Author: David Dayen

While Barack Obama called for bipartisan solutions to the country’s nagging problems, and discussed the growing lack of faith in public institutions, a simple read between the lines shows that he was really focusing his attention on one institution – the United States Senate. He made many references to items of his agenda passed by the House but not be the Senate, and he returned on more than one occasion to the paralyzing force of Republican obstructionism in the upper chamber. “If the Republican leadership is going to insist that 60 votes in the Senate are required to do any business at all in this town, then the responsibility to govern is now yours as well,” he said.

One Senator is trying to change that insistence, and put the focus back on governing rather than the crippling rules which have led, in a pretty direct way, to American decline. Tom Udall is a freshman Senator from New Mexico who served a decade in the House before that. Like 97 96 of his Senate colleagues, he has never had an opportunity to vote on any aspect of the chamber’s rules, which have instead carried over from one Congress to the next (fun fact, the only 3 current members to vote on Senate rules, in 1975, are Robert Byrd, Daniel Inouye and Patrick Leahy). His plan is to give the full Senate a vote on its own rules at the beginning of the next Congress, in January of 2011. This “Constitutional option,” as Udall calls it, is the beginning of a year-long effort to focus on the rules process, and the Senator looked back to history to design the strategy.

“The best advice my father gave me before entering the Senate was to re-read the biography of Clinton Anderson, my predecessor in this seat,” Udall said in a phone interview with FDL News (his father, Stewart Udall, was an Arizona House member and the former Interior Secretary under President Carter Kennedy and Johnson). “Anderson always thought the Senate could do a better job if we had the rules to do the job. He worked in the 1950s to change the Senate rules, and I’m picking up the baton from him.”

Udall described the maddening situation that the Senate finds themselves in – beholden to outdated and often paralyzing rules, but unable to change them readily. “Over the years, we’ve gotten ourselves into a box,” he said. “We have a provision that the rules of the Senate carry over from one Congress to the next. And if you want to change the rules, you need 67 votes. That’s a practical impossibility.”

To overcome this, Udall plans to make a motion for the Senate to adopt new rules for the 112th Congress at the beginning of 2011. How would such a process work? Udall says he needs to only bring up the motion and hold 51 votes to move to the next step of adopting those new rules. The Constitution does not refer to a super-majority vote to change Senate rules, Udall emphasized. And the premise that one legislature cannot bind the actions of a future legislature, affirmed in Supreme Court decisions, suggests that the Senate ought to be given a vote.

The new rules would be determined with a process going through the Senate Rules Committee, on which Udall sits. The committee is chaired by Chuck Schumer, and while Udall hasn’t spoken specifically with Schumer since he released his plan, he said that in the past, he has signaled an interest in working on rules this year. “I can say that there is a concern in the Senate about the rules,” Udall said. With a year to deliberate over new rules, the committee could be ready with a new proposal for adoption at the beginning of the next Congress. In the meantime, while the Senate waits to adopt new rules, general Parliamentary procedure would take precedence, Udall said.

While Udall didn’t want to “presume to say what the rules will be,” it’s pretty clear from his presentation that he is taking aim at the filibuster. Here’s what he writes about the filibuster in the Constitutional option plan on his website:

Specifically, under the “filibuster rule” (Rule XXII), it is not possible to limit debate, or end a filibuster, without three-fifths, or 60, of all Senators voting to do so. In the past several years, the use — and abuse — of filibusters by both parties to obstruct the Senate from functioning has become the norm. But it hasn’t always been this way. Such cloture votes used to occur perhaps seven or eight times during a congressional session, but last Congress there were 112 — most occasioned simply by the threat of a filibuster. The use of the filibuster today dominates the Senate’s business at an irresponsible level, threatening our ability to operate.

Ezra Klein, Ben Frumin and Jason Reif, and a host of other liberal commentators have noted this trend toward rising cloture votes. As Udall said to me, after having observed the Senate for 10 years while in the House and in his first year in the upper chamber, it has “become more dysfunctional than deliberative.” Udall said that “I’ve heard Senators say, ‘These rules are crazy,’ and then they say you have to find 67 votes to change them or we’re stuck. So that’s the box we’re in.” His goal is to design rules that produce legislation “that’s better for the American people.”

Udall hopes to get this done at the beginning of the next Congress, citing the Constitutional need for the Senate to vote on its own rules from Article I, Section 5. He’s amassed several quotes, including from two former Vice Presidents (Richard Nixon was one of them) stating that the Senate cannot be bound by the work of a former Congress. As for needing President Obama’s rhetorical support to really push for rules changes, Udall said, “I’m going to focus on the Senate.”

Both Nancy Pelosi and Harry Reid released statements last night thanking President Obama for his renewed commitment to health care reform, and both vowed to get something done. But Pelosi made news earlier in the evening in a series of sit-downs with various journalists. She is now favoring a dual-track approach to health care, where the major deal is still done through the reconciliation sidecar process, and other pieces that cannot be added or fixed in reconciliation get done in standalone bills.

Pelosi continues to insist that the Senate bill, in its current version, could not pass her chamber. But with a separate bill, passed under reconciliation (which Pelosi prefers to call “majority vote”), she predicted, “it’s a whole different ball game … We’ll be able to come up with something that sufficiently addresses the concerns of the House members.” […]

The House is also eager to see a restructuring of other parts of the bill, but it is not clear that this could be done under the limitations of the reconciliation rules. Reconciliation can be used for provisions that have a direct effect on the federal deficit, but not for writing new policies, such as a repeal of the insurance industry’s antitrust exemption. Aides say, for instance, they have yet to figure out how to restructure the Senate bill’s health insurance exchanges, and make them national rather than state-based. As a result, Pelosi is also talking about a “separate track”–additional pieces of legislation to make these kinds of revisions.

