The confirmation of Ben Bernanke moved a step forward today…. the vote was 16 - 7 in favor…
But an expanding group of Senators is questioning the role of Chairman Bernanke over his role in the bailout of AIG, Goldman Sachs and European banks in September of 2008.
In the hearing two camps emerged as Senators praised and criticized the efforts of Chairman Bernanke. The praise was generally lukewarm and the criticism was heated.
Senators who want to deny Chairman Bernanke believe that the American public has been ill served while Wall Street has emerged from the crisis with only minor damages.
The belief that the central bank often favors the interests of the banking community is longstanding. These tensions are not unique to Ben Bernanke.
President Andrew Jackson abolished the Second Bank of the United States in 1832. Jackson laid out his reasons for ending the national bank in his veto message:
- It concentrated the nation’s financial strength in a single institution.
- It exposed the government to control by foreign interests.
- It served mainly to make the rich richer.
- It exercised too much control over members of Congress.
Does any of that sound similar to the circumstances we find ourselves in today with the Federal Reserve?
We won’t have another Jacksonian - Congressional crisis because President Obama is standing firmly behind Ben Bernanke and the expansion of the authority of the Federal Reserve.
But the people of America know in their hearts that something is out of balance when global banks get bailed out at their expense but no one is requiring mortgage modifications or increasing small business lending.
The response of our government to the woes of the banks is of a much different caliber than their response to the distress of the people. Repairing the financial system and keeping the bond markets content is the number one priority of the Bush and Obama administrations… but does this serve the Republic?
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Senators Bunning, DeMint and Vitter see the circumstances around the AIG bailout as murky. And they tried to halt the Committee from voting today until more details can be brought forward to judge the actions of Chairman Bernanke.
Louisiana Senator Vitter argued that is was not appropriate for the Committee to vote without having had access to the documents requested from Chairman Bernanke and the Federal Reserve.
These documents have been seen by some Banking Committee staff at the Federal Reserve.
But the staff of individual Senators have been denied access to these documents and believe that they have a responsibility to review the information related to these cash transfers to Goldman Sachs and foreign banks.
Chairman Dodd said that he had spoke to former staff of past Chairman Sarbanes to understand what the rules of the Senate were in relation to assessing documents from the Federal Reserve. He explained that both he and Ranking Member Shelby had signed a request for their staff to see the documents at the Federal Reserve related to the payment to AIG’s counterparties on collateral calls. This payment was $62.5 billion.
Chairman Dodd and Ranking Member Shelby stated that staff should be able to see these documents. Chairman Dodd said that he didn’t want any staff member being denied access although he didn’t know specifically what the requested documents were.
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The details of the AIG bailout have not been adequately evaluated by those in the Congress. The House Oversight and Reform Committee held a hearing on May 13th and the Senate held a hearing on March 5.
The outcome of the Senate hearing was the release of the names and amounts of payments to AIG counterparties. We learned that over $36 billion of these payments went to foreign banks.
The Special Inspector General of TARP evaluated the bailout of AIG and his conclusions were reported by the New York Times …
The Fed “refused to use its considerable leverage,” Neil M. Barofsky, the special inspector general for the Troubled Asset Relief Program, wrote in a report to be officially released on Tuesday, examining the much-criticized decision to make A.I.G.’s trading partners whole when people and businesses were taking painful losses in the financial markets.
There have been suggestions that the Fed chose to negotiate weakly, Mr. Barofsky said, to give a “backdoor bailout” to A.I.G.’s banks. He said Mr. Geithner and the Fed’s lawyers had denied this, but added that “irrespective of their stated intent,” there was no doubt about the result: “Tens of billions of dollars of government money was funneled inexorably and directly to A.I.G.’s counterparties.”
History has not yet substantiated whether AIG’s payment to their counterparties at 100 cents on the dollar was legal and necessary. Some contend these actions were illegal and the Federal Reserve did not have the authority to use AIG as a conduit in this way.
Lucian Bebchuk of Harvard Law suggests that AIG Financial Products was adequately ringfenced from the insurance subsidiaries and counterparties should of have been haircut for their derivatives claims.
Elizabeth Warren’s Congressional Oversight Panel is reviewing the topic this month. This review, at least, should be completed and published prior to the full Senate vote of Chairman Bernanke’s confirmation.
The treatment of AIG and it’s counterparties is of particular importance because it tells us how Chairman Bernanke, if confirmed, will help shape our financial system for the 21st century.
