- Scott Miller
While the 2010 campaign season is not yet in full swing, I’m afraid that Republicans and conservatives are missing what would be as big of a campaign issue as socialized medicine.
That is, we have a lawless, rogue Federal Reserve and Treasury. John Hussman, founder of Hussman Funds, lays out a compelling narrative of just how egregious the Fed & Treasury violations of our constitution have been lately. I’ll excerpt the important parts below, but I encourage you all to read the entire piece:
Timothy Geithner Meets Vladimir Lenin
Last week, while Congress and the nation were preoccupied with the holidays, the Treasury made a Christmas eve announcement that it would be providing Fannie Mae and Freddie Mac unlimited financial support for the next three years.
Put simply, in a single, coordinated stroke, the Treasury and the Federal Reserve have encroached on spending powers that are enumerated for the Congress alone. Under the Housing and Economic Recovery Act of 2008 (HERA), the Treasury has no such open-ended authority. Indeed, the applicable portion of the Act explicitly limits the total amount of mortgage principal (not losses, but total principal) as follows:
“LIMITATION ON AGGREGATE INSURANCE AUTHORITY.—The aggregate original principal obligation of all mortgages insured under this section may not exceed $300,000,000,000.”
That’s $300 billion of original principal. If there is some loophole by which the Treasury’s action is legal, it’s clear that it was no part of Congressional intent, and certainly not broad public support. Taxpayers are now being obligated by the Treasury and the Fed to make good on a potentially much larger volume of bad mortgage loans, made by reckless lenders, guaranteed by Fannie Mae and Freddie Mac in return for a pittance (called a “G-fee”), and packaged into securities which are now largely owned by the Federal Reserve, which has acquired them through outright purchases (not traditional repurchase agreements).
As I wrote several weeks ago, “The Federal Reserve has expanded the U.S. monetary base by more than 150% since the beginning of the recession. That is not a typo. The monetary base has soared from $800 billion to over $2 trillion. Much of this has been accomplished through outright purchases of mortgage-backed securities (not repurchases) and an equivalent creation of base money. Unless these securities can be sold back out into private hands for the same value that was paid to acquire them, the Fed will have effectively forced the U.S. government to make its implicit guarantee of these agency securities explicit, without the authorization of Congress. To the extent that the underlying mortgages default, the U.S. government will be forced to issue additional Treasuries to retire the mortgage backed securities now held by the Fed. Alternatively, if the U.S. does not explicitly bail out Fannie Mae and Freddie Mac to the full extent, the Fed will have created money, with no recourse, and without the equivalent backing of assets or securities on its books. In short, the Fed is now engaging in unlegislated, back-door fiscal policy.”
The Treasury’s action last week completes this circle. It provides a surprise pledge of public resources to make these mortgage loans whole, and an unlegislated commitment to make the “implicit” backing of Fannie Mae and Freddie Mac explicit. All without debate, and without the force of public will. Even as the homeowners underlying these mortgages lose their property to foreclosure.
Or worse, perhaps homeowners who have been diligently making their payments will keep their homes, and homeowners who took out mortgages they couldn’t afford will keep their homes as well with no adverse consequence to the lenders – since the underlying loans are now owned largely by the Fed, and the Treasury has pledged its unlimited support. Why pay one’s debts if it becomes optional, and the Treasury stands to absorb unlimited losses at public expense?
What better time to bury news? Christmas eve release, and almost zero media coverage of the fact that Tax-Cheat Timmy just put the American taxpayer on the hook for all the bad mortgages held by Fannie & Freddie. Loans that you and I had nothing to do with… ZERO, ZIP, NADDA! We were not at the closing tables for the bad loans. We did not play a role in authorizing the loan… no, no, we just get stuck with the damn bill!
But It gets worse… Dr. Hussman explains later in the piece how the Fed & Treasury acted unconstitutionally to bail out the “Fat Cat Bankers” , you know the guys that Obama pretends to disdain, all while his administration continues to let them off the hook for their poor decisions, and puts the costs onto the poor American taxpayer schmuck.
