In defending the federal government’s $528 million investment in the failed solar company Solyndra, as well as the Department of Energy’s expensive loan guarantee program, President Barack Obama said at a press conference today:
"We are not going to be duplicating the kind of system that they have in China where they are basically state-run banks giving money to state-run companies and ignoring losses and ignoring, you know, bad management."
Not quite. The U.S. federal government actually does have a "state-run bank,” the Federal Financing Bank [FFB], that Congress and the White House direct to lend taxpayer funds to shaky, privately-run companies like Solyndra -- a practice that essentially is still "ignoring losses and ignoring, you know, bad management."
Taxpayers may not be aware that this little known bank run by the Treasury Dept .-- a bank that by law has unlimited access to taxpayer funds and is buried deep in the government’s financial statements -- sits at the center of the Solyndra controversy.
This Treasury-run bank has also been used to finance a mortgage bailout program launched under President George W. Bush that was initially meant to be paid for by bond investors in the private credit markets. But instead, taxpayers are shouldering the bill for this bailout program that only helped modify a fraction of the millions of mortgages under water.
"The FFB must by law provide funding for government programs, and by statute it must do so in a way to protect taxpayers. That means it must do so in a way that is as efficient and as inexpensive as possible," says a Treasury official. "The FFB doesn't direct or launch these programs. It is a funding mechanism that must finance them by law."
In fact, the FFB has been directed by all sorts of federal government agencies to finance pet projects that the White House or Congress want. That includes funding the White House’s ambitions of venture capitalism, where it invests seed (taxpayer) money in flimsy solar companies.
The FFB by statutory mandate also funds struggling operations like the U.S. Post Office. And years ago, the FFB was forced to lend $1.1 billion to shaky credit unions which had unwisely invested their funds in risky mortgage-backed securities.
This is an abuse of the public purse that is buried deep in the government’s financial statements.
All of this is unfair to the FFB, but again by law it must finance these projects. It doesn’t launch or direct these projects, and it must do all of this while trying to save taxpayers money. The FFB’s chairman of the board is usually the Treasury Secretary, and the bank’s board executives are Treasury officials.
“That is what the FFB must do under the law,” a Treasury official says in an interview.
Yet, when it comes to the FFB’s financing of the Bush mortgage bailout, there’s a difference between being a voluntary investor and an involuntary investor. In this instance, what Treasury did under the Bush Administration is determine it was easier and cheaper for it to sell these HOPE bonds directly to the FFB -- meaning to you, captive taxpayers, whether you like it or not.
Since it was launched in 1973 under the Nixon Administration, the Federal Financing Bank was supposed to be used to keep the government’s borrowing costs low. Shortly after 1973, the FFB helped finance a broad range of government operations, from agricultural to military programs.
Alice Rivlin, then director of the Congressional Budget Office, testified to Congress in 1983 that “the Federal Financing Bank was intended to be a neutral financial intermediary, lowering the government's interest costs but not otherwise affecting the budget.”
However, since then, the FFB has indeed affected the budget, as it has been used to provide cheap loans to the Energy Department’s green program, to date $1.9 billion worth, at times at microscopic 1% interest rates or less. The FFB went from a balance sheet in the tens of millions of dollars in the early ‘70s to $55.5 billion as of August 31, 2011.
Its taxpayer funds have gone to shaky green companies like Solyndra, where “no reputable venture capitalist would have invested,” says Ed Butowsky, managing partner at Chapwood Investments.
In fact, the FFB had little to no green financing on its books in 2008, but now has close to $2 billion worth, via the Energy Department’s loan guarantee program.
The FFB has also been used to give $11.5 billion in dirt-cheap loans charging just a quarter of a percent or less in interest to float the U.S. Post Office, which is estimated to post $10 billion in losses for this fiscal year. And the FFB has been used to buy the bonds issued in the HOPE mortgage bailout program.
Besides having access to unlimited Treasury (taxpayer) funds, this is what may give taxpayers pause. The 1973 law establishing the FFB, which has not been amended since, reads:
“The Bank is authorized to make commitments to purchase and sell, and to purchase and sell on terms and conditions determined by the Bank, any obligation which is issued, sold, or guaranteed by a federal agency.”
That essentially means the bank could buy any bond issued by any federal agency. And that’s a lot of bonds.
When asked about the use of the FFB to buy HOPE bonds, a Treasury official says the FFB by law exists to provide the least expensive financing in order to protect the U.S. taxpayer. “The decision was made to lower the costs for taxpayers,” the official says.
But to buy all of the bonds - and not just have taxpayers pay for just the yields on them instead, before they are redeemed?
Ask yourself if it is fiscally responsible to let the Treasury run a bank that is submarined deep in its budget statements, a bank that has helped the government round trip its borrowing and lending for shaky programs like the HOPE mortgage bailout, moves which in turn flood the zone with liquidity when the U.S. dollar is already getting pounded?
James B. Lebenthal of Lebenthal Asset Management, who says he supports Treasury Secretary Tim Geithner’s move to help the financial system and the economy, notes that he worries these moves at the FFB will add to inflation.
“The flooding of the system with liquidity – of which this is just one more of many steps all branches of the government have been taking,” Lebenthal says, which may lead to “the collapse of the dollar. What would be far more effective, though, would be to grow the damn economy, create jobs, and get the velocity of money flowing instead of just increasing the monetary base.”
