The Oversight Playbook From 2008 Returns as Bailout Swells

WASHINGTON — One of the most contentious questions dogging talks over the $2 trillion economic stabilization bill revolves around how to ensure that such a sweeping bailout is administered fairly and without preferential treatment.

Democrats have made Treasury Secretary Steven Mnuchin the face of the bailout, warning that one of President Trump’s closest advisers should not be in charge of a $500 billion “slush fund” with few strings attached that could be used to unfairly benefit Mr. Trump or businesses that did not properly compensate their workers.

To prevent any favoritism, lawmakers and Mr. Mnuchin have agreed to essentially dust off the 2008 playbook for overseeing a giant government rescue program.

The final bill, which was still being negotiated late Tuesday, is expected to include the appointment of a new special inspector general to oversee the disbursement of funds to companies and ensure they qualify, according to a congressional aide.

The legislation would also create a five-person oversight panel, chosen by congressional leaders, that would monitor whether companies that received bailout money were living up to the obligations detailed in the bill to retain workers and limit executive pay. Mr. Mnuchin would be required to make regular appearances before Congress to discuss the bailout package and how it was being carried out.

Those guardrails are similar to what lawmakers put in place for the Troubled Asset Relief Program, the $700 billion bank bailout that Congress passed during the 2008 financial crisis. That bill created a special inspector general for the Troubled Asset Relief Program, or SIGTARP, as well as a congressional oversight panel that was led by Elizabeth Warren, now a Democratic senator from Massachusetts.

The quick injection of federal money into the economy, combined with a fast-moving public health crisis, means that opportunities for fraud will be rampant. An effective oversight mechanism will be crucial to ensuring that the vast injection of government money goes toward relieving the brunt of the economic fallout from the coronavirus pandemic.

“To me, one of the biggest disasters you can have with this is if either in reality or perception there are a handful of policymakers with no guidance and no guardrails picking winners and losers based on a criteria that is only now to themselves,” said Neil M. Barofsky, who was the first special inspector general of the $700 billion TARP bailout for banks.

Of the $2 trillion stimulus package, the pot of money that has received the most scrutiny is Treasury’s Exchange Stabilization Fund, which is traditionally used for managing currency markets.

The original Senate legislation set out $500 billion in funding to be used in support of companies and local governments, with $75 billion earmarked for airlines and national security companies at the Treasury secretary’s discretion. The remaining $425 billion was meant to be used to support Federal Reserve programs.

An ambiguity in the bill’s text could have allowed Mr. Mnuchin to use that money with considerable discretion, said Peter Conti-Brown, a lawyer and Fed historian at The Wharton School at the University of Pennsylvania. He added that the ambiguity seemed like sloppy drafting rather than the intent.

The Republican bill alternately said the funds should be used “in support of” or “as part of” Fed programs; the latter would be much more limiting from the Treasury’s standpoint.

The compromise bill updated that language, so now the funds are specifically dedicated “to” Fed liquidity programs or facilities. “They’re trying to do this as a Fed-Treasury partnership,” Mr. Conti-Brown said, though he added that the new language went “sprinting in the other direction” of the earlier loophole and now left the Fed in charge.

Assuming that $425 billion is used purely to back Fed emergency lending programs, Mr. Mnuchin would have some — but not absolute — say over how the money is used.

The Treasury secretary legally must sign off on the Fed’s emergency lending programs. And in practice, the department has been financially backing the programs, agreeing to take the first round of losses if the interventions sour. As a result, Mr. Mnuchin will probably consult on program design, but the Fed does most of the legwork in setting up emergency lending facilities and administering them, according to lawyers who study the programs.

There are rules governing the Fed’s emergency lending. After the 2008 crisis, Congress insisted that the Fed must set up the programs to benefit broad groups of counterparties and not individual companies, for instance. That has been interpreted to mean that there must be five eligible participants.

Despite the additional oversight of how the bailout money is doled out, Mr. Mnuchin will still have broad discretion to pick winners and losers and to provide business to his friends on Wall Street. One provision of the legislation provides Mr. Mnuchin with $100 million in funds for hiring financial institutions to help manage Treasury’s services related to cities, states and businesses.

The funds could be used to hire Wall Street asset managers like BlackRock or banks like Goldman Sachs to administer the program or to hire people from financial firms to design it.

A draft of the legislation obtained by The New York Times on Tuesday afternoon said disclosure of the names of states, municipalities and cities that received federal money could be delayed by Mr. Mnuchin for up to six months. The comptroller general of the United States will also review the loans and provide reports to Congress.

Democrats remain concerned that even the most robust oversight panel could be rendered toothless by the Trump administration, which has defied congressional requests for information and challenged subpoenas for witnesses and documents.

“I think it’s an impossible task in terms of oversight,” said Barney Frank, the former Democratic congressman from Massachusetts who led the bailout negotiations in 2008. “This is a separation-of-powers problem.”

Mr. Trump did nothing to alleviate those concerns when asked on Monday evening about his Treasury Department having too much power to hand out money.

“Look,” he said. “I’ll be the oversight.”

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