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Feature
Secretary Loophole
(Page 2 of 4)
Instead, Geithner and crew dusted off Section 13(3) of the Federal Reserve Act—a special exception created during that fabled period of government growth, the Great Depression. This section of the law allows a Federal Reserve Bank “in unusual and exigent circumstances,” to open the discount window to non-banks.
This is the clause the Fed invoked in order to lend money to Bear Stearns. But to trigger this extraordinary clause the law requires “the affirmative vote of not less than five members” of the Fed’s Board of Governors. At the time, however, the Board of Governors had two vacancies, meaning there were only five members total. A Federal Reserve memo explains why this presented a problem:
Section 13(3), which relates to discounts to individuals, partnerships, and corporations, generally requires an affirmative vote of at least five members of the Board to approve an extension of credit under that provision. One member of the Board was unavailable at the time of the Board vote because he was en route to the Board from Helsinki, Finland.
So this 13(3) route had a roadblock—but Geithner found safe passage elsewhere in the Federal Reserve Act: “Any action that the Board is otherwise authorized to take under the second paragraph of section 343 of this title may be taken upon the unanimous vote of all available members then in office.” If someone is traveling from Helsinki, he is not “available,” now is he?
It was a loophole, and Geithner drove the New York Fed through it.
But it doesn’t end there. In order to keep Bear Stearns alive, the Fed called on J.P. Morgan to buy Bear Stearns. J.P. Morgan was willing to go along, but it didn’t want to own the “toxic assets” on Bear’s books. Couldn’t the Fed just buy the toxic parts of Bear and let J.P. Morgan buy the rest? No, the Fed isn’t allowed to buy stuff. They would need another loophole. It would come in the form of a “Special Purpose Vehicle,” that pillar of Enron’s financial shenanigans.
The website Talking Points Memo quotes an expert on how this loophole worked:
By law, the Fed isn’t allowed to buy assets—it can only lend, as lender of last resort. That was a problem for the Bear Stearns bailout, because JP Morgan said it would only buy Bear if someone else assumed responsibility for the crap. Fed came up with this idea to start a shadow company, called a special purpose vehicle (…the New York Fed called their SPV “Maiden Lane LLC” for name of the street the NY Fed is located on in southern Manhattan). The deal then was JP Morgan put $1 billion into Maiden Lane, the Fed put $29 billion in cash into it. Maiden Lane paid Bear Stearns $30 billion, which went straight back to JP Morgan as this deal happened simultaneously to JP’s purchase of Bear. So Morgan got $30 billion in cash ($29 billion net) and the Fed got stuck owning the crap, but was legally only making a loan to Maiden Lane, who was the legal owner (Maiden Lane was incorporated not in NYC, but in Delaware to avoid paying taxes).
So, while a few citizens’ groups, left and right, have sued the Fed for its Bear Stearns bailout, it appears that Geithner, Bernanke, and the Fed always followed the letter of the law, even if they followed it somewhere nobody ever thought it could go.
AIG = Additional Ingenuity From Geithner
I EXPLAINED THE COMPLEX Bear Stearns bailout in some detail to illustrate how Geithner and the Fed, acting under many seeming constraints of the law, had to find ways to change the Fed’s nature without breaking the law. For the AIG bailouts, the details are even more arcane and the loopholes nearly as fine.
Here’s a brief synopsis: The Bush brain trust, with Bernanke and Geithner at the helm, wanted the government to buy AIG in order to bail out those companies to whom AIG owed money—AIG’s “counterparties” as they put it. But no regular government agency could buy a private company without an authorization and appropriation from Congress. The Federal Reserve Bank of New York, headed by Geithner, on the other hand, could make up money out of thin air—that’s sort of why Congress created the Fed in the first place. Once again, though, Geithner’s bank couldn’t go buying up companies. What to do? In the end, the New York Fed loaned AIG $85 billion (eventually, it would loan more), and in exchange, the federal government—but not the Fed—got 79.9 percent ownership in AIG.
In fact, nobody really knew just who took ownership of AIG, which led to the lack of oversight regarding those bonus payments that caused such an uproar this March.
And, oh yeah—those AIG bonuses? They were made possible by another Geithner loophole. Obama had demanded that his stimulus package include a provision limiting employees’ pay at businesses bailed out by government. Geithner’s Treasury Department, however, requested that pre- promised bonuses be exempted from this restriction. It wasn’t until weeks after the uproar ensued that Geithner admitted his team had written the bonus exception into the stimulus.