Interestingly, she downplayed some of the hot-button issues that had dominated so much of the debate last year. Abortion, she said, “is not the subject of our conversations at this time.” And she dismissed any suggestion that the public option might be resurrected. “You can’t do that,” she said.

I think Pelosi is making a huge mistake trying to pretend the abortion issue doesn’t exist. And her entreaty that “you can’t do” the public option is curious – it reduces the deficit, so it’s open as a procedural matter. Is she saying the votes aren’t there for it? Since Jared Polis and Chellie Pingree are now whipping on it, we’ll certainly find out.

The major pieces of the reconciliation bill that Pelosi envisions still look to be fixing the excise tax, potentially going even further than the labor deal (”The easiest thing is to just get rid of the whole excise tax”); increasing affordability credits; adding some payroll taxes to offset the costs; and stripping some of the dealmaking like that of Ben Nelson’s kickback, which tainted the process. Reconciliation is a harrowing process, but these ideas appear to fit within the budgetary confines of the Byrd Rule.

The sequencing would go like this: the House would pass their reconciliation bill first, then the Senate, and only after that would the House pass the Senate’s health care bill. The President would sign them in reverse, so that the reconciliation fixes amend the Senate bill.

Still, none of this is etched in stone; Mark Pryor was not wrong in saying that nothing might get done all year. In particular, the whistling past the graveyard on the abortion issue seems to me very misguided. If anything, those votes need to be secured now.

UPDATE: Lynn Woolsey confirms that leadership isn’t considering the public option as part of any reconciliation sidecar, despite the budgetary implications. Woolsey has vowed to offer a standalone public option bill the day that health care passes. So even if it isn’t revived, we haven’t heard the last of the idea.

Everything we’re hearing is that this will be a “centrist” speech. And given the policies we’ve heard, that’s no surprise. The call to repeal DADT must be the bone to the base.

…OK, the President has entered the building. I have the text of the speech and am looking over it now as he spends several minutes with the handshakes, et al.

…He’s going to lead with the jobs bill and offer a real defense of the stimulus. Again, he’s in a box because it’s so hard to prove a negative.

…Obama on health care will say: “Do not walk away from reform.”

…Setting the scene with the long struggle of America, how we’ve had to persevere and fight. “These were the times that tested the courage of our convictions, and the strength of our union.” Actually coming back to some of the themes of the 2004 DNC keynote.

…”The worst of the storm has passed, but the devastation remains.” This is an “I feel your pain” moment. And it’s something Congress does need to hear.

…This is starting with a very solemn tone. Talking about the letters written by children with stories of economic devastation. “Change has not come fast enough…”

…This is the Obama of the campaign, the post-partisan Obama, the “overcome the numbing weight of our politics” guy.

…I actually don’t mind this, the “story of America” stuff, offering a sense of optimism for America. I’m more of a “tell me what you do” guy, but this is necessary stuff to show that the President understands the plight.

…This is actually reminiscent of the Carter “A Crisis of Confidence” speech, especially the line: “it’s time the American people get a government that matches their
decency; that embodies their strength.”

…Now starts into policy with the economy.

… “We all hated the bank bailout. I hated it. You hated it. It was about as popular as a root canal.” Then says he can’t just do what’s popular, but what’s necessary. This started OK, but the defense is a bit off.

…At least he said that the previous Administration started it, and most of the money has been recovered, and that he’s seeking to get the rest of the money with a fee on the biggest banks… Lieberman actually clapped at that one.

…The first solid policy line: “If these firms can afford to hand out big bonuses again, they can afford a modest fee to pay back the taxpayers who rescued them in their time of need.”

Careful what you wish for (photo: philcampbell)

The spending freeze that President Obama will endorse tonight at the State of the Union address did not preclude, advisors were quick to point out, another jobs bill to increase demand in the struggling economy. The House has already passed their version of a jobs bill, with a price tag of $154 billion, and including transportation infrastructure spending, aid for state and local governments, and social safety net expansion for unemployment benefits and COBRA subsidies to help the jobless pay for health insurance.

The Senate did not take up the bill last year, and have been working on legislation over the holiday break. We’re starting to see the outlines of it, and it’s underwhelming.

With lawmakers eager to pivot to economic legislation, Senate Democratic leaders have drafted an initial version of an $80 billion-plus job-creation bill that will be heavy on tax breaks designed to spur businesses to make new hires […]

The measure isn’t quite finished yet, but sources said the current version would cost just over $80 billion. Though that number may change as the process moves forward, it is clear Senate Democrats have no intention of moving a jobs package as large as the $154 billion measure the House passed in December on a narrow, party-line vote. The House measure included money to extend unemployment benefits and COBRA health insurance coverage, items that aren’t in the draft Senate bill but may move in the chamber separately.

“There is ‘big bill fatigue’ in the Senate right now,” said a Senate Democratic aide.

There’s “I don’t have a job” fatigue in the country, and an $80 billion dollar bill largely focused on tax cuts won’t do much to help.

The centerpiece of this legislation is a job creation tax credit, which some progressive economists have actually supported as a way to nudge businesses into hiring, but which could be gamed by employers who were planning on hiring anyway. Chuck Schumer thinks it has the all-important “bipartisan support.”

Schumer and (Orrin) Hatch have proposed a tax credit that would allow businesses of all sizes to skip out on the Social Security payroll tax in 2010 on any new employees they hire, as long as the new workers had previously been unemployed for at least 60 days.

