Patrick Semansky/AP Photo
Treasury Secretary Steven Mnuchin speaks in the briefing room of the White House in Washington, March 9, 2020, about the coronavirus outbreak.
At the center of the Senate Republicans’ version of the emergency aid bill, which Democrats opposed on Sunday and Monday, is $500 billion in money for big corporations that is to be entrusted to one public official—the Secretary of the Treasury—with no oversight of his decisions and no strong rules laying down how corporations should, and should not, use those funds. The ostensible reason for this is to protect jobs, yet the GOP bill’s job language is more of a suggestion than a mandate.
The coronavirus has crippled major sectors of our economy—including airlines, hotels, aviation, aerospace manufacturing, and small business. Just as the federal government needed to intervene in the financial sector in 2008, the federal government needs to help these sectors of our economy now. But a lot of people are asking, didn’t we just do that in the bank bailout? And should we repeat the bank bailout, this time with Donald Trump and Steve Mnuchin in charge?
To understand the answer, and where a TARP-style bailout will lead, we need to go back to 2008.
That September, global stock markets were in free fall. Credit markets had frozen. Major financial institutions—AIG, Merrill Lynch, Lehman Brothers—had gone bankrupt. Theoretically risk-free money markets were losing money. Confronted with this financial meltdown, the Congress passed, after much struggle, the Troubled Asset Relief Program, or TARP. Otherwise known as the bank bailout.
One lesson of 2008 clearly applies: If you give vast amounts of public money to a single person with no real accountability, you won’t like what happens next.
Then as now, big banks and big companies wanted money without conditions. Everything seemed so much easier that way. Government officials wanted flexibility, and no unpleasantness. But the result was that Wall Street and company executives got what they wanted, and the public, and anyone else who was supposed to be helped, like homeowners in 2008, and workers today, ended up with crumbs, or worse.
The coronavirus crisis is different from the 2008 panic. The economic crisis is worse, and the public-health threat has no modern precedent. The primary goal in anything that is done now has to be to preserve employment, and health care, and living businesses. But one lesson of 2008 clearly applies. If you give vast amounts of public money to a single person with no real accountability, you won’t like what happens next. It does not really matter who that person is, but it really does not help if that person, or that person’s boss, has an agenda other than the public interest.
The bank bailout was a grant of authority to one person, the Treasury Secretary. At the time the TARP statute was passed, President Bush was in office, and the Treasury Secretary was Hank Paulson, former CEO of Goldman Sachs, and the man who managed to get the Bush administration to support action to stabilize the financial markets. There is a famous picture of Paulson on his knees begging Congress to act. Later in the history of TARP, the Treasury Secretary was Timothy Geithner, who served under Barack Obama.
The TARP statute provided that the Treasury Secretary made all the decisions involving $700 billion in public money. There was no board, and no requirement of congressional approval. There was an inspector general—SIGTARP. The inspector general could issue subpoenas, and make recommendations to the Justice Department and to Congress. But the inspector general could not stop the Treasury Secretary from acting as the Treasury Secretary pleased.
Then there was the Congressional Oversight Panel, the COP, chaired by Elizabeth Warren (then a private citizen), on which I served. This is remembered as an effective body, but that was due really only to the enormous work put into it by Warren, my fellow board members, and the staff.
The truth is that the panel had no power at all. It was purely advisory. It had no subpoena power, and it could not swear in witnesses. Officials came in front of us and lied with impunity. The one I could never get over was the panel of Treasury Department witnesses who denied that Citigroup was bankrupt in the week before Thanksgiving 2008. They said that though they knew that Citi officials had called Treasury the Friday before Thanksgiving and told them they would be out of cash the following Tuesday.
With no conditions on how they employed the public’s dollars, the banks were allowed to bleed homeowners to rebuild their capital, and ten million American families were foreclosed on.
And what was the outcome? The COP did a study, which was all we could do, of the TARP transactions. We hired a top-flight independent valuation firm and recruited a team of finance professors to oversee them. They found that the government got securities-preferred stock and warrants—worth between 61 cents and 71 cents on the dollar—in exchange for the hundreds of billions of public money it had turned over to the big banks. Why? The Treasury had not asked for enough equity in return. When the program ended, TARP’s investments in the big banks and AIG did slightly better than break even, which is a terrible return for the risk that was taken with the public’s money. Small banks had to prove they were solvent to get help; bankrupt big banks didn’t. And with no conditions on how they employed the public’s dollars, the banks were allowed to bleed homeowners to rebuild their capital, small-business lending dried up for years, and ten million American families—40 million people, millions of children—were foreclosed on and driven from their homes. The beneficiaries—Citibank and Bank of America, Goldman Sachs and AIG and JPMorgan Chase—are all fine. But “bank bailout” is a curse word in American politics, public confidence in government has never recovered—and Donald Trump is president.
What are the lessons? Give no one person control over a public bailout—which is exactly what the Republicans’ legislation confers on Trump Treasury Secretary Steven Mnuchin. Have an independent board make those decisions. If the goal is maintaining employment, have workers on that board. If at all possible, use the money directly to accomplish the intended goals, rather than give general financing to companies. In this situation, that means subsidize payrolls first, then only if necessary give capital to firms. If we give capital to firms, insist on a fair equity return on the back end for the people of the United States. And any oversight body must have subpoena power and the ability to swear in witnesses and an adequate budget.
The American economy needs huge help now—trillions of dollars to support employment and keep broad swaths of otherwise healthy American business from collapsing. That help should first and foremost take the form of direct employment support and help for those who nonetheless end up without work. Yes, some help for severely affected industries is needed. We need to give it in a way that strengthens the public’s faith in our democracy and achieves the public purposes that the money was intended to achieve. That requires real accountability, real oversight. And that means doing a lot better than we did in the bank bailout.
