April 22, 2010

"The Dodd bill has unlimited executive bailout authority...That's something Wall Street desperately wants but doesn't dare ask for."  --Rep. Brad Sherman (D-CA), April 14, 2010

BACKGROUND:

The latest job numbers reported by the Bureau of Labor Statistics revealed that the national unemployment rate is currently 9.7 percent.  However, a closer look revealed that the unemployment rate is nearly 13 percent for Hispanic Americans and nearly 17 percent for African-Americans.  Instead of focusing on job creation, Democrats have chosen policies disguised to protect the politically connected on Wall Street, while families and small business owners on Main Street continue to struggle to make ends meet.  The House's TARP II bill creates a $150 billion bailout fund.  The Senate's TARP II bill creates a $50 billion bailout fund.  Both bills allow additional funds to be drawn from Treasury, authorize the FDIC to guarantee corporate debt, and authorize the FDIC and Fed to make creditors of failed firms whole.  More importantly, neither bill helps to create jobs.  In fact, TARP II will kill jobs by limiting the credit options for small business owners.

ISSUES OF CONCERN:

Empowers Washington Politicians:  The Democrats' TARP II bills create bailout funds that essentially amount to permanent slush funds to be distributed to politically connected firms.  For example, in January 2009, the Wall Street Journal reported that OneUnited, a Boston bank "that had seen most of its capital evaporate" and "was under attack from its regulator for allegations of poor lending practices" received $12 million from the original $700 billion TARP "after the intercession of Rep. Barney Frank, the powerful head of the House Financial Services Committee."  This revelation was reported after Treasury stated that it would only give TARP money to healthy banks to generate more lending.

On March 12, 2009, the New York Times reported, "Top federal regulators say they were taken aback when they learned that a California congresswoman who helped set up a meeting with bankers last year had family financial ties to a bank whose chief executive asked them for up to $50 million in special bailout funds.  Representative Maxine Waters, Democrat of California, requested the September meeting on behalf of executives at OneUnited, one of the nation's largest black-owned banks.  Ms. Waters' husband, Sidney Williams, had served on the bank's board until early last year and has owned at least $250,000 of its stock." 

Politicizes the Economy:  In a recent Politico interview, Rep. Brad Sharman, a member of the House Financial Services Committee, in a moment of candor, disclosed the Democrats' plan to spin the Goldman Sachs' fraud story.  When asked how the Democrats can, politically, get ahead of the story, Rep. Sherman responds, "We can say, ‘No taxpayer money to Wall Street firms, their creditors and the counterparts.'  Then we go to the voters and tell them there's no money for Wall Street, but regulation instead.  If you can't run on that slogan, you've got a problem...But there are serious problems with the Dodd bill...The bill contains permanent, unlimited bailout authority." 

According to columnist Timothy Carney, writing in the Washington Examiner, "For his presidential campaign in which Wall Street regulation was a mantra, Obama's top source of funds was investment bank giant Goldman Sachs, whose employees, partners, and executives gave him $995,000-that's the most any politician has raised from any one company in a single election since the age of "soft money' ended."  Interestingly, many reports indicate that the Goldman Sachs' fraud case will help the Democrats to bolster their case for "reform." 

On April 20, 2010, Politico reported that former Obama White House counsel, Gregg Craig, will lead Goldman Sachs' response to the legal and political challenges.  According the Commodity Futures Trading Commission's web site, its current chairman and Obama appointee, Gary Gensler, was a partner at Goldman Sachs and worked there for 18 years.  In November of 2008, Washington Examiner columnist, Tim Carney, reported, that current White House chief of staff, Rahm Emanuel, "was on the payroll of Goldman Sachs, receiving $3,000 per month from the firm to ‘introduce us to people,' in the words of one Goldman partner at the time."  Such questionable relationships justify the public's distrust of government control.

