By Pam Martens and Russ Martens: March 1, 2017
In President Trump’s speech last evening to a joint session of Congress, he described his plan to rebuild America’s crumbling infrastructure as follows:
“To launch our national rebuilding, I will be asking the Congress to approve legislation that produces a $1 trillion investment in the infrastructure of the United States — financed through both public and private capital — creating millions of new jobs.”
Financed through “both public and private capital” sounds a lot like a public-private partnership. Here’s how those hybrid creatures have worked out so far for the American people.
Fannie Mae and Freddie Mac were, effectively, public-private partnerships. (The government preferred to call them “Government Sponsored Enterprises” or GSEs.) Each company traded on the New York Stock Exchange and each company had private shareholders. Because Fannie and Freddie had a line of credit from the U.S. Treasury and the market’s perception that the U.S. government would never allow them to default, their bonds carried a triple-A rating. Wall Street played that public-private partnership for all it was worth. The big Wall Street banks sold Fannie and Freddie hundreds of billions of dollars of junk residential mortgages, which they knew from internal reviews were likely to default, while representing to Fannie and Freddie that these were good mortgages. Then Wall Street, with inside knowledge of the house of cards it had built, sold the debt issued by Fannie and Freddie to public pensions and university endowments as triple-A investments.
On September 9, 2008, one week before the collapse of Lehman Brothers, the U.S. government took over Fannie and Freddie as it became clear to the markets that the assets backing their bonds were a pile of toxic sludge.
This is how the Financial Crisis Inquiry Commission report (the official report on the 2008 financial collapse) summed up the situation at Fannie and Freddie:
“The GSEs were highly leveraged—owning and guaranteeing $5.3 trillion of mortgages with capital of less than 2%…
“The value of risky loans and securities was swamping their reported capital. By the end of 2007, guaranteed and portfolio mortgages with FICO scores less than 660 exceeded reported capital at Fannie Mae by more than seven to one; Alt-A loans and securities, by more than six to one. Loans for which borrowers did not provide full documentation amounted to more than ten times reported capital…
“At the end of December 2007, Fannie reported that it had $44 billion of capital to absorb potential losses on $879 billion of assets and $2.2 trillion of guarantees on mortgage-backed securities; if losses exceeded 1.45%, it would be insolvent. Freddie would be insolvent if losses exceeded 1.7%. Moreover, there were serious questions about the validity of their ‘reported’ capital.”
Today, Fannie and Freddie remain under the government’s conservatorship but unknown to most Americans, the government’s bailout of Freddie and Fannie was a well-disguised bailout of Wall Street’s biggest banks – just as the bailout of AIG was a backdoor bailout of Wall Street’s banks. Last May, Wall Street On Parade reported that Fannie Mae and Freddie Mac had continued to pay out billions of dollars to the Wall Street banks as counterparties to their derivative contracts. Freddie Mac’s SEC filing showed that it had paid out the following in just the past four years on its derivatives contracts: $2.1 billion in 2015; $2.6 billion in 2014; $3.46 billion in 2013; and $3.8 billion in 2012. (See in-depth reporting in related articles below.)
Who would have paid those billions if not for the U.S. taxpayers who consistently function as the dumb tourists in Wall Street’s casino?
Then there is the sugar daddy of all public-private partnerships – the U.S. Federal Reserve. The President of the United States appoints the members of the Board of Governors of the Federal Reserve but the banks are the shareholders of the 12 regional Federal Reserve banks. One of those regional banks, the New York Fed, has all the real power. Wall Street On Parade reported on the unique status of the New York Fed in 2013 as follows:
The President of the New York Fed sits permanently on the Federal Open Market Committee (FOMC). The Presidents of the other 11 regional banks rotate on the FOMC;
Although there is no law requiring that the New York Fed should be the sole regional Fed Bank to conduct the open market operations of the FOMC, it has uniquely served in this function since 1935;
It is the only regional Fed Bank to have its own trading floor and speed dials to the largest firms on Wall Street;
It is the only regional Fed Bank to be allowed to intervene in foreign exchange markets;
The New York Fed, uniquely among the regional Fed Banks, stores gold for foreign central banks, governments and international agencies;
The New York Fed played a uniquely controlling role in the disbursement of trillions of dollars in loans to foreign and domestic banks during the 2007 to 2010 meltdown of Wall Street;
And, problematically, while needing the good will of Wall Street firms to carry out its open market operations mandate, it simultaneously functions as a primary regulator to some of the largest firms.
The Federal Reserve, in fact, mostly through the New York Fed, secretly disbursed $16 trillion in almost zero interest loans to Wall Street banks and foreign banks from 2007 to 2010, according to the Government Accountability Office (GAO). The public only learned about this unprecedented and unimaginable bailout in 2011 as a result of an amendment by Senator Bernie Sanders to the Dodd-Frank reform legislation which called for a GAO audit.
You need to let that sink in for a moment: outside of any action by the legislative branch of the U.S. government, the United States Congress – members of whom are elected by the citizens of the United States – a hybrid public-private partnership called the Federal Reserve created $16 trillion out of thin air and secretly doled it out to the scoundrels of the Wall Street collapse under what it calls its emergency powers.
Mr. President, the last thing the public wants from you is another public-private partnership. The last thing the American people think will make the country great again is another public-private partnership.
Mr. President, the public already has good reason to suspect that you’re not draining the swamp in Washington but restocking it. Hank Paulson, the U.S. Treasury Secretary who pushed for the massive Wall Street bailouts in 2008, was the former Chairman and CEO of Goldman Sachs. Your U.S. Treasury Secretary, Steve Mnuchin, is a former 17-year veteran of Goldman Sachs. Stephen Bannon, your Chief Strategist in the White House, previously worked at Goldman Sachs. The sitting President of Goldman Sachs, Gary Cohn, was named by you as Director of the National Economic Council. And your nominee to Chair the Securities and Exchange Commission, Jay Clayton, is an outside lawyer to Goldman Sachs whose wife is currently a Vice President there. Clayton has represented 8 of the 10 largest Wall Street banks in the past three years.
Mr. President, another public-private boondoggle that privatizes profits and socializes losses in a thinly veiled, institutionalized wealth transfer system to the 1 percent could prove fatal to the U.S. economy.