“I think this sort of marks the way of the future as we can sort of work together,” said Schumer, who asserted that the plan would cost only $8-9 billion and create as many as 3 million new jobs.

And while the plan would apply to businesses of all sizes, the New York Democrat said small businesses would see “a bigger bang for the buck.”

If the tax break really did have that kind of an impact, I’d support it. But color me skeptical.

Meanwhile, the combination of minor initiatives helping the middle class and a budget freeze on non-security discretionary spending, both of which seem to cancel the other out, left the NY Times editorial board cold, as well it should have. And that’s not all – Obama will apparently call for a separate business tax break in his speech tonight:

President Barack Obama tonight will propose extending through 2010 a temporary tax incentive that encourages businesses to accelerate purchases of equipment, an administration official said.

Obama will call for renewal of the 50 percent so-called bonus depreciation in his State of the Union address to the nation, said the official, who spoke on condition of anonymity.

Extending the break, which expired Dec. 31, would save companies that make purchases of equipment such as tractors, wind turbines, solar panels and computers a total of $38 billion over this year and next by allowing a 50 percent write- off of the cost in the first year, the official said.

I suppose there’s some rationale for this for certain manufacturers, but really we’re combining a series of narrow, targeted tax breaks for the middle class, extension of bonus depreciation for businesses as a tax break, AND a job creation tax credit. So tax cuts, tax cuts, and more tax cuts, offset by tax cuts.

Oh, and the Federal Reserve isn’t about to get off its duff and force banks to tap into their excess reserves for lending, which could unleash $1 trillion into the economy.

Grr…

Stephen Lynch (D-MA), showing an unusual amount of fire, just lit into Tim Geithner in the House Oversight Committee hearing. He said that Geithner’s conduct was “not on the side of the American taxpayer.” He reminded Geithner that the Treasury Department “scalped the folks at Bear Stearns, 2 cents on the dollar. Goldman (Sachs, a counter-party to AIG) got 100 cents!”

Lynch added that it “stinks to high heaven what happened here” and called it inexcusable, saying “It makes me doubt your commitment to the American people.” Geithner replied that the American people would not have benefited from AIG defaulting, suggesting that was the only option other than paying off the counter-parties at par.

Lynch wasn’t buying it. “You were creating new facilities every week. We were changing the rules day by day. We had leverage, and we chose not to do it!”

Lynch closed by saying that “(Treasury Secretary Hank) Paulson brought everyone into a room, and said they were all taking bailout money, why couldn’t he have negotiated a better rate on behalf of the American taxpayer?” Geithner responded, “Why would I want to be in front of you today explaining actions that could have been avoided. If you cannot default, you do not have leverage. There was no choice between default and restructuring.”

Later on in the hearing, Marcy Kaptur (D-OH) got Geithner to admit that he never signed a formal or binding recusal agreement from NY Fed activities once he was nominated for US Treasury Secretary. The bulk of her questions sought to make the connections between the government operators involved in the AIG bailout and Goldman Sachs, the largest domestic beneficiary of the counter-party payments. She noted that the chairman of the NY Fed is elected by the individuals who sit on the board, which are the heads of the private banks in the region (”Not true,” Geithner said. “I work in the public interest”) She noted that Mark Patterson, Geithner’s current chief of staff, worked for Goldman Sachs. She said Hank Paulson, then the Treasury Secretary, worked for Goldman Sachs. She said Dan Jester, the man hand-picked by Paulson to be Treasury’s point person on AIG, also worked at Goldman Sachs. “You are suggesting that the people involved in this were not acting in the public interest… that is not true,” Geithner replied.

The House Oversight Committee hearing on government assistance for AIG has begun. Timothy Geithner, the US Trasury Secretary and the chairman of the New York Federal Reserve Board at the time of the AIG bailout, is testifying on the first panel. His opening statement is contained in this document obtained by FDL News. In it, Geithner will say that the AIG bailout was crucial to saving the economy and the financial system:

The steps the government took to rescue AIG were motivated solely by what we believed to be in the best interests of the American people. We did not act because AIG asked for assistance. We did not act to protect the financial interests of individual institutions. We did not act to help foreign banks. We acted because the consequences of AIG failing at that time, in those circumstances, would have been catastrophic for our economy and for American families and businesses.

The government responded to this crisis in a coordinated way. The Federal Reserve Bank of New York (FRBNY) did not act alone. It did not have the authority to do so. Every action it took was under the direction of the Board of Governors of the Federal Reserve and in
cooperation with the Department of the Treasury and the Executive Branch.

Almost a year and a half removed from that terrible week in September 2008, I believe that the government’s strategy regarding AIG was essential to our success in confronting the worst financial crisis in generations. Government support for AIG and our financial system more broadly will ultimately cost taxpayers far less than many feared. And importantly, if Congress adopts the President’s proposed Financial Responsibility Fee, American taxpayers will not have to pay one cent for the rescue of our financial system.

After explaining the history of AIG and the government’s decision to step in, Geithner finally gets around to the establishment of Maiden Lane III and the paying off of the counter-parties at par. He says that the government had few other options, and that the consequences of AIG defaulting on these payments would be catastrophic.

The counterparties held insurance entitling them to full or par
value of the contract. We could not credibly threaten not to pay. That meant putting AIG into bankruptcy. At the time, we were working desperately to rebuild confidence in the financial system. Any suggestion that we might let AIG fail would have worked against that vital aim. We could not risk a protracted negotiation. AIG’s financial position was deteriorating rapidly and the prospect of a downgrade was imminent.

