TJP

Congress should Recall Bank Bailout Funds

Byron A. Ellis-December 11, 2008

Congress had good intention, but bad advice from Secretary Paulson and Chairman Bernanke. Bailing out the banks with no strings attached was bad policy. Congress followed Paulson and Bernanke’s advice of an impending financial collapse without demanding proof.

Thus, they provided $700 billion dollars of taxpayers’ funds to Secretary Paulson and Treasury gave approximately half of the bailout funds (taxpayers’ money) to banks.

Subsequent to the bailout giveaway, several of the banks purchased other companies. Citigroup Inc agreed to purchase the debt-laden Spanish construction company Sacyr Vallehermoso for $10 billion and Bank of America doubled its position on China Construction Bank, tripling it to $14 billion dollars.

American taxpayers with foreclosure and mortgage problems are still awaiting the promised help from Congress and the Bush administration. Help from the Treasury, however, does not appear to be forthcoming.

Taxpayers’ funds allocated to bailing out banks were supposed to be used to buy up the so called “toxic assets,” sub prime mortgages Moreover, the public was led, erroneously, to believe that the economic problems were due to toxic assets. However, mortgage foreclosures (toxic assets) have yet to be addressed by Treasury and the Federal Reserve (Fed).

If sub prime mortgages were the root cause of the economic collapse, one would expect that the Treasury and the Fed would focus on solving the root cause. Their focus, however, was on funding banks and not resolving the mortgage foreclosure problems.

It is incomprehensible that Treasury provided taxpayers funds to financial institutions without any basic requirements to aid homeowners with mortgage problems.

It is possible, however, that highlighting sub prime mortgages as the root cause of the economic problem was merely a red herring. And, that financial institutions needed funds to cover losses due credit default swaps (CDS).

CDS is, basically, an unregulated financial insurance whereby the buyer makes periodic payments to the seller in exchange for the right to a payoff if there is a default or credit event with respect of a third party or reference entity. However, over time it morphed into a betting game where many non-owners could insure a single asset.

The Depository Trust Trading Corp., (DTTC) has registered more than $47 trillion of CDS; roughly twice the size of the U.S. stock market and far in excess of the $7 trillion mortgage market. Some analysts believe that the bankruptcy of Lehman Brothers was tied to about $400 million in CDS.

The board of members that controls the DTTC, includes JPMorgan Chase & Co., Goldman Sachs Group Inc. and other dealers that created and controlled trading in the CDS market. Both, the Treasury Secretary, Henry Paulson, and Assistant Secretary Treasury, Neel Kashkari, overseeing the $700 billion bailout were former employees of Goldman Sachs.

The Treasury and the Fed have done a disservice to Congress. Perhaps Congress should remedy the disservice by passing legislation to recall taxpayers’ funds supplied to bailout the banks and provide the recalled funds to the Federal Deposit Insurance Corporation (FDIC) to help homeowners with mortgage problems.

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