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Members of Congress were involved in crisis events last year and that may be why some feel comfortable reappointing Chairman Bernanke. Others feel differently.
It’s helpful to look back at those events.
James B. Stewart wrote of the crisis events of September, 2008 in the New Yorker…
TUESDAY, SEPT. 16…
“At 6 P.M., most of the House and Senate leadership, summoned on short notice, gathered in Senate Majority Leader Harry Reid’s conference room for a briefing by Paulson and Bernanke. Paulson announced that the Fed had decided to loan A.I.G. $85 billion and essentially seize control of the company under the Fed’s emergency powers.
Bernanke pointed out that A.I.G. stock was one of the ten most widely held in 401(k) retirement accounts. Reid put his face in his hands. ‘I hope you understand this does not constitute formal approval by Congress to take action,’ he said.
‘Do you have eighty-five billion?’ Representative Barney Frank asked. ‘I have eight hundred billion,’ Bernanke said, referring to the Fed’s balance sheet. Senator Christopher Dodd twice asked how the Fed had the authority to lend to, and take control of, an insurance company. Bernanke argued that the Fed had emergency powers to aid any company as long as there was a ‘systemic risk,’ and gave a brief tutorial on a little-known section of the Fed’s authorizing statute. Bernanke said that even this step might not be enough. Legislation authorizing additional aid probably would be needed as well.” …
WEDNESDAY, SEPT. 17: “At six that evening, Bernanke met with his top aides—Donald Kohn; Kevin Warsh; Scott G. Alvarez, the general counsel; and Michelle Smith, the spokesperson—with Paulson and Geithner participating by speakerphone. ‘We cannot do this alone anymore,’ he said. ‘We have to go to Congress and get some authority.’ Paulson hadn’t yet taken any concrete steps to enlist legislators to authorize a government rescue.
Paulson reiterated his concern about getting congressional leaders to go along. ‘I spoke to Harry and Nancy’—Harry Reid and Nancy Pelosi, the House Speaker—‘and the political advisers,’ he said. ‘If the Treasury and the Fed say it’s an emergency and we need help, and help doesn’t come,it would further destabilize the markets. You don’t go public until you’re reasonably certain you’ll get what you’re asking for.’
Bernanke was growing agitated. ‘Hank! Listen to me,’ he interrupted. ‘We are done!’ It was the first time Fed officials had heard him raise his voice. ‘The Fed is already doing all that it can with the powers we have,’ Bernanke continued.
One participant recalled, ‘Ben gave an impassioned, linear, rigorous argument explaining the limits of our authority and the history of financial crises in the U.S. and abroad.’ That history showed that efforts to resolve such crises ‘are successful only when overwhelming force from all parts of government is brought to bear,’ the participant said. ‘It was an encyclopedic tour de force.’ It was as though Bernanke were the professor and Paulson the student. Bernanke’s comments lasted about fifteen minutes, and Paulson was uncharacteristically silent until near the end. ‘Got to go,’ he said, and hung up.”
THURSDAY, SEPT. 18: “The Fed group reconvened at six-thirty that morning. They had decided the night before that repetition would be helpful, so Bernanke started on the same lecture. Thirty seconds into it, Paulson interrupted. ‘Ben, Ben, Ben . . . ’ Bernanke stopped talking. ‘I’ve done some thinking,’ Paulson said. ‘You and I should go see the President and then go to Congress tonight and ask for more authority.”
At 10:15 a.m., President Bush delivered a two-minute televised statement outside the Oval Office, his first public pronouncement since the crisis began, which concluded: ‘Our financial markets continue to deal with serious challenges. As our recent actions demonstrate, my Administration is focussed on meeting these challenges. The American people can be sure we will continue to act to strengthen and stabilize our financial markets and improve investor confidence.’ When staffers again huddled in Paulson’s office, Paulson wanted to know what ideas they had come up with. Asian and European markets were continuing to plunge, with banks and insurers bearing the brunt of the losses. …”
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Richard Shelby, an Alabama Republican who’s the Ranking Member on the Senate Banking Committee, talks to Bloomberg’s Peter Cook about his vote against Ben S. Bernanke for a second term as chairman of the Federal Reserve. (Source: Bloomberg, running time 4 minutes)
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> > Video of the hearing from Bloomberg…
> > Bernanke Fights for His & the Fed’s Jobs. But Does the Fed Really Need to Supervise Banks?
> > Time mag “Person of the Year”
> > Bernanke Foes Seek to Curtail Fed
> > How America let banks off the leash
> > Senate Banking Committee vote count