What follows here is an abridgement, interpretation, and simplification of a RollingStone article by Matt Taibbi.
America has two national budgets, one official, one unofficial.
The official budget is on the public record, and hotly debated: Money comes in as taxes and goes out as jet fighters, DEA agents, wheat subsidies, and Medicare, plus pensions and bennies for that great untamed "socialist' menace called a unionized public-sector workforce that Republicans are always complaining about. On top of that, at least according to popular legend, we're broke and in so much debt that 40 years from now our granddaughters will still be hooking on weekends to pay the medical bills of this year's retirees from the IRS, the SEC and the Department of Energy.
Most Americans know about this official budget. What they don't know is that there is another budget of roughly equal heft, that is maintained in complete secrecy -- or at least it was until just recently. After the financial crash of 2008, this once-secret budget grew to monstrous dimensions, as the government attempted to unfreeze the credit markets by handing out trillions of dollars to banks and hedge funds. And thanks to a whole galaxy of obscure, acronym-laden bailout programs, this largely secret giveaway eventually rivaled the "official" budget in size -- it became a huge roaring river of cash flowing out of the Federal Reserve to destinations neither chosen by the president nor reviewed by Congress, but instead handed out by fiat, apparently on the whim of unelected Fed officials, using a seemingly nonsensical and apparently unknowable methodology.
And now, following an act of Congress that has forced the Fed to open its books from the bailout era, this previously secret budget is for the first time becoming (at least partially) a matter of public record. Staffers in the Senate and the House, whose queries about Fed spending have been rebuffed for nearly a century, are now poring over 21,000 transactions and are discovering a host of outrages and lunacies in this "other" budget. It is as though someone sat down and made a list of every individual on earth who actually did not need "emergency financial assistance" from the United States government, and then handed each of them a special pass and a key to the back door of the US treasury. Inexplicably, the US Federal Reserve gave billions in bailout aid to banks in places like Mexico, Bahrain and Bavaria, billions more to a spate of Japanese car companies, more than $2 trillion in loans, each, to Citigroup and Morgan Stanley, and billions more to a string of individual millionaires and billionaires with Cayman Islands addresses. But what kind of favors were granted in return, and to exactly whom, and how could this not have been some kind of arrangement that broke laws?
If you want to get a true sense of what this "shadow budget" was/is all about, all you have to do is look closely at the taxpayer money handed over to a single company that goes by a seemingly innocuous name: Waterfall TALF Opportunity. Waterfall's haul doesn't seem all that huge -- just nine loans totaling some $220 million, made through a Fed bailout program. That doesn't seem like a whole lot, considering that Goldman Sachs alone received roughly $800 billion in loans from the Fed. Through the Waterfall TALF Opportunity, the Federal Reserve handed just two bankster-related individuals low-interest loans of nearly a quarter of a billion dollars through a complicated bailout program that virtually guaranteed them millions in risk-free income.
The full name of the program that these privileged individuals took advantage of, TALF, is Term Asset-Backed Securities Loan Facility. But the federal aid they received actually falls under a broader category of bailout initiatives, designed and perfected by Federal Reserve chief Ben Bernanke and Treasury Secretary Timothy Geithner, and should be called "giving already stinking rich people gobs of money for no f*cking reason at all." So, if you want to learn how the shadow budget works, and how welfare for the rich works, follow along.
