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Hearings in Congress about the Federal Reserve Board and Bank of America (BofA), which received $20 billion in federal aid, are focusing on whether Fed chairman Ben Bernanke threatened BofA’s CEO, Kenneth Lewis, with firing if the bank first refused, and then came back for, federal bail-out monies.   Michael Crittenden and Jon Hilsenrath deliver the story in the Wall Street Journal. The Fed had determined Bank of America needed help, but the bank, apparently, was playing it coy.  According to Bernanke’s aides, the Fed chief made it clear that if BofA said no first, and then later came begging for help, "management [would be] gone." 

It’s hard to see what’s wrong with the Fed playing hardball with a bank that led the industry’s charge toward disaster.  Individual managers at companies like Bank of America and AIG have shown that they’re perfectly comfortable putting their own fortunes ahead of the country’s.  So why shouldn’t these companies’ chief creditor — the federal government — call the shots every now and then?  It’s hard to see why Kenneth Lewis should be able to bandy about $20 billion when, as Crittenden and Hilsenrath report, regulators have been downgrading the bank’s overall ratings and "hand[ing] down a confidential supervisory action that forced the company to improve governance . . . [and] improve risk management."   And here Members of Congress are shocked — shocked! — that people talking about massive sums of taxpayer money would speak frankly with paragons of private industry. -NH

Joe Matthews made a good point in the Washington Post Outlook section this weekend about California’s projected $42 billion budget deficit over the next two years:

California has one-eighth of the country’s population and represents one-seventh of the economy. But our debt is less than one-hundredth of the federal debt. And we’ve been far more responsible in managing our budget. As a columnist for Bloomberg News recently noted, if California had the same deficit relative to its GDP as the federal government, we would have a shortfall of about $230 billion. The state’s current (and massive) deficit is $24 billion.

Now obviously there are limits to comparing California’s fiscal woes with the federal government: California can’t run up a $700 billion Pentagon budget and invade two Middle Eastern countries. But there is inconsistency in the Obama administration not bailing out California (or as Matthews more modestly proposes, guaranteeing the state’s bonds). The state has been no more irresponsible than bailed-out banks, auto companies or the federal government during the George W. Bush administration. And California’s fiscal health as is important as, for example, Bank of America’s, based on the state’s huge economy as well as state workers and aid recipients.-MB

If the Treasury Dept. must pay more money for General Motors and Chrysler to avoid bankruptcy, where will this money come from? Maya Jackson Randall of the Wall Street Journal reports that it could from what’s left of the $700 billion Troubled Asset Relief Program. Treasury Sec. Tim Geithner says that there is still $134.5 billion (which is 19 percent of $700 billion) left in TARP money and that the Treasury Dept. will not have to ask Congress for more. But Geithner’s estimate assumes that the banks that got TARP money will soon pay back $25 billion to the Treasury Dept — which hasn’t happened yet.

Geithner’s statements also seem to ignore his own massively expensive plan to have the government subsidize purchases by hedge funds and private equity firms of subprime mortgage securities now held by banks. The Obama administration had asked Congress to set aside $250 billion in the new budget for financial rescue money. But Congress ignored the request. Judging from Geithner’s latest bank rescue plan, the GM and Chrysler restructuring plan, and talk of helping credit unions and insurance companies, it’s hard to see how Obama and Geithner can execute their economic policies without substantially more money. And it’s far from clear Congress will approve more money.-MB

Despite his penchant for czars, Barack Obama had resisted the appointment of a car czar to deal with the dilapidated auto industry. Until today. In his address on government plans to restructure General Motors and Chrylster, Obama announced that Edward Montgomery, dean of the University of Maryland’s College of Behavioral and Social Sciences and (very briefly) a former Labor Dept. deputy secretary, would be Director of Recovery for Auto Communities and Workers.

Montgomery might have a narrow role: helping communities with GM and Chrysler plants and extolling people to buy cars (Obama announced that car purchases are tax deductible through the end of they year — he didn’t say whether that meant just American cars or all cars). Montgomery might not be the point man on giving GM 60 more days to restructure or getting Chrysler to merge with Fiat. Ultimate responsibility could lie more with National Economic Council head Larry Summers and Treasury Sec. Tim Geithner, the leaders of Obama’s auto task force.

But Montgomery is a new face to an administration with not enough faces to deal with Detroit. There’s a staff shortage at Treasury, though the Senate just confirmed Gary Locke to head the Commerce Dept. Unlike Locke and top Treasury officials, Montgomery will circumvent the Senate confirmation process. For Obama, this might have been the most compelling reason to create a new position. -MB

By Fred W. Apelquist, III

I’m sure you’ve heard about the thousands of earmarks in the current omnibus spending bill that has made its way through Congress. President Obama has signed the bill and while the debate over earmarks continues, the Obama Administration’s general line is that these earmarks are a holdover from the previous administration.