For more than a decade and a half, the Federal Financing Bank sat off the government’s budget reports, effectively off the balance sheet, after the U.S. Congress launched it in 1973.
Rivlin, the former director of the Congressional Budget Office, testified to Congress that such off-the-books treatment of the FFB led to distortions in the true fiscal debt picture of the U.S. government.
The Treasury Dept. later put the FFB back on the budget, but to this day, information about this bank’s activities and its use of taxpayer funds are sunk in the Treasury’s budget statements. For example, the bank’s dirt-cheap lending, including to the insolvent, poorly run Post Office, is found in just one short table in and around page 178.
This little known bank has been at the core of the Solyndra controversy involving the White House and Solyndra's investors, one of which, the George Kaiser Family Foundation, was seeded by George Kaiser, who gave political donations to President Obama. Republican Congressional officials are now seeking documents and internal communications between the Department of Energy and the White House with regards to Solyndra.
Solyndra received a $535 million Energy Department loan guarantee, of which it used $528 million, reports indicate. The FFB provided the money for many of Solyndra’s loans, at times at cheap interest rates. The FBI has raided Solyndra’s headquarters, and government probes continue.
A new batch of e-mails show the White House’s Energy Department was poised to give Solyndra a second taxpayer loan of $469 million last year, even as the company’s financial condition deteriorated, and at a time when Solyndra’s auditors were already warning that the company was in danger of collapsing, reports indicate. The FFB would likely have been the source of these funds, too.
And it’s the circling slush of funding for the Bush Administration’s “HOPE for Homeowners” program in 2008 that is unusually curious, and should be of concern to taxpayers. This program was meant to help struggling families keep their homes, and it was initially meant to be funded by private bond investors. But that didn’t happen.
Under the HOPE program, in order to avoid what would be even costlier foreclosures, participating banks were told they would have to write down existing mortgages to 90% of the new appraised values of homes in the program. Homeowners could then get refinancing help via the HOPE program at the Federal Housing Administration.
In order to pay for this new federal bailout of mortgage borrowers, bonds were created by the Housing and Economic Recovery Act of 2008 (signed into law on July 28, 2008), and the government was set to launch the first HOPE Bonds within weeks. The government envisioned this bailout could hit $300 billion in federal costs.
However, within a month’s time, the Treasury under the Bush Administration decided it would have to pay too much in the way of yield on these HOPE bonds in order to get the private investor to buy them. The FFB was in a bind, again because part of its statutory purpose is to reduce the costs of federal borrowings.
"Due to the cost of issuing special purpose bonds to the public, the secretary of the Treasury has decided to issue the HOPE bonds to the bank,” the Federal Financing Bank, a government document reads.
A Treasury official says it does not have access to information as to whether the Treasury informed the White House or Congress of this decision.
So, in a month’s time, the Treasury Department elected instead to make taxpayers the captive investors in HOPE bonds, through the FFB. Treasury officials in an interview could not state how much the extra costs in selling these bonds in the private market would have been, absent a government document search.
That means taxpayers are shouldering the costs of all of these HOPE bonds, instead of just paying the yields on them for now. To date the FFB has an estimated $493 million of these bonds on its balance sheet.
A Treasury official says if the government had sold these bonds in the credit market, “the cost to taxpayers of going into the private market would be higher.” Another Treasury official adds these bonds “are full faith and credit instruments. Taxpayers already are responsible for the payment of Treasury bonds’ interest and principal.”
But there’s more to this move here. “Because the taxpayers are both the issuers (through Treasury) and the buyers (through Treasury), the taxpayers as issuers are paying the interest costs of the bonds and the taxpayers as buyers are paying the purchase price and bearing the credit risk,” says FOX News analyst James Farrell.
“Think of it as lending money to yourself,” Farrell adds. “Who bears all the costs and who bears all the risk? With one party in a circular transaction, the answer is pretty simple.”
And a reasonable taxpayer may wonder that if, as with every transaction financed by the FFB, “the cost to the general taxpayer is lower than any alternative financing mechanism," as the government contends, “then why don't we just have Congress authorize the FFB to buy all new debt issued by the Treasury?” asks Farrell.
Farrell adds: “We could lower the borrowing cost of increasingly spending more than we take in by just having Treasury determine a below-market interest rate that it would pay the FFB and we would eliminate the leverage that China has over us as owner of more than $1 trillion of our national debt.”
A government official also says that selling HOPE bonds to the public would have incurred “additional administrative costs,” which would have included “modifications to software systems used to account for and make payments on marketable Treasury securities."
The official added that “conducting unique auctions to sell HOPE Bonds to the public would have disrupted the regular and predictable schedule of Treasury financing.”
But couldn’t the same have been said of Ginnie Maes when these government bonds were launched decades ago?
In the end, it’s the value of the dollar that is at issue. “It really makes no difference if the FFB buys up all Treasuries, or if the Federal Reserve does so through massive quantitative easing,” says Lebenthal. “Either way the US government is creating dollars, with the attendant risk of inflation.”
Lebenthal adds: “At least in the case of the FFB buying HOPE bonds, there is real collateral behind it. At some point, of course, the rest of the world will say screw you guys, and pummel the dollar. And then, any imported good (like oil) will skyrocket in price. Imported inflation, through a collapse in the dollar, due to over-issuance needed to sterilize too much government debt, is the risk in all of this.”