By Pam Martens and Russ Martens: December 1, 2020 ~
Five days before Congress passed the CARES Act on March 25 of this year, President Donald Trump issued an Executive Memorandum giving U.S. Treasury Secretary Steve Mnuchin complete discretion to use $50 billion in the Treasury’s Exchange Stabilization Fund (ESF) as Mnuchin solely saw fit. The Memorandum was dated Friday, March 20. On the prior Tuesday and Wednesday of that same week, Mnuchin had already used $20 billion of the Exchange Stabilization Fund to bail out Wall Street. As Mnuchin’s letter of November 19 to Fed Chair Jerome Powell confirms, he gave (or committed) $10 billion from the ESF to the Fed’s Commercial Paper Funding Facility on March 17 and another $10 billion to another Fed emergency lending program, the Money Market Mutual Fund Liquidity Facility, on March 18.
Most Americans have never heard of the Treasury’s Exchange Stabilization Fund (ESF), a slush fund available to the sitting U.S. Treasury Secretary since 1934. The ESF has grown from $94.3 billion in assets prior to Trump taking office to $682 billion as of September 30, 2020. As recently as March 31, 2007, the ESF had assets of just $45.9 billion, meaning it has grown by a factor of more than 14 times in 13 years.
The size of the ESF slush fund matters because under current law (31 U.S.C. §5302) the decisions on how to spend the billions in this slush fund belong to the Treasury Secretary and “are final and may not be reviewed by another officer or employee of the Government.” The law also provides that the Treasury Secretary “with the approval of the President, may deal in gold, foreign exchange, and other instruments of credit and securities the Secretary considers necessary.” Since publicly traded stocks are “securities,” that certainly sounds like the Treasury Secretary would have the right to intervene in buying up stocks to shore up the stock market, effectively making the Treasury Secretary a Plunge Protection Team of one.
The Dow Jones Industrial Average had closed on the first trading day of March at 26,703, then preceded to lose 7,529 points by the close of trading on March 20 as the COVID-19 crisis escalated. By March 23, CNBC was reporting that the S&P 500 had plunged 30 percent in 22 trading sessions, the fastest decline in history, noting further that the “second, third and fourth quickest 30% pullbacks all occurred during the Great Depression era in 1934, 1931 and 1929, respectively.”
If Mnuchin did want to use his ESF slush fund to intervene in markets, how would he go about placing his trades? The insidious New York Fed tells us this about its relationship with the ESF: “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.”
Who better than the tight-lipped New York Fed to be trading on a “confidential” basis for the Treasury Secretary. Wall Street On Parade couldn’t even get a photo from the iron-grip of the New York Fed of its Wall Street-esque trading floor back in 2013, but we located one anyway without its help.
We know that Mnuchin didn’t use his $50 billion of taxpayers’ money in his slush fund to trade foreign currencies, ostensibly what the ESF was created to do during the Great Depression to support the U.S. dollar, because the Fed has released reports for the first three quarters of this year indicating that it did not intervene on behalf of the ESF in foreign exchange markets.
We also know that Mnuchin’s ESF slush fund grew by $500 billion in the spring of this year because the CARES Act legislation mandated that amount of money to be first deposited into the Exchange Stabilization Fund. (According to Mnuchin’s November 19 letter, he “was personally involved in drafting the relevant part” of the CARES Act.) The Treasury Secretary was directed under the Act to use up to $46 billion of the $500 billion to make direct loans and loan guarantees to pandemic-impacted businesses as follows: up to $25 billion to passenger air carriers; up to $4 billion to cargo air carriers; and up to $17 billion to businesses critical to national security. The balance of $454 billion was to go exclusively to the Federal Reserve to be used as loss absorbing capital for the Fed’s emergency lending facilities.