For decades, I knew earmarks were those specific projects – sometimes demonstrably valuable and worthwhile, sometimes not – which senior and influential lawbreakers injected into the federal budget for their constituents’ alleged benefit. Lesser legislators and their flocks had to wait their seniority turns to feed at the public trough and bring home the bacon — the ‘pork.’

Lately, the word around Washington has been that it’s better to have members of congress decide where special projects’ money should be spent than “faceless bureaucrats.” But this week, I found out that the real problem, which isn’t the fact that earmarks are “pet projects” – it’s the way the money is spent. I contacted the office of one of earmarks’ most determined foes, Rep. Jeff Flake of Arizona (Flake who was quoted in the Washington Post as saying President Obama was “spitting in [sic] the wind” if he approved the budget with earmarks.  Congressman Flake points out that real evil of earmarks is sole-source procurements, also known as no-bid contracts.

You see, earmarks go to preselected projects, and often result in contracts to companies in the sponsoring politician’s state or district. Once a bill with earmarks becomes law, there is no fair-and-open procurement process to determine which company could provide the best products at the best price to the government. And often, these companies have contributed or will contribute significantly to the incumbent congressperson’s campaign.

Lesser-known documents known as conference reports, behind-the-scenes and subsidiary to the appropriations bill, direct that certain businesses perform the work associated with the approved earmarks. Senators and Representatives sign documents swearing they hold no financial interest in the specified business, but that is just the tip of the iceberg. While lawmakers may have no actual money at stake in a given enterprise, they certainly have a political one, as these businesses help fill their reelection campaign chests.

According to Congressman Flake: “Putting an end to earmarks for private companies, which essentially constitute no-bid contracts, would be a step in the right direction, at least in terms of eliminating the corrupting nature of earmarks.”

So, when you read about how many people complain that incumbents are reelected over 90% of the time, ask yourself: do you think earmarks could have something to do with it? Do you think the ability to maintain well-financed campaigns, and comfortable home-town relationships, could be the real reason for these special projects? It’s another reason for a budgetary process that excludes earmarks.

One of the toughest things for a new president is dealing with mistakes made by previous ones.  In a very short time, their mistakes become yours.  And in the case of securities deregulation and the "greed is good" attitude that has thrived in the past decade or so in the financial industry, President Obama and his fire chief Timothy Geitner have a conflagration on their hands.  Chris Arnold at NPR tells us the bad news:  there are conceivably "hundreds and hundreds of billions of dollars" still needed to buy out bad loans held by American banks.  Arnold quotes Obama adviser Paul Volcker saying "the financial system is broken."  Sounds conclusive.  Actual nationalization of banks is not going to happen, so some are looking to a quarantine of bad loans, which would free up the banks from their irresponsibility and make you and me responsible.  Arnold calls this idea a "good bank" and a  "bad bank," with the taxpayers as investors in the bad one.  Making an argument for this could require all of President Obama’s eloquence and intelligence, not to mention his recruiting skills.  Because who wants to become CEO of National Bad Bank and Mistrust? -NH

Part I

By Fred Apelquist

Washington, January 9, 2009 — This morning I was endeavoring to attend a monthly briefing on the state of the nation’s economy by an Assistant Secretary at the Treasury Department. I was unsuccessful in my quest for prior approval, so I proceeded to Plan B. I would make a courtesy call on the Public Affairs staff so I and they could put faces with names and engage in high-touch, in-person interactions. This was the Public Affairs office of the Treasury Department of our open, democratic government. This will be simple, I thought. (more…)

By Fred Apelquist

Washington, December 20, 2008 — Remember IndyMac? They were the first symbol of the economic crisis we are now in up to our necks (or maybe over our heads). But IndyMac, taken over by the Federal Deposit Insurance Corporation (FDIC) in July, 2008, is still alive and kicking – and working to stabilize the home mortgage foreclosure crisis. They’re applying FDIC’s “Model in a Box” paradigm to salvage the salvageable and balance the pain that both loan owners and mortgage borrowers are experiencing. (more…)

The next time your credit card company calls you with a question about a charge on your card, be glad that the bank is looking out for its own interests as well as yours.  Financial companies constantly upgrade systems against identity theft to protect their bottom line.  But executive branch agencies that have your SSN, home address, telephone number, and other personal information have much lower standards, an article in the September 2008 issue of Consumer Reports shows.  Citizens give the government their personal data every day when they apply for mortgages, unemployment insurance, Medicaid, agricultural programs, veteran’s benefits — you name it.  Still, to this day there is no U.S. government-wide policy on protecting citizens’ personal data, and individual agencies often do little to protect your good name.  Consumer Reports quotes one expert who points out that "government agencies are among the worst offenders in weeding out data breaches because they have no financial incentive to look for them."  The incentive of protecting citizens from crime should be enough.  -NH