Taking a step back, the whole AIG bailout on its face is akin to a loophole. Bailing out AIG is really bailing out its counterparties, such as Goldman Sachs and Deutsche Bank. Before the Great Wall Street Bailout, AIG was a backdoor way to funnel cash, with no appropriations and no obvious fingerprints, to ailing Wall Street firms.
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Paul Milenkovic| 5.15.09 @ 11:08AM
Threading a needle through a loophole? The payroll tax matter was one of smashing an M1-A1 tank through a building.
Much as there has been populist and right-wing snark against Mr. Daschle getting a limo and not counting that as income, the average person out there, who admittedly doesn't get a free limo, can at least sympathize with getting some non-monetary freebie. Tell me that no one here has not put Frequent Flier miles to personal use (my reading of the tax rules is that there is an exemption for Frequent Flier miles being taxable income, and that is probably the result of airline lobbying).
Secretary Sibelius has also been the target of criticism for whatever tax problem she had. But her problem involved deductability of mortgage interest when her house was in some kind of post-sale limbo, and this kind of gray-area tax problem can happen to any of us.
But as to Mr. Geithner, there was not gray-area or "I forgot to enter it" or "TurboTax made me do it" excuse that works here. It has been reported that the HR people where he worked took people aside and told them they had to pay the tax. And we are not talking about the Income Tax here. We are talking the Payroll Tax, you know, that regressive tax on working stiffs who would not otherwise have any withholding from their meagre paychecks, that tax that funds Senior Citizens through the Third Rail of American Politics: Social Security and Medicare.
I mean here is the head of the Treasury which is in charge of the IRS. Maybe this is a "it took Nixon to go to China" matter. Perhaps Geithner is the only person with the moxie for the financial crisis, and it took a left-liberal President to put him in charge as a right-conservative President would never be allowed to to this.
Tim| 5.15.09 @ 2:26PM
Dr Ray Stantz: Personally, I liked the university. They gave us money and facilities, we didn't have to produce anything! You've never been out of college! You don't know what it's like out there! I've *worked* in the private sector. They expect *results*.
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Twitted by Lyn_Sue links to this page. Here’s an excerpt:
D. Smith| 5.15.09 @ 11:36PM
Interesting, insightful dissection of Tiny Tim, omitting one of his more creative interpretations of IRS filing of taxes. Did TurboTax tell him it was OK to call posh summer camp tuition for his kid "child care"?
In my opinion, this kind of penny-ante skirting of paying one's taxes requires a criminal mind with the sensitivity of a safe-cracker. A perfect fit for the Obama Administration.
Every time I hear of Geithner's avoidance of four years of IMF taxes, I think anyone who calls summer camp "child care" and gets away with it can get away with anything with the asleep-at-the-wheel IRS. How about private school tuition, is that child care, too?
Just wait until we get Souter's replacement. We will have plenty to howl about, then. A Supreme Court Justice chosen based on empathy, compassion and having "been there". Describes Oprah, doesn't it? You don't have to be a lawyer to be a Supe.
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An Open Letter to American Government and Business:
Okay, that’s it; why does the United States continue to deal with China?
Our nation has been subtly at war with China. Communist China has already breached the borders of Capitalist America, in many ways. And their insidious “attacks” have been deadly. America needn’t even engage in a military war with China, China has already successfully attacked American families in their very homes. China has assaulted us through the avenues of our own consumerism:
- China has killed our pets, with inferior tainted petfood.
- China has killed our elderly and sick, with inferior tainted drugs.
- China has sickened our children, with inferior lead and toxin laden toys.
- China has destroyed our newly-constructed homes values, with inferior tainted drywall.
- China has destroyed our job base, through outsourced manufacturing jobs.
- China mocks fair trade, by perennially running trade imbalances with the U.S.
- China damages our digital data, through state sponsored cyber attacks and censorsoring our companies.
- China has stolen our personal identities, through online identity theft.
- China steals our stories, by wantonly ignoring copyright laws.
- China continues to flagrantly harm the global environment; by poor pollution controls, by on-lining coal-burning power plants one-a-week and by dumping cheap plastic goods the world over.
- China ruins economies the world over, by keeping their own currency’s value artificially low.
- China despises the American Dollar, China wants to no longer base the International Monetary Fund currency on the U.S. Dollar.
- ...and ultimately China could very easily behead our economy, when they call in the U.S. debts which they hold.
Capitalist America has undermined itself in the short-run by “selling out” to Communist China, at the long-term expense of having a robust American economy. China is no friend the the United States. Ultimately, if America wants to reverse it’s decline during this 21st century, American government and business leaders must help our nation by limiting and eliminating many imbalanced policies and dealings with China. No excuses, no gray areas. Period.
- A Concerned American
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