Some have suggested that the FRBNY should have used its regulatory authority, or some other means, to effectively coerce AIG’s counterparties to accept concessions. This was not a viable option either. Once a company refuses to meet its full obligations to a customer, other customers will quickly find other places to do business. If we had sought to force counterparties to accept less than they were legally entitled to, market participants would have lost confidence in AIG and the ratings agencies would have downgraded AIG again. This could have led to the company’s collapse, threatened our efforts to rebuild confidence in the financial system, and meant a deeper recession, more financial turmoil, and a much higher cost for American taxpayers.

Clearly this is the cover story. Geithner also says that he had no role in the NY Fed preventing disclosure of the counter-party payment information, having recused himself from day-to-day operations after being nominated for Treasury Secretary on November 24, 2008.

You can read the testimony for yourself. I’ll be monitoring the hearings and see how Oversight Committee members react to Geithner’s defense.

UPDATE: Here’s a portion of Chairman Ed Towns’ testimony. You can watch live on C-SPAN 3, by the way, or at the Oversight Committee website.

In the AIG case, we can talk all we want about complicated business deals, but this all boils down to a simple concept – when average people were losing their homes and jobs, the same big banks that caused the problems got every dollar back, courtesy of the American taxpayer. And the Federal Reserve tried to keep important information secret.

Secrecy leads to distrust. And the American people now distrust what happened in these bailouts. Congress has the right to know how and why that happened and the American people have the right to know how and why that happened.

The Wall Street Journal now counts 51 votes in favor of Ben Bernanke’s confirmation for another term as the Chair of the Federal Reserve. If the new regime of just Ben Bernanke requiring 50 votes to pass the Senate, then he’s pretty much assured of confirmation. This would explain why a date has been set for the vote.

The U.S. Senate on Tuesday moved to clear the way to confirm Ben Bernanke to a second term as Federal Reserve chairman, setting a procedural vote for Thursday in a sign that the needed votes were now secured.

President Barack Obama and Senate Democrats scrambled to drum up backing for Bernanke after a Republican won a stunning upset in a Massachusetts Senate race last week, largely because of voter anger about the economy.

Considering the intellectual caliber of the people voting on the nomination – like genius Tom Coburn, who doesn’t know that the Federal Reserve has a mandate to maximize employment, I can’t say I’m surprised.

About the only thing that can trip Bernanke up at this point is if something damaging comes out at the AIG hearing coming up in just a few minutes [update: hearings now under way]. Today Bernanke delivered a letter to the House Oversight Committee explaining the Fed’s role in the AIG bailout. He says that he was not directly involved in negotiating with the counter-parties (which we knew) and supported the final plan to create Maiden Lane III to pay off the counter-parties at par. He also begged off having any knowledge of the NY Federal Reserve Bank trying to withhold disclosure of the counter-party payment information. You can read the letter, it’s all “I was not involved, I was not involved.” If information that contradicts this comes to light today, maybe that gets back to the issue of confirming Bernanke. But I’d find that possibility unlikely.

Treasury Sec. Tim Geithner and friends

This morning at 10am ET, the House Oversight Committee will hold three separate panels on the AIG bailout. The first features Treasury Secretary Timothy Geithner, who chaired the New York Federal Reserve Board at the time, which was instrumental in managing the bailout. The second panel will feature former Treasury Secretary Hank Paulson, who was at Treasury at the time. And the third panel includes a number of interested parties, including Thomas C. Baxter, general counsel of the Federal Reserve Bank of New York; Stephen Friedman, the former chairman of the New York Fed; Neil Barofsky, the special Inspector General for the TARP; and Elias Habayeb, the former chief financial officer of A.I.G. The hearings will be broadcast on C-SPAN and at the Oversight Committee’s website.

The hearing will look at the overall federal response to the AIG debacle, but at two specific circumstances in particular – 1) the decision to pay off the credit default swaps to AIG’s counter-parties “at par,” without forcing the banks involved to take a haircut; and 2) the effort by the NY Fed to hide disclosure of counter-party payment information to securities regulators, as revealed in recent emails. In addition to the Oversight Committee, Barofsky’s SIGTARP office is investigating the NY Fed anew over the disclosure issue (they first probed this issue in November).

Oversight Committee staffers have been poring over documents released by AIG in response to subpoenas, including some not available to SIGTARP last year, and have uncovered crucial information to which Paulson, Geithner and the rest of the panel will have to respond. Committee staffers seem relatively convinced by the documentary evidence that Geithner was not involved in the push by the NY Fed to withhold disclosure of counter-party payment information, including the names of counter-parties, amounts of the payments, and details regarding the “Maiden Lane III” special purpose vehicle which essentially purchased the CDOs that paid off the banks. But this does not reflect well on how the Treasury Secretary handled his leadership position at the NY Fed, if improper conduct could take place without his knowledge, and I would imagine lots of questions about Geithner’s conduct. Thomas Baxter, the NY Fed general counsel, will say that the issue didn’t rise to the level of importance that he would have shared it with Geithner. Really? Skirting SEC disclosure is a meaningless side issue? Indeed, we still do not know the exact amounts of the payments to the various companies, so expect that to be part of the testimony.

On the issue of counter-party payments, the new documents show that the Treasury and the Fed essentially took the term sheet that private banks were working from to use as a template for the AIG bailout, a terrible deal for the government prepared by the likes of JP Morgan and Goldman Sachs. First AIG and then the NY Fed reportedly tried to get the counter-parties to stand down throughout October and November 2008, and banks like Goldman Sachs, Deutsche Bank and the French firm Societe Generale simply refused, the documents show. However, somewhere along the line, the government gave up and paid off the banks at par, a decision that the SIGTARP report lays directly at the feet of Timothy Geithner.

