Clarity: Shrouded In Double-Speak

by Rob Kirby, Kirby Analytics. November 17, 2008

Today, we’re going to begin with the cliché, “the more things change – the more things seem to stay the same.”

It was back on Oct. 3rd, 2008 that Rep. Brad Sherman [D-Ca] reported from the floor of the House [C SPAN] the disingenuous nature of the [then] proposed Bail-Out Bill by revealing that dissenting voices had been “threatened” of imminent, dire consequences if the bill was not passed in its proposed form [see link: http://www.youtube.com/watch?v=gnbNm6hoBXc].

Then last week, on Nov. 13, 2008, we learned from Treasury Secretary Hank Paulson that there had in fact been a material change-of-heart in the manner in which the 700 billion Bail-Out Bill funds would be deployed.

This deception immediately raised the concern of law makers that the Treasury Secretary had engaged in a fraudulent act of bait-and-switch:

Joint Letter of Concern to Secretary Paulson After His Announcement to the Change Intent of the Troubled Asset Relief Program

November 13, 2008

Dear Secretary Paulson:

We are writing to express our deep concern over your announcement this morning that the Department of the Treasury will halt all plans to purchase trouble mortgage assets through the Troubled Asset Relief Program (TARP). We are concerned that the program has been fundamentally changed from its original intent and worry that continued changes may erode the structures of accountability put in to protect taxpayers.

When legislation authorizing the TARP was first proposed to members of Congress in mid-September, its primary component was a program to allow the Secretary of the Treasury to purchase “toxic” mortgage assets from financial institutions. The primary reason for this course of action, we were told, was to assist the market in discovering the price of these assets and to return liquidity to the financial markets.

At a hearing of the Senate Banking Committee on September 23, 2008, you made the following comments on the urgent necessity of a troubled asset purchase program:

We have proposed a program to remove troubled assets from the system. This troubled asset relief program has to be properly designed for immediate implementation and be sufficiently large to have maximum impact and restore market confidence. It must also protect the taxpayer to the maximum extent possible, and include provisions that ensure transparency and oversight while also ensuring the program can be implemented quickly and run effectively.

This troubled asset purchase program on its own is the single most effective thing we can do to help homeowners, the American people and stimulate our economy.

Although the legislation was passed on October 3, the program was never implemented and now has been officially abandoned in favor of alternative plans after little more than a month. Such a rapid reversal raises questions about the TARP’s original design as well as the propriety of future plans.

Congress never intended for the TARP to be a blank check that could be spent with unlimited discretion. To ensure proper boundaries are in place to protect the taxpayer, we hope and expect that congressional approval will be sought by the administration before further changes are made.

Sincerely,

U.S. Senator Tom Coburn, M.D., U.S. Senator Richard Burr, U.S. Senator David Vitter

Whether or not Secretary Paulson purposely misled Congress – you will have to judge for yourself; but it does appear that both the Treasury and Federal Reserve are doing everything in their power to obfuscate the true nature of and exactly "who" the ultimate recipients are of these Bail-Out funds:

Bloomberg Sues Fed to Force Disclosure of Collateral
By Mark Pittman

Nov. 7 (Bloomberg) -- Bloomberg News asked a U.S. court today to force the Federal Reserve to disclose securities the central bank is accepting on behalf of American taxpayers as collateral for $1.5 trillion of loans to banks.

The lawsuit is based on the U.S. Freedom of Information Act, which requires federal agencies to make government documents available to the press and the public, according to the complaint. The suit, filed in New York, doesn't seek money damages.

"The American taxpayer is entitled to know the risks, costs and methodology associated with the unprecedented government bailout of the U.S. financial industry," said Matthew Winkler, the editor-in-chief of Bloomberg News, a unit of New York-based Bloomberg LP, in an e-mail.

The Fed has lent $1.5 trillion to banks, including Citigroup Inc. and Goldman Sachs Group Inc., through programs such as its discount window, the Primary Dealer Credit Facility and the Term Securities Lending Facility. Collateral is an asset pledged to a lender in the event that a loan payment isn't made…

There’s a much more in-depth report on the true nature of what’s really occurring with the Bail-Out funds in a detailed report titled, The Federal Reserve – Draining the Swamp, at Kirbyanalytics.com.

Of course, it’s no wonder the folks over at Bloomberg would feel they had been left-out-of-the-loop since Mr. Bernanke and Mr. Paulson had given their word back in Sept. that they would comply with congressional demands for transparency regarding the doling-out of public monies:

Fed Defies Transparency Aim in Refusal to Disclose

Nov. 10 (Bloomberg) -- The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn't require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return…

Then again, perhaps these failures to provide the promised transparency should surprise no-one, since it is a matter of historical record, as told by [then] Federal Reserve Vice-Chairman, Alan Blinder on national television,

"The last duty of a central banker is to tell the public the truth."

Ah, some clarity at last!

Today’s Market

Overseas equity markets began the week on a positive note with Japan’s Nikkei Index gaining 60 points to 8,522. North American markets did not fare as well with the DOW falling 223.70 to 8,273.60, the NASDAQ off 34.80 to 1,482.05 and the S & P losing 22.55 to close at 850.75. NYMEX crude oil futures fell 2.01 to close at 55.03 per barrel.

On foreign exchange markets the U.S. Dollar Index dropped .95 to 86.82.

Interest rates were lower across the board with the benchmark 5 yr. bond finishing at 2.28% while the 10 yr. note ended the day at 3.67%.

The precious metals complex ended the day mixed with COMEX gold futures slipping 7.10 to 736.00 per ounce while COMEX silver futures dropped .22 to 9.31 per ounce. The XAU Index fell 2.98 to 77.22 and the HUI added 6.05 to 180.38.

On tap for tomorrow, at 8:30 a.m. Oct. PPI data is due. Headline number expected -2.0 % vs. prior -.4 %. Core PPI expected 0.0% vs. prior .4%. At 9:00 a.m. Sept. Net Foreign Purchases [TIC] data is due – previously reported at +14.0 B.

Wishing you all a pleasant evening and a happy and productive tomorrow!

Rob Kirby

Contact Information

Rob Kirby | Proprietor, Kirby Analytics Newsletter - Proprietary Macroeconomic Research
Toronto, Ontario, Canada | Observations | FSU Editorials | E-mail