Despite the very clear directive of the CARES Act, Treasury Secretary Mnuchin only provided $114 billion to the Fed for its emergency lending facilities and $20 billion of that came from the ESF prior to passage of the CARES Act. That means that out of $454 billion that Congress earmarked to the Fed’s emergency lending facilities under the CARES Act, Mnuchin only handed over $94 billion, leaving $360 billion sitting at his disposal in the ESF slush fund. According to Mnuchin’s letter of November 19, he has more than half ($26 billion) of the $46 billion he was to make in direct loans still unused. If you add the $26 billion to the $360 billion, Mnuchin has been sitting on a $386 billion slush fund that he is allowed to use without any Congressional approval for the past eight months. And, had President Trump been re-elected, as his administration had expected, the CARES Act provided that the ESF would not have to turn that pile of money over to the Treasury’s General Fund until January 1, 2026. The CARES Act reads as follows:
“Deficit reduction. On January 1, 2026, any funds described in paragraph (1) that are remaining shall be transferred to the general fund of the Treasury to be used for deficit reduction.”
But since Trump was not re-elected, Mnuchin is now demanding that all unused funds from the $500 billion allocated under the CARES Act be turned over to the Treasury’s General Fund five years ahead of what the legislation requires, thus depriving incoming Treasury Secretary Janet Yellen of her own ESF slush fund.
Both Mnuchin and Fed Chair Jerome Powell will appear today before the Senate Banking Committee and both will appear again tomorrow before the House Financial Services Committee. We’re not holding out much hope for clear answers as to what Mnuchin has been doing with that surplus $386 billion in the ESF.
The ESF has an ignoble history. President George W. Bush used the ESF to shore up Wall Street by guaranteeing money market funds during the last financial crisis. After Lehman Brothers collapsed into bankruptcy on September 15, 2008, a number of money market funds were found to have invested in Lehman paper. That set off a run. Bush issued a Memorandum authorizing the ESF to guarantee “certain” money market funds.
Notably, without any attention on the part of mainstream media, the CARES Act also authorized the ESF to guarantee money market mutual funds this year. Congress had restricted the ESF from using this maneuver again in the future when it passed the Emergency Economic Stabilization Act of 2008. Some smart Wall Street lawyer had the foresight to remove that restriction in Section 5001 of the CARES Act, which reads: “Temporary Permit Use to Guarantee Money Market Mutual Funds: Section 131 of the Emergency Economic Stabilization Act of 2008 (12 U.S.C. 5236) shall not apply during the national emergency concerning the novel coronavirus disease (COVID–19) outbreak declared by the President under the National Emergencies Act (50 U.S.C. 1601 et seq.).”
In July 1999, a bipartisan group of House members attempted to add an amendment to the 2000 Appropriations bill that would mandate Congressional approval before the President or Treasury Secretary could spend more than $1 billion from the ESF.
Senator Bernie Sanders of Vermont, then a member of the House, was a Co-Sponsor of the amendment. Senator Sanders said this in his remarks on the amendment:
“Once again, this amendment will not in any way restrict the Treasury Department’s use of the ESF to stabilize currencies, because currencies stabilization is the purpose for which Congress established the ESF.
“The point here is that, as every Member of this body knows, that we on occasion spend hours debating how we are going to spend $1 million here or $1 million there. Given that reality, some of us think that maybe we should participate in debates when billions of dollars are appropriated.
“Mr. Chairman, in recent years, whether it has been Mexico, whether it has been Asia, whether it has been Latin America, in Brazil, the President has acted unilaterally. I would argue that those of us who believe in the democratic process, those of us who get up here and argue about how we spend $1 million here or there, have a right to participate in where billions of taxpayer dollars are going.”
Former Congressman Ron Paul of Texas also supported the amendment. He said this:
“I would like to clarify one thing about the original intent of the Exchange Stabilization Fund. It was never meant to be used to support foreign currencies. It should not be so casually accepted that that is the proper function of the Exchange Stabilization Fund. The Exchange Stabilization Fund was set up, I think in error; but it was set up for the purpose of stabilizing the dollar in the Depression…
“How did it come about over these many years that this fund has been allowed to exist without supervision of this Congress, and now has reached to the size of $34 billion and we give it no oversight? It is supposed to send reports to us, very superficial reports to the Congress. We don’t know how they got $34 billion. They earned interest on some of the loans, and all the loans are paid back because the countries who get the loans borrow more money.
