They First Make Mad: Summertime Tales of National Bankruptcy

Perhaps it’s because the daylight lingers, but the season seems especially revealing of the madness of those who have the nation staring into the abyss of bankruptcy. Among the summer’s disclosures is news that the monetary authorities have topped their refusal to be audited with an indifference to the truth of their testimony before congress. July has also provided a reemergence of the harebrained Treasury officials in charge of hustling the people’s billions in the meltdown two years ago.

Both Federal Reserve Chairman Ben Bernanke and then New York Fed President Tim Geithner assured senators in April 2008 banking committee testimony that the assets assumed by the Fed in its bail-out of Bear Stearns were "investment grade." In loading its own balance sheet with unprecedented credit risk, the Fed not only made the American people guarantors of toxic paper — and placed the value of the US dollar at greater risk — it materially misrepresented the quality of the securities involved. While credit quality and credit risk were at the heart of the unfolding banking crisis, the Fed itself was claiming that $30 billion in collateral it assumed consisted of only currently performing and investment grades assets. But the collateralized debt obligations and mortgage-backed bonds involved had already been downgraded at the time of the testimony.

In the face of Fed stonewalling, Bloomberg News had to go to federal court to get documents in the transaction released to the light of day. Finally this summer Bloomberg was able to report that the government "became the owner of $16 billion of credit-default swaps, and taxpayers wound up guaranteeing high-yield, high-risk junk bonds."

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Senate Banking Committee member Richard Shelby told Bloomberg that despite his efforts to discover the quality of the assets during the 2008 testimony, "It is apparent that the Fed withheld from the Congress and the public material information about the condition of these securities."

July also brought sightings within days of one another of former Treasury secretary Henry Paulson and his former Goldman Sachs colleague and Treasury sidekick Neel Kashkari. Each was found in the pages of the Washington Post shining light on matters of our economic health going forward. Paulson wrote about housing policy and the roots of the crisis, but one searches in vain for a word about the Federal Reserve’s role in the debacle. Kashkari, who ran the $700 billion dollar TARP program conceived by Paulson, offered his thoughts about "the collective good."

The appearance of the pair should help dispel any pretenses about governmental competence, all the illusions of special expertise and the engineering conceit that the economy can somehow be managed by the brightest technocrats with Harvard (Paulson) and Wharton (Kashkari) MBAs and Goldman Sachs on their rsums.

One need only think of Paulson himself lurching from one iteration of the "Paulson plan" to the next. One day he favored buying distressed assets from the banks, arguing that injecting capital into the banks hadn’t worked for Japan. The next he was presenting leading banks a "take it or take it" offer to sell the government preferred shares.

Any remaining illusions vanish with a glimpse at the precision with which they arrived at the amount of the $700 billion boondoggle.

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It would be a mistake to think the calculations involved analysts, risk managers, statisticians, and banking regulators burning the midnight oil at the Treasury. "Seven hundred billion was a number out of the air," the aptly named Kashkari said. Actually he did it all on his Blackberry. When Paulson told him he couldn’t get a trillion dollars, Kashkari put his investment banking skills to work in earnest. "We have $11 trillion residential mortgages, $3 trillion commercial mortgages. Total $14 trillion. Five percent of that is $700 billion. A nice round number."

A nice round number, indeed, although one suspects that Kashkari and Paulson are not quite so cavalier when someone offers to back the truck up to their own bank accounts.

But it is not just Fed and Treasury officials who are responsible for our national insolvency. Before July melted into August, the elected wing of the governing classes added to our dependency on Chinese creditors. Republican congressmen came together to support President Obama’s surge in Afghanistan with a $59 billion emergency spending bill. Within days of the vote we learned that July was the deadliest month for U.S. troops in America’s longest war. The news came just as Congress left on its summer recess.

No wonder they had to get away. It’s already been a long, hot summer and it’s not over yet. Who knows what disclosures will come to light as we swelter through August and race to the destruction promised those the gods have made mad.