In March 2008, the Federal Reserve and the Treaury provided a $30 billion non-recourse loan to J.P. Morgan in return for toxic securities of Bear Stearns. I strongly argued for regulatory authority to expedite the receivership of non-bank financial institutions, so that the losses of these institutions would be properly borne by the bondholders, without the need for a disorderly unwinding of the operating companies (as we ended up having in the case of Lehman). I emphasized that the “failure” of financial institutions need not result in customer losses or disorderly unwinding. All it requires is that the bondholders of the institution properly absorb the losses. In the case of Bear Stearns, for example, the liabilities of Bear to its own bondholders were far more than sufficient to absorb any loss without any public funds at all.
“In effect, the Federal Reserve decided last week to overstep its legal boundaries – going beyond providing liquidity to the banking system and attempting to ensure the solvency of a non-bank entity. Specifically, the Fed agreed to provide a $30 billion “non-recourse loan” to J.P. Morgan, secured only by the worst tranche of Bear Stearns’ mortgage debt. But the bank – J.P. Morgan – was in no financial trouble. Instead, it was effectively offered a subsidy by the Fed at public expense. Rick Santelli of CNBC is exactly right. If this is how the U.S. government is going to operate in a democratic, free-market society, ‘we might as well put a hammer and sickle on the flag.’
“The Fed did not act to save a bank, but to enrich one. Congress has the power to appropriate resources for such a deal by the representative will of the people – the Fed does not, even under Depression era banking laws. The ‘loan’ falls outside of Section 13-3 of the Federal Reserve Act, because it is not in fact a loan to either Bear Stearns or J.P. Morgan. Bear Stearns is no longer a business entity under this agreement. And if the fiction that this is a ‘loan’ to J.P. Morgan was true, J.P. Morgan would be obligated to pay it back, period. The only point at which the value of the ‘collateral’ would become an issue would be in the event that J.P. Morgan itself was to fail. No, this is not a loan. It is a put option granted by the Fed to J.P. Morgan on a basket of toxic securities. And it is not legal.
“The deal was made under duress, to the benefit of a private company, on the basis of financial assurances that the bureaucrats involved had no business making. The Federal Reserve is going to put up public assets and accept default risk so that Bear Stearns’ own bondholders are effectively immunized?! That’s not sound monetary policy – it’s a picnic for insiders, bought and paid for through the abuse of public funds by government officials too unprincipled even to recognize the abuse.
And to top it all off, we learn that Geithner told AIG to lie about the Treasury laundering money through AIG to save his wall street banking buddies:
The Federal Reserve Bank of New York, then led by Timothy Geithner, told American International Group Inc.to withhold details from the public about the bailed-out insurer’s payments to banks during the depths of the financial crisis, e-mails between the company and its regulator show.AIG said in a draft of a regulatory filing that the insurer paid banks, which included Goldman Sachs Group Inc. and Societe Generale SA, 100 cents on the dollar for credit-default swaps they bought from the firm. The New York Fed crossed out the reference, according to the e-mails, and AIG excluded the language when the filing was made public on Dec. 24, 2008. The e-mails were obtained by Representative Darrell Issa, ranking member of the House Oversight and Government Reform Committee.
The New York Fed took over negotiations between AIG and the banks in November 2008 as losses on the swaps, which were contracts tied to subprime home loans, threatened to swamp the insurer weeks after its taxpayer-funded rescue. The regulator decided that Goldman Sachs and more than a dozen banks would be fully repaid for $62.1 billion of the swaps, prompting lawmakers to call the AIG rescue a “backdoor bailout” of financial firms.
So we have a renegade Fed & Treasury on our hands, and I haven’t heard a peep on this from the Republican leadership! The American people are outraged at all the damn the bailouts, especially the bailouts of the wall street banker buddies of Obama and Geithner. Our kids, and grand kids are going to have to pay for the massive incompetence of the big banks, and Obama let’s them get away scott-free… free to pay massive bonuses just one year after many should have been allowed to fall into extinction.
Get on this issue conservatives… it will have huge legs politically with the American people, and Obama, Geithner and Bernake are chest deep in all of it.
