By Pam Martens and Russ Martens: December 22, 2020 ~

The language that Republican Senator Pat Toomey inserted into the final stimulus bill (Consolidated Appropriations Act, 2021) appears below. It not only restricts the Federal Reserve’s ability to extend some of its current emergency lending programs that help small and medium size businesses and state and local governments beyond December 31 of this year (while leaving Wall Street bailout programs alive for at least another 90 days) but it also enshrines the autonomy of the U.S. Treasury Secretary to operate a massive slush fund – the Exchange Stabilization Fund (ESF).

Most Americans have never heard of the Treasury’s Exchange Stabilization Fund. It was created in 1934 to provide support to the U.S. dollar during the Great Depression. The ESF has grown from $94.3 billion in assets prior to Trump taking office to a balance of $681 billion as of October 31, 2020. As recently as March 31, 2007, the ESF had assets of just $45.9 billion.

According to footnote 1 of the October 31, 2020 ESF financial statement linked above, the ESF received the “full amount” of the CARES Act appropriation to the Treasury of $500 billion in March, from which Treasury Secretary Mnuchin was supposed to give $454 billion to the Fed to backstop the Fed’s emergency lending programs. Those programs were to be used during the financial crisis to loosen credit markets, help Main Street businesses and shore up local and state governments through support of municipal bond markets.

But instead of turning over the full $454 billion to the Fed, Mnuchin turned over just $114 billion for the Fed’s emergency lending programs, as confirmed by the Congressional Research Service on December 17.  Since what the Treasury Secretary does with the ESF “may not be reviewed by another officer or employee of the Government” according to its dodgy statute, the public has no idea as to what Mnuchin actually did with the balance of $340 billion in his slush fund from the CARES Act.

While there has been widespread media attention to Toomey’s effort to kneecap the Fed’s emergency lending programs by inserting language into the stimulus bill, there has been no mainstream media attention to Toomey’s effort to memorialize both Mnuchin’s and (potentially) future Treasury Secretaries’ ability to have a slush fund to intervene in markets. The Treasury Secretary has, effectively, become a Plunge Protection Team of one.

The Exchange Stabilization Fund is governed by Section 5302 of Title 31 of the U.S. Code. The new language that Toomey (with likely the input of Treasury Secretary Mnuchin) inserted into the just-passed stimulus bill reads as follows:

‘‘(A) IN GENERAL.—Except as provided in subparagraph (B), the Secretary is permitted to use the fund established under section 5302 of title 31, United States Code, for any purpose permitted under that section.

‘‘(B) EXCEPTION.—The fund established under section 5302 of title 31, United States Code, shall not be available for any program or facility established under section 13(3) of the Federal Reserve Act (12 U.S.C. 343(3)) that is the same as any such program or facility in which the Secretary made an investment pursuant to section 4003(b)(4), except the Term Asset-Backed Securities Loan Facility.’’

The Section 5302 statute governing the Exchange Stabilization Fund gives the Treasury Secretary the following rights:

“Subject to approval by the President, the fund is under the exclusive control of the Secretary, and may not be used in a way that direct control and custody pass from the President and the Secretary. Decisions of the Secretary are final and may not be reviewed by another officer or employee of the Government.

“…the Secretary or an agency designated by the Secretary, with the approval of the President, may deal in gold, foreign exchange, and other instruments of credit and securities the Secretary considers necessary.”

Stocks and bonds are “securities” and thus qualify as markets in which the Treasury Secretary can intervene under this statute.

Is manipulating markets by a single, unelected official something that American taxpayers really want to be funding? According to the New York Fed, which has its own trading floor, it does the trading on behalf of the Treasury’s Exchange Stabilization Fund. Its website reports that: “ESF operations are conducted through the Federal Reserve Bank of New York in its capacity as fiscal agent for the Treasury.” The New York Fed also shares this: “ESF accounts and activities are subject to Congressional oversight. The Treasury provides monthly reports on U.S. intervention activities and a monthly financial statement of the ESF to Congress on a confidential basis.”

“Confidential” is the operative word here. Past members of Congress have complained that these reports are as clear as mud.

President Donald Trump has expressed a peculiar confidence in Tweets over the past four years that the stock market could only go up and set new highs under his Presidency. Trump has also expressed the view that the stock market would crash under a Biden presidency. One has to wonder if the Exchange Stabilization Fund had something to do with Trump’s bravado.

