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Sen. Grassley Hammers Paulson on Bailout Implementation

The ranking member of the Senate Finance Committee Sen. Chuck Grassley (R-Iowa) has sent a letter to Treasury Secretary Henry Paulson and Federal Reserve Board...
November 18, 2008

The ranking member of the Senate Finance Committee Sen. Chuck Grassley (R-Iowa) has sent a letter to Treasury Secretary Henry Paulson and Federal Reserve Board Chairman Benjamin Bernanke questioning the changes in the way taxpayer money has been used in the bailout bill known as the Emergency Economic Stabilization Act (EESA) of 2008.

In a statement accompanying the November 12 letter, Grassley said that with the increasing number of changes, "you have to wonder if they really know what they're doing." He agreed that the changes might be "completely legal," but said they certainly raise questions about whether the administration officials "have a handle on how bad the situation really is."

Grassley all but accused Treasury of bait-and-switch on the purchase of mortgage backed securities, saying that the agency sold EESA to Congress by arguing that the $700 billion was needed to purchase mortgage-backed securities in order to reestablish a market in these securities that had frozen up. However, once it got the money, Treasury used it for everything except the purchase of mortgage-backed securities. In a news conference earlier in the day on Nov. 12, Paulson announced that Treasury was no longer considering purchasing mortgage-backed securities and indicated it had other priorities for the TARP funds.

Grassley cited a number of published reports that banks received large sums of money under the act, but did not use most of the money to extend credit. Instead they bought other banks, paid large bonuses to their executives, and paid dividends to shareholders.  Grassley noted that on Oct. 24, Treasury approved $7.7 billion in aid to PNC Financial Services Group, which just hours later announced that it was using the money to acquire National City Corporation for $5.58 billion. Earlier, Treasury had denied funds to National City. Given this discrepancy, Grassley asked Treasury for a detailed description - as well as printed copies - of standards, policies and procedures that it uses to decide which banks get aid. He also wanted to know who makes the decisions, and specifically, how Treasury decided not to help National City, but to help PNC.

Separately, Sen. Grassley has asked for an investigation by the Treasury Department's Inspector General of the circumstances surrounding Treasury's issuance of Notice 2008-83, guidance that responded to the financial crisis by lifting restrictions on the ability of banks to use losses after an acquisition under tax code Section 382.

In a letter to Treasury Inspector General Eric Thorson requesting the inquiry, Grassley raised concerns about both Treasury's legal authority to issue the notice and about possible conflicts of interest involving Treasury officials, former Goldman Sachs executives and board members in the sale of Wachovia to Wells Fargo, which many believe was enabled by the notice. "Without the issuance of the notice, Wells Fargo would have only been able to shelter a limited amount of income," Grassley said. "Under the notice, however, Wells Fargo could reportedly shelter up to $74 billion in profits," which potentially enabled Wachovia's senior executives to qualify for parachute payments that may not have been available under a competing Citibank deal, Grassley said. Grassley said that the notice "appears to have had the effect of benefiting Wachovia Corporation executives and Wells Fargo," noting that Robert Steel, the CEO of Wachovia, was a former Treasury undersecretary for domestic finance and a vice chairman at Goldman Sachs.

From wire services.

Sen. Grassley's Letter to Paulson & Bernanke (Iowa 11/13/08)