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As the Bush administration waned, the Treasury shoveled more than a
quarter of a trillion dollars in tarp funds into
the financial
system—without restrictions, accountability, or even common sense. The
authors reveal how much of
it ended up in the wrong hands, doing the
opposite of what was needed.
By Donald L. Barlett and James B. Steele
October
2009
Just inside the entrance to the U.S. Treasury, on the other side of a
forbidding array of guard stations and
scanners that control access to
the Greek Revival building, lies one of the most beautiful interior
spaces in all of
Washington. Ornate bronze doors open inward to a
two-story-high chamber. Chandeliers line the coffered ceiling, casting
a
soft glow on the marble walls and richly inlaid marble floor.
In this room, starting in 1869 and for many decades thereafter,
the
U.S. government conducted many of its financial transactions. Bags of
gold, silver, and paper currency arrived here
by horse-drawn vans and
were carted upstairs to the vaults. On the busy trading floor,
Treasury clerks supplied commercial
banks with coins and currency,
exchanged old bills for new, cashed checks, redeemed savings bonds,
and took in government
receipts. In those days, anyone could observe
all this activity firsthand—could actually witness the government and
the
nation’s bankers doing business. The public space where this
occurred became known as the Cash Room.
Today
the Cash Room is used for press conferences, ceremonial
functions, and departmental parties. And that’s too bad.
If Treasury
still used the room as it once did, then perhaps we’d have more of a
clue about what happened to the
billions of dollars that flew out of
Treasury to selected American banks in the waning days of the Bush
administration.
Last
October, Congress passed the Emergency Economic Stabilization Act
of 2008, putting $700 billion into the hands of the Treasury
Department
to bail out the nation’s banks at a moment of vanishing
credit and peak financial panic. Over the next three months,
Treasury
poured nearly $239 billion into 296 of the nation’s 8,000 banks. The
money went to big banks. It went
to small banks. It went to banks that
desperately wanted the money. It went to banks that didn’t want the
money
at all but had been ordered by Treasury to take it anyway. It
went to banks that were quite happy to accept the windfall,
and used
the money simply to buy other banks. Some banks received as much as
$45 billion, others as little as $1.5 million.
Sixty-seven percent
went to eight institutions; 33 percent went to the rest. And that was
just the money that went to
banks. Tens of billions more went to other
companies, all before Barack Obama took office. It was the largest
single
financial intervention by Treasury into the banking system in
U.S. history.
But once the money left the building,
the government lost all track of
it. The Treasury Department knew where it had sent the money, but
nothing about what
was done with it. Did the money aid the recovery?
Was it spent for the purposes Congress intended? Did it save banks
from
collapse? Paulson’s Treasury Department had no idea, and didn’t
seem to care. It never required the banks to
explain what they did
with this unprecedented infusion of capital.
Exactly one year has elapsed since the onset
of the financial crisis
and the passage of the bailout bill. Some measure of scrutiny and
control has since been imposed
by the Obama administration, but even
today it’s hard to walk back the cat and trace the money. Up to a
point,
though, it’s possible to reconstruct some of what happened in
the first chaotic and crucial three months of the bailout,
when
Treasury was still in the hands of Henry Paulson and most of the money
was disbursed. Needless to say, there is
no central clearinghouse for
information about the tarp money. To get details of any kind means
starting with the hundreds
of individual recipients, then poring over
S.E.C. filings, annual reports, and other documentation—in other
words,
performing the standard due diligence that the government
itself failed to perform. In the report that follows, we have
no more
than dipped a toe into the morass, but one fact emerges clearly: a lot
of the money wound up in the coffers
of some very surprising
institutions— institutions that should have been seen as “troubling”
as much
as “troubled.”
A Reverse Holdup
The intention of Congress when it passed the bailout bill could not
have
been more clear. The purpose was to buy up defective
mortgage-backed securities and other “toxic assets” through
the
Troubled Asset Relief Program, better known as tarp. But the bill was
in fact broad enough to give the Treasury
secretary the authority to
do whatever he deemed necessary to deal with the financial crisis. If
tarp had been a credit
card, it would have been called Carte Blanche.
That authority was all Paulson needed to switch gears, within a matter
of
days, and change the entire thrust of the program from buying bad
assets to buying stock in banks.