Committee staffers allege that only mid-level operatives at Treasury and the Fed were negotiating with the bankers, and not Geithner, Paulson or Federal Reserve Chair Ben Bernanke. The attempt seemed half-hearted, and with leverage in the hands of the NY Fed, they could have forced haircuts to the counter-parties, but did not. In fact, Thomas Baxter, the NY Fed general counsel, wouldn’t even call the efforts negotiations. “I don’t know why we even bothered to ask (for any concessions),” he told committee staffers. Paulson will almost certainly be asked about this, committee staffers say, although he will testify that he had nothing to do with the decision on counter-party payments. But Geithner, who apparently signed off on dropping negotiations with the counter-parties and paying them off at par, will face scrutiny on this as well.

The New York Times reports that two Federal Reserve governors wanted AIG’s counter-parties to return $30 billion in payments, calling them “a gift.” They were eventually overruled.

One email, from NY Fed staffer Meg McConnell to Geithner, was highly critical of Treasury and the Federal Reserve’s participation in managing the AIG mess and particularly Dan Jester, Hank Paulson’s hand-picked associate to deal with AIG (needless to say, he was a former Goldman employee). “I sat in on the AIG call with Board staff… so that Jester could spend half an hour telling Sarah that there would be no capital and we would need to make ’something else’ work,” McConnell writes. “Leaving aside Treasury’s unfortunate (untenable?) stance on this, Board staff still doesn’t seem to be attacking this in a ‘here’s what we need to do and why’ kind of way.”

Baxter will defend the bailout and the counter-party payments in his remarks, as will Geithner presumably, as he’s been on the record that the counter-parties could only be paid at par, because that’s all the banks we’re willing to accept. But the claim that Treasury and the Federal Reserve had little bargaining power doesn’t hold up to scrutiny.

There’s also the issue of Friedman, who will appear on the third panel:

Mr. Friedman also addressed another sore subject: his purchases of Goldman Sachs stock on Dec. 17, 2008, and Jan. 22, 2009, after the Fed had decided to pay out A.I.G.’s counterparties in full. Many have questioned the move by Mr. Friedman, a former Goldman chief executive who remained a director of the firm even as he was chairman of the New York Fed.

Mr. Friedman contended that it was no secret that he was a Goldman director when he was first appointed to the New York Fed. Nor was it unknown that Goldman was a major A.I.G. counterparty. He reiterated that he had received clearance from the general counsels of both Goldman and the New York Fed.

Bernanke, whose nomination for another term at the Fed is nearing a vote, may be hiding documentation that his staff told him not to bail out AIG at all, and he ignored their warnings.

Sen. Jim Bunning (R-Ky.), a Bernanke critic, said on CNBC that he has seen documents showing that Bernanke overruled such a recommendation. If that’s the case, it raises questions about whether bailing out AIG was actually necessary, and what Bernanke’s motives were.

A letter Bunning sent Monday to Banking Committee Chairman Chris Dodd (D-Conn.) also refers to an “[e]mail exchange regarding restructuring of assistance to AIG, initiated by Treasury Secretary Timothy Geithner” in March 2009 […]

Meanwhile, Rep. Darrell Issa (R-Calif.), who has been investigating the AIG bailout in his role as ranking Republican on the House Oversight and Government Reform Committee, said that a whistleblower has informed him of “troubling details” of Bernanke’s role in the bailout.

There may be nothing incriminating in the documents, but without access to them, the Senate will be voting to confirm him in the dark.

This may also come up in the course of the investigation.

Here are some documents to guide you through the hearings:

Thomas Baxter’s remarks prepared for the hearing.
Stephen Friedman’s remarks prepared for the hearing.
Elias Habayeb’s remarks prepared for the hearing.
Neil Barofsky’s remarks prepared for the hearing.
Oversight Committee Staff Report and various AIG documents
Republican Staff Report on AIG bailout.

Sen. Tom Harkin (D-IA)

Via fatster in comments, Iowa Democrat Tom Harkin has become the latest Democrat to oppose Ben Bernanke’s confirmation for a second term at the Federal Reserve.

Harkin said Bernanke enabled the financial and mortgage meltdowns of recent years by catering to big financial institutions and not requiring them to behave more responsibly […]

Harkin said Bernanke has been too lenient on financial institutions in not requiring them to trim compensation for executives or include low-interest loans for small businesses and renewable energy as part of the taxpayer-funded bailout.

Specifically, Harkin cited the Sept. 2008 bailout of insurance giant AIG as particularly permissive.

“He provided too much money with no conditions on trillions of dollars he provided of taxpayer money, and this is at near-zero percent interest,” Harkin said of Bernanke’s role in the AIG deal.

“I have for a long time been getting irritated with this concept of ‘too big to fail,’” Harkin said.

Meanwhile, Iowa’s other Senator, Chuck Grassley, has said he has reached a decision on the confirmation vote, but will not announce it. He seems to be most concerned about the Fed’s efforts to fight inflation – which all of their public and private statements and actions have endorsed – so he doesn’t seem to be well-informed on the issue.

Asked about whether market conditions would play a role in his vote, Harkin said, “Is our economic policy going to be held hostage forever by the Wall Street threat that total collapse is going to happen if we don’t do what they want?”

I have to wonder if Jeff Merkley’s warnings led Harkin to this conclusion. Merkley delivered a long Dear Colleague letter, available here, a nine-page indictment of Bernanke’s career, and how he “helped set the fire that destroyed our economy.” The letter details in multiple ways with how Bernanke failed to rein in derivatives and proprietary trading, failed to recognize the housing bubble and failed to respond to increased systemic risk, relying heavily on this Washington Post piece about the Fed’s reluctance to regulate in response to the financial crisis.