The NY Fed's chairman, Stephen Friedman, sat on the board of Goldman Sachs.  In December 2009, Bloomberg reported, "The Fed's [under the leadership of then-president NY Fed President Tim Geithner] bailout of American International Group Inc., and its decision to pay the insurer's counterparties in full, funneled an additional $12.9 billion to Goldman Sachs."  Interestingly, during his presidential campaign, then-candidate Obama, pledged to limit the influence of lobbyists in his administration.  However, on January 27, 2009, the USA Today reported, "Treasury Secretary Timothy Geithner picked a former Goldman Sachs lobbyist as a top aide...Mark Patterson will serve as Geithner's chief of staff at Treasury, which oversees the government's $700 billion financial bailout program.  Goldman Sachs received $10 billion of that money."   Lastly, the UAW supported then-candidate Obama's presidential campaign and beat out senior creditors in the Chrysler bankruptcy.  

Rewards Bad Judgment:  After the Democrats blocked Republican efforts to rein in the activities of Fannie Mae and Freddie Mac, the firms went bankrupt.  Senator Dodd, as late as July 2008, stated, "These two institutions [Fannie Mae and Freddie Mac] are fundamentally, fundamentally strong."  The taxpayers have lost $126.9 billion propping up the GSEs, and may lose more than $400 billion.  However, accounting and bonus scandals that contributed to Fannie's failure provided former President Clinton's appointees, Franklin Raines and Jamie Gorelick, approximately $116 million in combined compensation and Democrat fundraiser, James Johnson, received over $21 million.  Current White House chief of staff, Rahm Emanuel received over $330,000 as a member of the board of directors of Freddie Mac.  As AEI's Peter Wallison recently noted, "It was in 2005 that the GSEs-which had been acquiring increasing numbers of subprime and Alt-A loans for many years in order to meet their HUD-imposed affordable housing requirements-accelerated the purchases that led to their 2008 insolvency...As a senator, he [Barack Obama] was the third largest recipient of campaign contributions from Fannie Mae and Freddie Mac, behind only Sens. Chris Dodd and John Kerry."

Yet, the Democrats' TARP II proposals offer no solution for Fannie Mae and Freddie Mac. 

REPUBLICAN SOLUTION:

House Republicans introduced the Consumer Protection and Financial Regulatory Enhancement Act (H.R. 3310) to bring a new era of responsibility to the federal government and Wall Street.  The Republican solution is premised on three key principles: ending the bailouts once and for all; restoring market discipline; and protecting taxpayers.  This means ending the misguided government policies that helped cause and worsen the current financial crisis, while propping up failed financial institutions. 

Enhanced Bankruptcy:  The Republican bill provides for the resolution of insolvent non-bank institutions-no matter how large or systemically important-by creating a new chapter of the bankruptcy code to provide an efficient and orderly manner for resolving large non-bank financial institutions.  This new chapter would facilitate coordination between regulators and the courts to ensure technical and specialized expertise would be applied when dealing with complex institutions.  Bankruptcy judges would also have the power to stay claims by creditors and counterparties to prevent runs on troubled institutions.

Government Sponsored Enterprise (GSE) Reform:  The Republican bill would phase out taxpayer subsidies of Fannie Mae and Freddie Mac over a number of years and end the current model of privatized profits and socialized losses.  It would sunset the current GSE conservatorship by a date certain and place Fannie and Freddie in receivership if they are not financially viable at that time.  If they are viable, once the housing market has stabilized, the plan would initiate the process of cutting their ties to the government by winding down the federal subsidies granted through their charters and transitioning Fannie and Freddie into non-government backed entities that compete on a level playing field with other private firms.  In making such reforms, Republicans would address reducing Fannie and Freddie's portfolios, re-focusing Fannie and Freddie on promoting housing affordability, and requiring SEC registration and the payment of taxes.

Fundamental Reform of the Federal Reserve:  The Republican bill would also bring transparency and accountability by directing the Government Accountability Office to conduct extensive audits of the Federal Reserve.  The plan would refocus the Fed on its core mission of conducting monetary policy, relieving it of its current regulatory and supervisory responsibilities by reassigning them to other agencies, and require an explicit inflation target.  These changes would eliminate the Fed's current incentive to prop up the economy through an accommodative monetary policy. The bill would impose limitations on the Fed's use of its authority under section 13(3) of the Federal Reserve Act to respond to "unusual and exigent" circumstances by subjecting actions under 13(3) to Treasury approval and giving Congress the ability to disapprove, placing 13(3) transactions on Treasury's balance sheet, and eliminating the use of this authority on behalf of specific institutions.