Posts Tagged ‘Treasury Secretary’

The Canary in the Mine Shaft

Thursday, March 25th, 2010

Brooksley Born predicted market collapse and financial meltdown and nobody listened.  A decade before the financial meltdown, one woman was sounding the alarm that a catastrophe was coming.  That woman is Brooksley Born, who correctly predicted that investments known as over-the-counter derivatives could cause a financial crisis.  As Chairman of the Commodity Futures Trading Commission (CFTC) during the second Clinton administration, Born would wake up “in a cold sweat” fearing that derivatives like credit-default swaps might cause the economy to implode.

Ultimately, Born’s worst fears became reality despite the fact that former Federal Reserve chairman Alan Greenspan had dismissed her concerns.  According to Born, Greenspan “explained there wasn’t a need for a law against fraud because if a floor broker was committing fraud, the customer would figure it out and stop doing business with him.”  The comment made no sense to Born, a Stanford-educated lawyer who had spent most of the 1980s defending clients enmeshed in a conspiracy perpetrated by Nelson and William Hunt, the wealthy Texas brothers who had duped investors while trying to control the world silver market.

The CFTC was established in the 1970s, primarily to regulate futures contracts bought by farmers as a hedge against price fluctuations.  By the time Born took the CFTC’s helm in 1996, the futures market had grown more sophisticated.  Born believed that the mostly unregulated “dark markets” were showing signs of trouble.  “I was very concerned about the dark nature of these markets,” Born said.  “I didn’t think we knew enough about them.  I was concerned about the lack of transparency and the lack of any tools for enforcement and the lack of prohibition against fraud and manipulation.”

Born has now been vindicated, and the Obama administration has introduced legislation to regulate the derivatives markets.  Additionally, she was honored with a prestigious John F. Kennedy Profiles in Courage award last year.

$700 Billion Financial Bailout Plan Still Evolving

Friday, November 21st, 2008

Treasury Secretary Henry Paulson is sitting on $350 billion dollars of the taxpayers’ money, and can’t quite settle on the best way to spend it.  When approved by Congress in October, the $700 billion Troubled Assets Relief Program (TARP) bill’s purpose was to purchase bad mortgage assets that had frozen the credit markets. The Treasury Department has already used approximately half of the money to capitalize banks and prevent insurer American International Group (AIG) from going into financial default.  The problem with the TARP bill is that conditions keep changing and Treasury is altering its focus to one of helping banks that are sound to stay healthy – with the ultimate goal of thawing credit.  Meanwhile, Treasury is coordinating with the Federal Reserve to restore consumer confidence so people start buying cars, taking out student loans, or even using their credit cards again.  The question is:  which version of TARP eventually will unfreeze the debt markets.  Given the complexity of the situation, there is no simple answer.  Because both Wall Street and Main Street are equally impacted, TARP is likely to end up providing some amount of relief to both groups.

So, the question is, which TARP is it?  We invite your comments.

http://www.reuters.com/article/ousiv/idUSTRE4AB7P820081112

http://www.chicagotribune.com/business/chi-thu-crisis-bailout-shift-nov13,0,2664351.story

The Federal Government Takes First Steps to Bail Out Banks

Tuesday, October 21st, 2008

The Treasury Department is spending the first $250 billion of the $700 billion rescue bill that Congress recently approved in an attempt to defuse the financial crisis that has dominated the headlines for weeks.  According to a recent article on GlobeSt.com, the move – which partially nationalizes the banking system – is seen by some as conflicting with the free-market principles that typically have characterized the American economy. To shore up the United States banking system, the Treasury Department is partially nationalizing nine banks by using $125 billion to purchase minority stakes in major financial institutions.  Although the banks haven’t been named, they are believed to include Citigroup, Goldman Sachs, Wells Fargo, J.P. Morgan Chase, Bank of America, Merrill Lynch, Morgan Stanley, State Street and Bank of New York Mellon Corporation.  The Treasury Department is also expected to make the remaining $125 billion available to banks and thrifts across the country to purchase their preferred shares.

According to Treasury Secretary Henry Paulson, “Today’s actions are not what we ever wanted to do, but are what we must do to restore confidence to our financial system.  The needs of the economy require that our financial institutions not take this new capital to hoard it, but to deploy it.”  Just weeks before the presidential election, outgoing President George W. Bush sees the move as a short-term measure.  “The government’s role will be limited and temporary.  These measures are not intended to take over the free market, but to preserve it,” Bush said.

The question now is whether the banks will use the capital as the government intends – lend it to businesses and consumers again – or will they use it to sweeten their own balance sheets?  The government, no doubt, intends to exert significant pressure on the institutions to loosen credit so that people can start buying big-ticket items like houses and cars again.