After Biden won the presidential election, Mnuchin stated that he would be removing the CARES Act money from the Exchange Stabilization Fund and moving it into the Treasury’s General Fund, thus depriving incoming Treasury Secretary Janet Yellen of her own giant slush fund. Whether that is going to happen or not is unknown at this time. The CARES Act states that this should not occur until January 1, 2026 — that would have been after Trump left office if he had won a second term.

The full text concerning the Fed’s emergency programs as well as the Exchange Stabilization Fund (referenced only by its 5302 statute number) appears below. While the Fed has definitely been kneecapped on its current Treasury-supported emergency lending programs, Democrats clearly fought very hard to get the final paragraph added which preserves the Fed’s ability to establish emergency lending facilities without the support of the Treasury, using Section 13(3) of the Federal Reserve Act.

After the Fed went on a secret wild binge throwing $29 trillion at Wall Street’s teetering banks, trading houses and foreign central banks during the 2007-2010 financial crisis, Congress lightly clipped its wings under the Dodd-Frank financial reform legislation of 2010. That legislation revised the Fed’s 13(3) powers by requiring that the Fed could only make loans on a broad basis, rather than bailing out single insolvent institutions like Citigroup, which had received more than $2.5 trillion in secret, cumulative loans from the Fed from December 2007 to July 2010.

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Text from Consolidated Appropriations Act, 2021 Pertaining to the Fed’s Emergency Lending Facilities and the Exchange Stabilization Fund

(1) IN GENERAL.—After December 31, 2020, the Board of Governors of the Federal Reserve System and the Federal Reserve banks shall not make any loan, purchase any obligation, asset, security, or other interest, or make any extension of credit through any program or facility established under section 13(3) of the Federal Reserve Act (12 U.S.C. 22 343(3)) in which the Secretary made a loan, loan guarantee, or other investment pursuant to section 4003(b)(4), other than a loan submitted, on or before December 14, 2020, to the Main Street Lending Program’s lender portal for the sale of a participation interest in such loan, provided that the Main Street Lending Program purchases a participation interest in such loan on or before January 8, 2021 and under the terms and conditions of the Main Street Lending Program as in effect on the date the loan was submitted to the Main Street Lending Program’s lender portal for the sale of a participation interest in such loan.

(2) NO MODIFICATION.—After December 31, 2020, the Board of Governors of the Federal Reserve System and the Federal Reserve banks—

(A) shall not modify the terms and conditions of any program or facility established under section 13(3) of the Federal Reserve Act 16 (12 U.S.C. 343(3)) in which the Secretary made a loan, loan guarantee, or other investment pursuant to section 4003(b)(4), including by authorizing transfer of such funds to a new program or facility established under section 13(3) of the Federal Reserve Act (12 U.S.C. 22 343(3)); and

(B) may modify or restructure a loan, obligation, asset, security, other interest, or extension of credit made or purchased through any such program or facility provided that— (i) the loan, obligation, asset, security, other interest, or extension of credit is an eligible asset or for an eligible business, including an eligible nonprofit organization, each as defined by such program or facility; and (ii) the modification or restructuring relates to an eligible asset or single and specific eligible business, including an eligible nonprofit organization, each as defined by such program or facility; and (iii) the modification or restructuring is necessary to minimize costs to taxpayers that could arise from a default on the loan, obligation, asset, security, other interest, or extension of credit.

(3) USE OF FUNDS.—

(A) IN GENERAL.—Except as provided in subparagraph (B), the Secretary is permitted to use the fund established under section 5302 of title 31, United States Code, for any purpose permitted under that section.

(B) EXCEPTION.—The fund established under section 5302 of title 31, United States Code, shall not be available for any program or facility established under section 13(3) of the Federal Reserve Act (12 U.S.C. 343(3)) that is the same as any such program or facility in which the Secretary made an investment pursuant to section 4003(b)(4), except the Term Asset-Backed Securities Loan Facility.

Except as expressly set forth in paragraphs (1) and (2) of subsection (c) of section 4029 of the CARES Act, as added by this Act, nothing in this Act shall be construed to modify or limit the authority of the Board of Governors of the Federal Reserve System under section 13(3) of the Federal Reserve Act (12 U.S.C. 343(3)) as of the day before the date of enactment of the CARES 18 Act (Public Law 116–136).