It started out small, with the government throwing a few hundred billion in public money to prop up genuinely insolvent firms like Bear Stearns and AIG. Then came TARP and a few other programs that were designed to stave off bank failures and dispose of the toxic mortgage-backed securities that were a root cause of the financial crisis. But before long, the Fed began buying up every distressed investment on Wall Street, even those that were in no danger of widespread defaults: commercial real estate loans, credit- card loans, auto loans, student loans, even loans backed by the Small Business Administration. In other words, what started off as a targeted effort to stop the bleeding in a few specific trouble spots became a gigantic feeding frenzy. It was "free money for sh*t," says Barry Ritholtz, author of Bailout Nation. "It turned into 'Give us your crap that you can't get rid of otherwise.' "
This sudden manic expansion of the bailouts began with a masterful bluff by Wall Street executives: Once the money started flowing from the Federal Reserve, the executives began moaning to their buddies at the Fed, claiming that they were suddenly "afraid' of investing in anything -- student loans, car notes, you name it -- unless their profits were guaranteed by the state. (Socialism for the rich?) "You ever watch soccer, where the guy rolls six times to get a yellow (penalty) card?" says William Black, a former federal bank regulator who teaches economics and law at the University of Missouri. "That's what this is. If you have power and connections, they will give you a freebie deal -- if you're good at faking and whining."
This is where TALF fits into the bailout picture. Created just after Barack Obama's election in November 2008, the program's ostensible justification was to spur more consumer lending, which had dried up in the midst of the financial crisis. But instead of lending directly to car buyers and credit-card holders and students -- that would have been socialism! -- the Fed handed out a trillion dollars to banks and hedge funds, virtually interest-free. In other words, the government lent taxpayer money to the same a**holes who caused the crisis, so that they could then lend that money back out on the market virtually risk-free, at an enormous profit.
A key feature of TALF is that the Fed doles out the money through what are known as non-recourse loans. Essentially, this means that if you don't pay the Fed back, it's no big deal. The mechanism works like this: Hedge Fund Goon borrows $100 million from the Fed to buy crap loans, which are then transferred to the Fed as collateral. Folks somewhere are supposed to pay off these loans that have been bundled into a mortgage-backed security, and if enough of these folks default, and don't pay off their loans, then the Hedge Fund Goon simply does not repay that $100 million he borrowed from the Fed to buy these mortgage-backed securities, and the Fed simply keeps this pile of crap securities and calls everything even. And how nice that is for the Hedge Fund Goons: No wonder top hedge-fund managers average $540 million in annual income!
In other words, this is the deal of a lifetime. Think about it: You borrow millions from the Fed, buy a bunch of very risky crap securities and stash them on the Fed's books. If the securities lose money, you leave them in the Fed's lap and the public eats the loss. But if they make money, you of course quickly grab them back, happily cash them in, and ever so honestly repay the funds you borrowed from the Fed. It's a clever scheme by which certain people at the Fed are essentially giving out free money -- to their friends and associates in high places -- almost certainly with those favors to be discretely compensated at a later date.
This whole setup -- in which millionaires and billionaires gambled on mountains of dangerous securities, with taxpayers providing the stake and assuming virtually all of the risk -- is the reason that it's insanely premature for Wall Street to claim that the bailouts have actually made money for the government. We simply can't make that determination until the final bill comes in on all the dicey securities we financed during the bailout feeding frenzy.
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In early April, Sen. Chuck Grassley of Iowa wrote a letter to Waterfall -- see Waterfall TALF Opportunity, described earlier in this articled -- asking 21 detailed questions about certain transactions. In addition, Sen. Bernie Sanders has personally asked Fed chief Bernanke to provide more complete information on the TALF loans given to gazillionaires like former Miami Dolphins owner H. Wayne Huizenga and hedge-fund shark John Paulson. But Bernanke bluntly refused to provide the information -- and the Fed has similarly stonewalled other oversight agencies, as well, including the General Accounting Office and TARP's special inspector general, Neil Barofsky. So what's Bernanke covering up, and what laws have been broken?
But even without more information about the loans they got from the Fed, we know that TALF wasn't the only risk-free money being handed over to Wall Street. During the financial crisis, the Fed routinely made billions of dollars in "emergency" loans to big banks at near-zero interest. Many of the banks then turned around and used the money to buy Treasury bonds at higher interest rates -- essentially loaning the money back to the government to collect a somewhat inflated rate of return. "People talk about how these were loans that were paid back," says a congressional aide who has studied the transactions. "But when the state is lending money at zero percent, and the banks are turning around and lending that money back to the state at 3 percent, how is that different from just handing people money?"