IPFS Brock Lorber

More About: Economy - Economics USA

Wall Street Bankers About to Find Out What they Asked For

Correction: Senator Dodd allowed a few reporters to look at his Countrywide loan docs on Feb 2, 2009. 
Thursday, Elizabeth Warren, the chair of the congressional oversight panel for the Troubled Asset Relief Program testified before the Senate Banking Committee.  She noted that the TARP paid $254 billion to banks in return for $176 billion in equities, a $78 billion overpayment.

While Warren got the press, Neil J. Barofsky, special inspector general for the Troubled Asset Relief Program, released his own 188-page report describing his work over the last two months.  According to the LA Times:

The report says Barofsky also will require senior bank executives to certify under criminal penalty their plans for complying with the executive pay limits that the Obama administration will impose on TARP recipients. 

The plans amount to a rewrite of TARP rules. Certified explanations of the use of TARP funds were not required when the first awards were made last fall, but they were included in a second round of funding, to Bank of America Corp. and Citigroup Inc.
Barofsky said he would conduct wide-ranging investigations of the process by which TARP recipients were selected and the uses they made of the money. He said he would announce one audit target today. Any lies or misrepresentations found in applications for TARP funds would also be grounds for criminal prosecution, he said. (my emphasis)
In the few paragraphs CNN devoted to Barofsky, they noted, “a measure quietly passed by the Senate on Wednesday evening would allow him to seize evidence and ask for warrants without receiving prior approval from the Department of Justice, as well as require the Treasury to address any problems found in audits done by the IG's office.”  And, in the Columbus Dispatch, “the inspector general's office is working with the FBI and other federal law-enforcement agencies, he said. It has hired veteran prosecutors and investigators with a broad range of experience, including securities law.”

Work Camp Foremen
One of the first targets will be Bank of America.  Designated a “healthy bank” by then Treasury Secretary Hank Paulson, BofA received $15 billion in October 2008 while acquiring Merrill Lynch, which also received $10 billion.  In January, BofA CEO Kenneth Lewis was back in Paulson's office asking for an additional $20 billion, plus a $118 billion backstop on Merrill assets, saying that Merrill's portfolio had been overestimated during the shotgun marriage of the two firms.  However, at the time, there was speculation that the overvalued assets were actually those of Countrywide (a sub-prime lender BofA had acquired earlier), not Merrill.

Whether Mr. Lewis' head is brought on a pike to capital hill will probably be up to Senator Chris Dodd, Chairman of the Senate Banking Committee.  As Mr. Dodd received favorable loans from Countrywide, but has yet to release or declare the terms of the loans, a high-profile investigation of BofA may expose those documents publicly.  Likely, to the extent that he can, Dodd will steer early investigations and prosecutions to other, smaller banks of the 250 some who have received TARP funds.

The Cold Corner Office
Certifications, investigations, and prosecutions, combined with new limits on executive compensation will most certainly have a chilling effect on banks as well as automakers who received TARP funds.  It is the unknown nature of the assets these firms hold in their portfolios that have lead to their devaluing and subsequent begging for bailout funds. 

If the assets in a firm's portfolio are valued fairly and objectively, that firm could receive the same capital from financial markets as the TARP, without the governmental strings attached.  However, if the firm wants more or easier capital than the financial markets are willing to furnish, the CEO of that firm will have to falsify the statements made to the Treasury.  It should be clear, then, that any application for TARP funds is de facto evidence of false and misleading certification.

However, criminal investigations and ever-increasing government intervention in the running of these firms should come as a surprise to no one.  In an October 2008 opinion piece for Freedom's Phoenix, even this author predicted such outcomes.

If the Treasury takes no steps to protect its “investment”, we must ask again about the point of taking equity stakes in these firms. If, however, the Treasury goes against its word and assumes the role of managing partner, Treasury officials will be directing actions of these firms contrary to law. While Treasury employees enjoy qualified immunity, the executives and employees of these firms have no such protection from criminal penalties.
That is the next problem these firms will face. Where before they faced civil liability for their actions and omissions, since the Treasury has an equity stake mistakes and fraud are now crimes against the state (ask any number of Siberian residents). This is certainly not unprecedented or trivial; Elliot Spitzer and other prosecutors have gained standing against publicly-traded companies in the past specifically because the state pension plans were invested in these companies.
Executives, employees, and shareholders of participating firms take heed: there will be scapegoats and jail time involved with this program.
Socialism 101
These are the outcomes realized by socialist economies throughout history.  When prices, profits, and losses are replaced by political fancies, there can be no other outcome.  It doesn't matter that you donated to the right campaigns, attended all the right fund raisers, granted special favors, and, in the end, did exactly as the party directed.  When it becomes politically expedient to throw you under the bus, you will have tire marks on your back.

Betting your life and property on the willingness of Senator Chris Dodd taking responsibility for any bad outcomes of his directives is sheer folly.  However, there is such a thing as a first-mover advantage; the heads of the banks and automakers who have participated in these programs will get the best bunks, nearest the chow line and latrines.

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Proverbs 22:7 The rich ruleth over the poor, and the borrower is servant to the lender. King James Bible