(If you’d rather read the short version of this, check out Dean Baker, or Sen. Merkley’s remarks on Bernanke yesterday on Bloomberg.)

Of course, the right question for Harkin, apparently, is not whether or not he will vote against Bernanke, but whether or not he will deny the procedural vote, in the same manner of every other vote in Washington according to everyone you talk to, except for the Bernanke nomination, somehow.

Even if you think that Congress will agree to every request by the Obama Administration on discretionary spending, which they won’t, the policy announced today on “freezing” the budget for these non-security related items doesn’t look like much of a freeze. Some discretionary programs can go up, others can go down. Overall outlays can still rise, because this just impacts authorizations. And because extensions to the Recovery Act and other short-term initiatives like a jobs bill would be outside the scope of this policy, authorizations can rise, too. The amount of money “saved” by this policy amounts to 2-3% of total budget deficits.

In fact, this doesn’t look all that different than some of the rhetoric around last year’s budget. Then as now, OMB slated programs for elimination, and raised other spending based on Presidential priorities. On a conference call just now, OMB Deputy Budget Director Rob Nabors said that the President is “still focused on creating an economy that will work in the 21st century – and at the same time eliminating things in the budget that don’t work.” That’s not functionally different than previous years. Obama talked about “going through the budget line by line” and finding things that aren’t working during the campaign. Asked about whether this is an example of Clintonian triangulation, positioning the President in the political center, Nabors said:

No. We look at this as an effort to balance competing economic initiatives. We need to be in a position where we are balancing the budget and spending money wisely. Liberal criticisms will be somewhat muted when they see the details.

So, if the spinmeisters are going out of their way to classify this freeze as not a freeze, er… WHY CALL IT A FREEZE???

Jed Lewison is absolutely right here, it’s a pretty cheap rhetorical gimmick, and yet consequential all the same:

So the good news is that it doesn’t sound like the proposal will really be a calamitous disaster for the economy. The bad news is that not being a calamitous disaster is probably the best thing you can say about this. And for this economy to recover, we need more than not a disaster.

In a way, Bernstein’s argument is that the freeze isn’t really that much of a freeze. But if that’s the case, why do it all? It runs the risk of looking like a political gimmick, and even if it is a narrowly crafted as Bernstein argues, isn’t it hard to square the spending freeze proposal with the need to pass the health care bill? And isn’t the administration making it harder than ever to request the kind of funding that we’ll need to invest in rebuilding our energy economy? Perhaps more than anything else, this is intended to be a signal that with the stimulus under its belt and health care almost on its way, the administration is done thinking big.

Exactly. And it’s actually worse than that. This would be bad enough rhetorically during good economic times, a ceding of the battlefield and a validation of the Republican worldview that government is the problem. But because we’re in the midst of high unemployment numbers, net cuts (this is a hard freeze without accounting for inflation) are precisely the wrong way to go, because they depress demand. As Brad DeLong writes:

And what do we get for these larger output gaps and higher unemployment rates in 2011 and 2012? Obama “signal[s] his seriousness about cutting the budget deficit,” Jackie Calmes reports.

As one deficit-hawk journalist of my acquaintance says this evening, this is a perfect example of fundamental unseriousness: rather than make proposals that will actually tackle the long-term deficit–either through future tax increases triggered by excessive deficits or through future entitlement spending caps triggered by excessive deficits–come up with a proposal that does short-term harm to the economy without tackling the deficit in any serious and significant way.

Nabors was asked on the call if he expects unemployment figures and the larger economy to completely turn around in the next 9 months before this freeze hits the budget in October, and he basically said “yes.” That’s an even more unserious and ahistorical answer. It also doesn’t align with CBO predictions of a slow recovery.

What could cross this over from a political gimmick into even more unserious territory is the kind of mentality at work in this Noam Scheiber piece:

It’s almost certain that Congress will pass, and the president will sign, a jobs bill early next year, probably in the neighborhood of $100 billion to $200 billion. Given that, and given the difficulty of doing anything about the long-term deficit next year, the administration needs some signal to U.S. bondholders that it takes the deficit seriously. Just not so seriously that it undercuts the extra stimulus.

The Orszag approach just might accomplish that. Given the amount of domestic discretionary spending in the federal budget–about $700 billion this fiscal year–we’re talking about cuts of, at most, several tens of billions of dollars if Orszag holds the line on spending (and probably less once Congress weighs in). Which means the cuts wouldn’t come close to offsetting the likely stimulus. But they just might buy some credibility in the bond market, which could defer the day when the real deficit cutting has to start. “It’s a little bit of form over substance,” says Michael Granoff, a money manager who served on the advisory council of the Brookings-based Hamilton Project when Orszag ran it. “But, if you show resolve, that you care about this stuff, it gets into the psychology of bond traders.” The laws of psychology may prove easier to finesse than the laws of economics.

The “psychology of the bond traders” won’t just rub off on a ten-block area in Lower Manhattan, but the entire country. This is an effort to prepare the ground for longer-term reductions – there’s no other reason to call it a freeze. On the conference call, Nabors discussed this as part of a three-pronged strategy: 1) this discretionary freeze, 2) the deficit reductions from the health care bill (”health care reform is entitlement reform” is an oft-heard mantra), and 3) the Conrad-Gregg deficit reduction commission to “look at revenues and mandatory programs.” He said that, with these three programs in place, the President has a “solid strategy to put the country back on a sustainable path.”