“Mr. Chairman, the Mexico bailout did not solve the Mexico problem. It is ongoing. The peso is in trouble again. They are in more debt than before. We only encourage the financial bubble around the world. This is a dangerous notion that we can take something that was set up to stabilize the dollar, and now we are pretending we can stabilize all the currencies in the world and use it as foreign aid to boot without the congressional approval. There is something seriously flawed with this.
“It has also been suggested by many who know a lot more about the details of the Exchange Stabilization Fund than I do, and it has been suggested that possibly, quite possibly, what happens is Treasury deals in currencies all the time and there are profits to be made. And when there is a profit, it goes into the Exchange Stabilization Fund. When there is a loss, it is sent over to the Treasury and then recorded as a loss…in a free society, in a democracy, in a republic where we are supposed to have the rule of law, we are not supposed to have a slush fund that is run by our Treasury without supervision to be doing things that was never intended. This is a serious problem. And I think economically it is serious because it is contributing to the bubble. It is contributing to a financial bubble.”
In his remarks from the House floor, former Congressman Dennis Kucinich of Ohio called the ESF the “Foreign Investment Failure Fund.” His remarks included the following:
“Mr. Chairman, the Exchange Stabilization Fund is being misused by Treasury to bail out foreign investment failures. When some aspects of corporate foreign investment policy fails, the Treasury taps the ESF to cover over the failure.
“Here is a recent example, Mr. Chairman. In Indonesia, the International Monetary Fund caused a run on Indonesian banks when it directed the closure of 16 banks there. A confidential internal IMF memo even acknowledged the failure. The IMF caused a panic by making a bad situation much worse. So what does this ‘Foreign Investment Failure Fund’ do? Without congressional approval, Treasury dispatched a credit line of $3 billion to cover the mistake.
“NAFTA caused a flood of U.S. investors to abandon their investments in the U.S. for higher rates of return in Mexico. Then the already over-valued Mexican currency collapsed. Guess what? The ‘Foreign Investment Failure Fund’ was used without congressional approval to cover the multi-billion dollar failure.
“Indeed, the ESF was used in this way because Congress refused to pass a $20 billion package to benefit the Mexican elite at the expense of the Mexican people. The use of the ESF by Treasury thwarted the will of the Congress.
“The ‘Foreign Investment Failure Fund’ is used to accomplish policy changes that often make international financial problems worse. In Korea, important consumer and labor standards and regulations were overturned as conditions for $5 billion in ‘Foreign Investment Failure’ funds from the U.S.
“Koreans now talk about ‘IMF suicides’ to characterize the wave of suicides among jobless and hopeless Koreans. Korean labor unions are conducting massive protests and strikes. Without Congress’ approval or involvement, global economic policy is being forged for the benefit of the few with the funds of the American people as leverage.
“This amendment will correct the abuses, but it will not tie Treasury’s hands. If Treasury needs to stabilize another country’s currency, it will be able to use the ESF to do so unilaterally and without Congress’ approval. The amendment allows Treasury to do currency swaps and other currency stabilization aids without Congressional approval.
“But if Treasury is making a large loan to another country, they will have to come to Congress, which is the only appropriate process, given the American system of checks and balances.
“This amendment is nearly identical to one that Congress passed in 1995. Many of my fellow Democrats voted for that amendment then. Unfortunately, the authority of that provision lapsed in October of 1997. Today, we need to repeat our correct action. So long as the Exchange Stabilization Fund is used to extend credit or give loans to foreign nations without Congress’ approval, these foreign investment failures will get larger and will become more frequent. More of the U.S. Treasury will be exposed to paper over them, benefit foreign elites, bail out big banks, and underwrite austerity, joblessness and hopelessness for the majority of people around the globe.
“Let us stabilize the power of Congress by voting yes on this amendment.”
The amendment did not pass and today we are looking at a Treasury Secretary who has provided no details on what he has been doing for the past eight months with a slush fund of $386 billion while food lines grow by miles across America, 98,000 businesses permanently closed, and 20.4 million Americans are receiving unemployment benefits.