he defended his record. “Wall Street and Main Street are tied together,” he said. “Often times, they are not in conflict. When they are in conflict, I tend to side with Main Street.”

While Mr. Schumer has taken some pro-consumer stances, his critics fault him for tilting too far toward Wall Street in balancing his responsibilities.

“He is serving the parochial interest of a very small group of financial people, bankers, investment bankers, fund managers, private equity firms, rather than serving the general public,” said John C. Bogle, the founder and former chairman of the Vanguard Group, the giant mutual fund house. “It has hurt the American investor first and the average American taxpayer.”

Brash and brainy (perfect SATs and double Harvard degrees), Chuck Schumer, now 58, learned early in his career how to talk to the financiers and chief executives who would become a vital constituency for him. Though he did not grow up in that world — his father owned a small exterminating business in Brooklyn — he quickly showed a keen grasp of complex financial issues.

It's hard to believe that those last two quotes came from the same story. On one hand:

Mr. Schumer said that until the recent market turmoil, he did not fully appreciate how much risk Wall Street had assumed and how much damage its practices could inflict on ordinary Americans. “It is a learning process, no question about it, an evolution,” he said

But on the other hand, he was Brash and brainy and quickly showed a keen grasp of complex financial issues. Seems like this guy has a real keen grasp of how to lie and cover his ass.

Soon after arriving in Congress in 1981, Mr. Schumer snared a seat on the Financial Services Committee, which he viewed as the best way to help New York. While reliably liberal on many social issues, he established himself as a pragmatic Democrat willing to align with powerful business interests.

Mr. Schumer’s political rise — he moved in 1999 to the Senate, where he now has a party leadership post — paralleled Wall Street’s growing influence in Washington. As more Americans invested in the markets and financial institutions had a greater global reach, the industry came to rival the manufacturing sector as a driving force of the United States economy.

Mr. Schumer became a magnet for campaign donations from wealthy industry executives, including Jamie Dimon, now the chief executive of JPMorgan Chase; John J. Mack, the chief executive at Morgan Stanley; and Charles O. Prince III, the former chief executive of Citigroup. And he was not at all reluctant to ask them for more.

Donors describe the Schumer pitch as unusually aggressive: He calls repeatedly to suggest breakfast or dinner, coffee or cocktails. He enlists intermediaries to invite prospects to events and recruits several senators to tag along. And he presses for the maximum contribution — “I need you to max out,” he is known to say — then follows up by asking that a donor’s spouse and four or five friends write checks, too.

“He was probably the kid that sold the most candy in grade school,” said Julie Domenick, a Democratic lobbyist who has given to the senatorial campaign committee. “He is not shy.”

Mr. Schumer, in the interview, acknowledged his full-speed-ahead approach. “Any job I do, I work hard at and I try to succeed at,” he said.

As a result, he has collected over his career more in campaign contributions from the securities and investment industry than any of his peers in Congress, with the exception of Senator John F. Kerry of Massachusetts, the Democratic nominee for president in 2004, according to the Center for Responsive Politics, which analyzed federal data. (By 2005, Mr. Schumer had so much cash in reserve that he shut down his fund-raising efforts.)

In the last two-year election cycle, he helped raise more than $120 million for the Democrats’ Senate campaign committee, drawing nearly four times as much money from Wall Street as the National Republican Senatorial Committee. Donors often mention his “pro-business message” and record of addressing their concerns. John A. Kanas, the former chief executive of North Fork Bank, said: “He would solicit my opinion, listen to my advice and he appeared to take it into consideration.”

Lee A. Pickard, a lawyer representing clients including the Bank of New York, whose employees have been significant donors to Mr. Schumer and other Senate Democrats, turned to Mr. Schumer last year to successfully beat back a regulatory initiative by the Securities and Exchange Commission. “If you get Chuck Schumer on your side, you are O.K.,” he said.

To Christopher Cox, the Republican chairman of the Securities and Exchange Commission, the need for action was obvious in the spring of 2006.

His agency, which would later be criticized for a 2004 ruling that let banks pile up debt, had grown deeply concerned about lack of oversight of the nation’s largest credit-rating agencies, like Standard & Poor’s and Moody’s Investors Service. Linchpins of the financial system, their ratings are vital to safeguarding investors by evaluating the risks of bonds and other debt. After the collapse of Enron and WorldCom, which had repeatedly been awarded favorable ratings, the agencies had agreed to meet voluntary standards.

But the S.E.C. concluded that those agreements were inadequate, so Mr. Cox urged Congress to give his agency oversight powers. “Without additional legislative authority, the S.E.C. will not be able to regulate in a thoroughgoing way,” he told the Senate banking committee at an April 2006 hearing.

The plan drew broad, bipartisan support on Capitol Hill. But executives at the credit-rating agencies soon began pressing Mr. Schumer and other allies in Congress to block the proposal or at least limit its reach, according to current and former employees.

“They knew Schumer would support them,” said one former Moody’s executive, who asked not to be named because he still works in the industry. “He was their go-to guy,” the executive said.

While the Manhattan-based agencies were not significant campaign donors to Mr. Schumer or the Senate campaign committee, their lobbyists and many of their clients were.

At that time, revenues for the agencies were skyrocketing. The housing market was robust, and Wall Street investment firms were paying the agencies to rate various mortgage-backed securities after first advising the firms — and also collecting fees — on how to package them to get high credit ratings.

It was an obvious conflict of interest, financial experts now say. Despite their high ratings, many of those securities, based on risky loans, would prove worthless, roiling markets and threatening financial institutions worldwide.

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President Decries 'Shameful' Bonuses For Wall St. CEOs

President Obama yesterday scolded Wall Street bankers who received millions of dollars in bonuses last year, calling the payouts "shameful" and chiding the executives for a lack of personal responsibility at a precarious time for the nation's economy.

"There will be time for them to make profits, and there will be time for them to get bonuses," the clearly irritated president said. "Now's not that time. And that's a message that I intend to send directly to them."

Obama's comments came on the same day that the Democratic chairman of the Senate Banking Committee threatened to bring before his committee any Wall Street executives who take big bonuses after their firms are propped up with public money.

"Whether it was used directly or indirectly, this infuriates the American people and rightly so," said  Sen. Christopher J. Dodd (D-Conn.). "So I say to anyone else who does it: If you do it, I'm going to bring you before the committee."

The president said he was reacting to a New York Times report about Wall Street executives who had given themselves almost $20 billion in bonuses in 2008, the same amount they received collectively during the much more bullish 2004.

The article was based on a report by the New York state comptroller's office that said last year's total of Wall Street bonuses was the sixth-highest ever, despite the poor economic performance of the firms.

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Treasury overpaid to the tune of $78 Billion!

The chairwoman of a Congressional TARP ovesight panel just dropped a bombshell nugget in a Senate banking Committe Hearing. She says that Treasury -- using TARP money -- vastly overpaid in its first 8 purchases -- to the tune of 78Billion dollars. This means that more than 10% of the 700 Billion in TARP funds were essentially wasted.