That’s the rhetoric of every fiscal scold in Washington, and during this jobless recovery, that’s just poisonous. As benign as this budget policy may be, it’s a prelude to essentially the return of the pain caucus.

Herbert Hoover, 31st President, by Douglas Chandor. Just sayin'. (photo: cliff1066)

Breaking tonight, the President will propose a discretionary, non-security spending freeze for three years starting in FY 2011 as part of his State of the Union address.

The move, intended to blunt the populist backlash against Obama’s $787 billion stimulus and an era of trillion-dollar deficits — and to quell Democratic anxiety over last Tuesday’s Massachusetts Senate election — is projected to save $250 billion, the Democrats said.

The freeze would not apply to defense spending or spending on intelligence, homeland security or veterans.

The proposal is in line with a plan floated by Sen. Evan Bayh (D-Ind.), a fiscal hawk, who told Bloomberg’s Al Hunt last week that there was a “fighting chance” Obama would propose a freeze in most discretionary spending by the federal government as part of his address.

I have to head out the door here in a moment, so more on this tomorrow. But Obama is basically saying that the stimulus fixed the economy, that there will be no further government support measures and that he’ll govern like a hybrid of John McCain and Herbert Hoover for the rest of his term to curry favor with the deficit maniacs.

And of course, the truly unbelievable thing about this is how it’s framed as non-security discretionary spending, as if spending on the military is magic and somehow doesn’t affect budgets. If anything is bankrupting the country, it’s the bloated military budget, which is currently at a higher level than during the Cold War buildup of the Reagan Administration. So this freeze will do exceedingly little for the budget deficit, but is sure to hurt a lot of poor and middle-class people.

Matt Yglesias was on a conference call about this, where the line was that some programs would go up while others would go down, baselining the final number. Theoretically, this could mean a slash of farm subsidies by half while increasing community health centers or TANF payments. You can read him for additional context. I like this line:

I’m attempting not to freak out because (a) I don’t have details and (b) I suspect this initiative was deliberately leaked to progressive bloggers in an effort to get denounced by the left and I don’t want to give them the satisfaction.

(photo: epicharmus)

Email disclosures by AIG, responding to subpoenas from the House Oversight Committee, have revealed that the New York Federal Reserve requested that information about the AIG bailout be kept secret as if it were connected to national security.

U.S. securities regulators originally treated the New York Federal Reserve’s bid to keep secret many of the details of the American International Group bailout like a request to protect matters of national security, according to emails obtained by Reuters.

The request to keep the details secret were made by the New York Federal Reserve — a regulator that helped orchestrate the bailout — and by the giant insurer itself, according to the emails.

The emails from early last year reveal that officials at the New York Fed were only comfortable with AIG submitting a critical bailout-related document to the U.S. Securities and Exchange Commission after getting assurances from the regulatory agency that “special security procedures” would be used to handle the document.

As Ryan Grim notes, these are basically unprecedented steps to keep secret the details of the AIG deal with counter-parties. The emails tell a story of strictly enforced secrecy and massive PR efforts to get securities regulators and Congress to stand down on disclosure. It paints a picture of the Federal Reserve as evading not only the oversight responsibilities of Congress, but any effort to offer insight into their activities whatsoever. And the SEC eventually agreed to the request:

The SEC, according to an email sent by a New York Fed lawyer on January 13, 2009, agreed to limit the number of SEC employees who would review the document to just two and keep the document locked in a safe while the SEC considered AIG’s confidentiality request.

The SEC had also agreed that if it determined the document should not be made public, it would be stored “in a special area where national security related files are kept,” the lawyer wrote.

Tim Geithner and Ben Bernanke are in their own ways culpable for this astonishing level of secrecy attempted by organizations they ran to get around accountability for the AIG deal. Geithner faces the House Oversight Committee in hearings on Wednesday.

(photo: turtlemom4bacon)

Karen Tumulty picks up on a general awareness out in Massachusetts of Ben Nelson’s Nebraska Medicaid deal, which was used as a symbol for the tainted process of the health care reform debate.

The deal now known as the “Cornhusker Kickback” may have been one of the biggest blunders in modern political history. Normally, you’d be surprised if people in Massachusetts even know who the Senator from Nebraska is. But the number of people I talked to who brought up Ben Nelson’s name, unprompted, was striking. I’m also told, by some who were doing phonebanking, that they got an earful about it over and over.

Voters I talked to also brought up the deal with labor. How come, they wanted to know, that everyone has to pay this “Cadillac Tax” on high-cost insurance plans except for the unions, who get a five-year exemption? People are so disgusted by the process, I think, that they have ceased to believe that there is anything in this bill for them.

Based on my own conversations, that seems accurate, and also completely insane. Ben Nelson’s Medicaid deal is about the least offensive thing he’s ever done in the United States Senate. He got poor people in his state a good deal for health care, and ensured that enough state governors would vocalize their frustrations about it that this Medicaid expansion would essentially be federalized, which is really good policy. No liberal validators tried to contextualize that element of the deal.

Tumulty chalks this up to a heightened amount of information among the electorate about the Congressional sausage-making process, and that’s true to a small extent. But actually it’s a testament to how Republicans can still drive narratives and twist the information that reaches the public. I’m sure most people in Massachusetts didn’t know that Nelson also got a tax break for one large insurance company in his state, Mutual of Omaha, in the negotiations. They also probably weren’t aware that the far bigger Medicaid kickback in the Senate bill went to Massachusetts.