Why did this
happen? Ostensibly, Treasury concluded that the task of
buying up toxic assets would take too long to help the financial
system
and unlock the credit markets. So, theoretically, something
more immediate was needed—hence the plan to inject billions
into
banks, whether or not they wanted or needed the money. To be sure,
Citigroup and Bank of America were in precarious
condition. So was the
insurance giant A.I.G., which had already received an infusion from
the Federal Reserve and ultimately
would receive more tarp money—$70
billion—than any single bank. But rather than just aiding institutions
in
distress, Treasury set out to disburse money in a more freewheeling
way, hoping it would pass rapidly into the financial
system and
somehow address the system-wide credit crunch. Even at this early
stage, it was hard to escape the feeling
that the real strategy was
less than scientific—amounting to a hope that if a massive pile of
money was simply
thrown at the economy, some of it would surely do
something useful.
On Sunday, October 12, between 6:30 and 7 p.m.,
Paulson made a series
of calls to the C.E.O.’s of the biggest banks—the so-called Big 9—and
asked
them to come to Treasury the next afternoon for a meeting on the
financial crisis. He was short on details, as he would
be throughout
the crisis. A series of e-mails obtained by Judicial Watch, a
Washington public-interest group, offers
a window on the moment. The
C.E.O. of Citigroup, Vikram Pandit, had agreed to attend, but asked
his staff to scope out
the purpose. “Can you find out soon as possible
what Paulson invite to VP [Vikram Pandit] for meeting at Treasury
this
afternoon is about?” a Citigroup executive in New York wrote the
bank’s Washington office. When Citi’s
high-powered lobbyist Nicholas
Calio called Paulson’s office, he was told only that Pandit should
attend.
Top
Treasury staffers were likewise in the dark. Paulson’s chief of
staff, James Wilkinson, sent out a 7:30 a.m. e-mail:
“Can someone tell
Michele Davis, [Kevin] Fromer and me who the ‘Big 9’ are?”
By midmorning,
people finally had the names—Vikram Pandit, of
Citigroup; Jamie Dimon, of J. P. Morgan Chase; Kenneth Lewis, of Bank
of
America; Richard Kovacevich, of Wells Fargo; John Thain, of Merrill
Lynch; John Mack, of Morgan Stanley; Lloyd Blankfein,
of Goldman
Sachs; Robert Kelly, of the Bank of New York Mellon; and Ronald Logue,
of State Street bank. Their destination
was Room 3327, the Secretary’s
Conference Room, on the third floor.
Paulson laid before them a one-page memo,
“CEO Talking Points.” He
wasn’t there to ask for their help, Paulson would say; he was there to
tell
them what he expected from them. To “arrest the stress in our
financial system,” Treasury would unveil a $250
billion plan the next
day to buy preferred stock in banks. Paulson’s memo told the bankers
bluntly that “your
nine firms will be the initial participants.”
Paulson wasn’t calling for volunteers; he made it clear the banks
had
no choice but to allow Treasury to buy stock in their companies. It
was basically a reverse holdup, with Paulson
holding the gun and
forcing the banks to take the money.
Some of the C.E.O.’s had misgivings, fearing that
by accepting tarp
money their banks would be perceived as shaky by investors and
customers. Paulson explained that opting
out wasn’t an option. “If a
capital infusion is not appealing,” the memo continued, “you should
be
aware that your regulator will require it in any circumstance.”
Paulson gave the bankers until 6:30 p.m. to
clear everything with
their boards and sign the papers.
Treasury had prepared a form with blank spaces for the name
of the
bank and the amount of tarp money requested. Each C.E.O. filled in the
two blanks by hand—$10 billion,
$15 billion, $25 billion, whatever—and
then signed and dated the document. That was all it took.
“There
Is No Problem Here”
But this was just the beginning. It’s one thing to call nine big banks
into a room
and give them what turned out to be a total of $125
billion. That required little more than a few hours. It’s quite
a
different matter to look out over the landscape of 8,000 other U.S.
banks and decide which ones should get slices
of the tarp pie.
Moreover, the guiding principle was never clear. Was it to give money
to essentially sound banks, so
that they could help inject more money
into the credit markets? Was it to pull troubled banks into the clear?
Was it
both—and more?
Regardless, the mechanism to disburse all this money even more widely
was an entity called
the Office of Financial Stability. Unfortunately,
it wasn’t a functioning office yet—it was just a name written
into a
piece of legislation. To lead it, Paulson picked Neel Kashkari, a
35-year-old former Goldman Sachs banker who
had followed Paulson to
Treasury when he became secretary, in July 2006. Kashkari was an odd
choice to oversee a federal
bailout of private companies. A
free-market Republican, he had downplayed the gravity of the
subprime-mortgage crisis
only months before his appointment,
reportedly sending the message to one gathering of bankers, “There is
no problem
here.”
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