The reason that conservatives seized on the Nelson deal was because it applied to a narrow sliver of easily demonized poor people in a red state. A lot of powerful people in right-wing media saw the opportunity to use the kickback to define the legislation as giving benefits to “other” people. It turns out that the bill pays for the “other,” with the other defined as pharmaceutical company profits, for example, in a multitude of different ways, but only the Nebraska deal fits with a right-wing critique of government as helping the hated poor who should be able to help themselves. That’s why it lodged in the minds of conservatives who heard about it endlessly on Fox News and AM talk radio.

Those lamenting “media coverage” giving too close scrutiny to the legislative process are wrong. They should be lamenting their own conduct, for failing to contextualize that scrutiny and allowing those interested in demonizing the bill to selectively highlight the “backroom” deals. Sunshine remains a good disinfectant and crucial to the modern legislative process. But that sunshine must lead to a proper understanding of the revelations. For one, media investigators could bother to tell everyone that the only reason Ben Nelson had so much power is because of a dysfunctional Senate system that has turned 60 votes into a de facto requirement.

The White House released a statement yesterday (a rare Saturday news dump) expressing the President’s support for the Conrad-Gregg commission. This commission would create a bipartisan panel of equal numbers of Republicans and Democrats to make recommendations for reducing the deficit. Many fear that it would open a gateway to cutting entitlement programs like Social Security and Medicare. The rules governing the Conrad-Gregg commission are more problematic for their recommendations than even normal legislation. All recommendations would need the support of 14 out of the 18 commission members, and then the recommendations would go to the House and Senate. They would have to pass them with an up-or-down vote, but that vote would require a 3/5 supermajority to pass the Senate AND the House. In other words, this approach adds MORE minority veto points and obstacles than what already exists in our paralyzed Congress.

Nevertheless, such a commission would essentially take away lawmaking powers from the legislative branch, forcing them to contemplate deficit reduction legislation without being able to alter it through amendments. This just doesn’t seem like a smart approach to governing, and it could allow a pain caucus to sprout in Congress and force major slashes to safety net programs.

The Obama Administration comes pretty late to the table to support the Conrad-Gregg commission. Judd Gregg has already said he doesn’t have the votes for it, and the White House reportedly struck a deal this week to name a deficit panel via executive order (one which Republicans almost immediately opposed and denounced as a gimmick). Perhaps this endorsement is part of that deal, with the executive order tossed out as a back-up plan.

The statement is below. It at least adds some rhetorical flourish, reminding everyone that the deficit we face is almost entirely the responsibility of the Bush Administration, both in failing to pay for all of its domestic programs but also driving the economy into a ditch that required federal spending through stimulus.

The serious fiscal situation that our country faces reflects not only the severe economic downturn we inherited, but also years of failing to pay for new policies – including a new entitlement program and large tax cuts that most benefited the well-off and well-connected. The result was that the surpluses projected at the beginning of the last administration were transformed into trillions of dollars in deficits that threaten future job creation and economic growth.

These deficits did not happen overnight, and they won’t be solved overnight. We not only need to change how we pay for policies, but we also need to change how Washington works. The only way to solve our long-term fiscal challenge is to solve it together – Democrats and Republicans.

That’s why I strongly support legislation currently under consideration to create a bipartisan, fiscal commission to come up with a set of solutions to tackle our nation’s fiscal challenges – and call on Senators from both parties to vote for the creation of a statutory, bipartisan fiscal commission.

With tough choices made together, a commitment to pay for what we spend, and responsible stewardship of our economy, we will be able to lay the foundation for sustainable job creation and economic growth while restoring fiscal sustainability to our nation.

Dead man sitting? Federal Reserve Chair Ben Bernanke (photo: talkradionews)

Chris Dodd and Judd Gregg issued a joint statement yesterday expressing confidence that Ben Bernanke would be confirmed to a second term as chairman of the Federal Reserve.

Senator Christopher J. Dodd, the Democrat from Connecticut who is chairman of the Senate Banking Committee, and Senator Judd Gregg of New Hampshire, a Republican who is a longtime member of the panel, said in their statement that “based on our discussions with our colleagues, we are very confident that Chairman Bernanke will win confirmation by the Senate for a second term.”

The senators referred to recent media reports “highlighting a very vocal opposition.” Two Democratic senators facing tough re-election races had announced at the end of the week they would be among those who would oppose Mr. Bernanke, and his prospects for winning the needed 60 votes suddenly were clouded.

This is part of a very forceful establishment blowback, which is essentially positing that Bernanke must be saved for the sake of the stock market. It has already brought in the likes of Harry Reid, Mary Landrieu, and today, Dick Durbin.

The latest whip count from The Hill shows 25 Senators supporting Bernanke, with 13 opposed, thus far. That count does not include Durbin, so it’s 26-13. The count makes the assumption that those who voted for Bernanke in the Banking Committee will also do so on the floor of the Senate, although at least one Democrat, Sherrod Brown, expressed hesitancy at doing so.

Importantly, 8 Republicans have come out in support, and 5 Democrats are opposed. That means, if Democrats can be mustered to support, Bernanke would have a 62-38 cushion even if no more Republicans would support him. But the Times article showed that there are more than five Democrats in opposition:

Senate Democratic leaders had contemplated a vote this week on the nomination, but were forced to hold off after encountering opposition at their caucus’s weekly luncheon on Wednesday. The leaders asked for a show of hands and, though aides would not provide a precise count, Mr. Reid was said to be surprised at the number.

And in a sign of such uncertainty, Mr. Reid asked the minority leader, Mitch McConnell of Kentucky, to count the votes on the Republican side. Mr. McConnell has not said how he will vote.

As I’ll be rounding back into full-time News Desk stuff this week, I will continue to monitor this as we move forward.