Treasury’s move to cut off Fed emergency aid program a ’Salt the earth political strategy’: Fmr. TARP Special Inspector General

Neil Barofsky, Jenner & Block Partner and Fmr. TARP Special Inspector General joins to discuss the. Treasury’s move to cut off Fed emergency aid program.

Video Transcript

- We're going to be digging into this some more with Neil Barofsky. He's The former Inspector General for the Troubled Asset Relief Program, also known as TARP.

Neil, thank you so much for joining us. You wrote in an Op Ed in the New York Times last week, I believe it was Friday, and it was titled, "How Mnuchin snubbed Joe Biden." And you called the move to essentially end the Fed loan program, I'm going to quote you here, you called it a terrible idea. Mnuchin, you know, for his part, had pointed to improving economic data, said that this was the will of Congress.

So I want to just kind of briefly summarize what you detailed in the Op Ed for everyone. And I'm wondering if you can let us know what you think this move is going to be doing to markets and to an economy right now whose recovery is sluggish, and as we're seeing from the jobless claims, not trending in the right direction, or as people are hoping.

NEIL BAROFSKY: Well, you have to remember, these Federal Reserve programs are intended as a backstop, right. They were launched really at the height of this current crisis in March, when markets were freezing up, the credit markets, particularly the corporate bond markets and municipal lending markets. And just the announcement of these programs unfroze those markets. Just the idea that the Fed was sitting there with hundreds of billions of dollars, ready, willing, and able to deploy them, to buy bonds, if they needed to, you know, whether they were corporate or municipal, just that knowledge brought confidence back in the market. And you saw companies that were unable to borrow, were teetering potentially on the edge of bankruptcy, all of sudden, they could sell their bonds in the market because of this Fed backstop.

And so when Mnuchin says, well, gee, we're going to shut these down because they haven't been used all that much anyhow, it kind of misses the point, right. The point of these programs and where they've been successful is not because they've actually had to buy these bonds. It's just their presence that helps calm markets. And by pulling the rug out from under them, which is what Mnuchin has done, if and when there is a another sort of shock to the system, right, that buffer isn't going to be there. That shot of market confidence isn't going to be there.

And to do that now, right, when we're in the grips, right, of the highest peak of the coronavirus pandemic, when we're seeing shutdowns, you know, sweep across the country. You just cited the unemployment numbers that are getting worse. To do that now is beyond irresponsible. It is, it's just completely reckless, particularly because there is no, absolutely no reason to do so. And the pretext that this is legally required is just that. It is a pretext. Mnuchin himself didn't believe it, just a couple of weeks ago when he talked about the possibility of extending the programs. Any clear look at the statute shows that it is absolutely legal for these programs to continue past December 31.

This is just salt the earth bad politics. That's what's happening right now. And it's a gamble for the American people and the strength of our system. So yeah, terrible idea.

BRIAN CHEUNG: Neil, Brian Cheung here. I don't want to take our viewers through a lesson on earmarking. But I imagine you're very familiar with all of this right now. Mnuchin has argued that it's his understanding, it's his interpretation of congressional intent that allows him to say, yes, I want to close these programs down and I have the authority to block that money away in the TGA as opposed to the Exchange Stabilization Fund, where the Fed and Treasury could potentially reopen those facilities once there is a new Treasury Secretary next year.

Do you feel that the Treasury was right, or that Mnuchin was right in that interpretation? Or is there a legal argument that maybe they kind of sidestepped it here?

NEIL BAROFSKY: No. He's making it up. I can't be-- this can't be any more clear. He's making this up as a justification for a political move. OK? Because if he believed that to be true, then there would be no reason whatsoever not to just leave it in the Exchange Act Fund, right, that special fund. Because if he's right and it would be illegal for a new administration to re-tap those funds, well, then they couldn't do it. But he knows that's nonsense, so he has to take this extraordinary step.

And look, there is a precedent for this, in the Obama administration when they decided they didn't want to use all of the TARP money and they wanted to direct those funds out of the Exchange Fund and into the general fund, it took an act of Congress. Right? That was one of the parts of Dodd-Frank. Took $225 billion of TARP out of TARP and put it in the general fund, right, because the statute didn't allow them to do it. And essentially doesn't allow him to do this until 2026.

And so the only, only reason to do it, the only justification for taking what is a legally questionable act of moving these funds out of the reach of the Biden administration is to salt the earth, to limit their options, and leave the country in a more dangerous place for political purposes. Full stop. There is no legal justification for this.

- I'm honestly staggered. Because to hear you just come out and say it-- because I was actually going to ask you, you know, pretty bluntly, you call this a political move, you call it essentially a-- do you look at this as like a scorched earth policy that, you know, that the Trump administration is just so upset at losing the election that they are willing to hobble the incoming administration to effectively help the country financially going forward? Is that really it? That is the entire premise and purpose for removing-- for this policy, essentially.

NEIL BAROFSKY: Look, it's one part of a consistent approach of trying to seed for 2024. Look, that's why they're attacking the election results. Not because there's any fraud in the election but because they want to delegitimize it so that they have more leverage and more an argument to make in 2024.

This is the same thing. If the economy goes down and the Biden administration doesn't have the tools to deal with it, all you're going to hear on the campaign trail is how the Biden administration screwed this up, even though it is an act of sabotage. This is just raw naked power politics of the worst type.

And look, there's another reason to do this otherwise. Assuming that the Senate, Republicans maintain the Senate, there's going to be negotiations over another stimulus. And by taking this off the table, right, it removes some of the leverage that the Biden administration might have. Because the other part of this, to keep in mind, is that these programs were run very conservatively and didn't have as big of an impact as they could, particularly the municipal lending for the struggling states and local governments, and for medium business in the Main Street Lending Program.

But again, that was a choice made by Mnuchin, a policy choice. You know, former, future Treasury Secretary Yellen may have a very different approach, right, and want to be more aggressive and put this money into the economy in a more stimulative way, right? And so this is keeping the Bush administration from being able to do that so that the only road for any stimulus has to go through Mitch McConnell and Senate Republicans. And this is, again, power play. More leverage for McConnell and the Republicans to extract what they want to extract out of any negotiations if you cut off other avenues for the Biden administration. There is no law that requires this. I can't emphasize that enough.

BRIAN CHEUNG: Neil, this is a big deal, because this is essentially accusing the Treasury of not following the law here. So what is the legal recourse here? I have a hard time believing the Fed would launch a challenge to this, because of the optics of the fiscal monetary policy side of things not working together during this time. We saw that from Powell's response to Treasury in allowing the remittance of the money back to the Treasury.

So do you expect a challenge? Where could a challenge come from? What are the options here for people that argue this should still be open?

NEIL BAROFSKY: Well, I 100% agree that the Federal Reserve is not going to do anything along those lines. It is just completely against the culture of that institution. And it's just not, it's not the way they operate.

But it is an interesting question. Look, if the incoming administration decides that this was an illegal act that Mnuchin did, they could treat it as if it didn't happen, as a nullity, and bring the funds out of the general fund and put them back into the Exchange Fund and use them under the CARES Act, under the theory that this was legally, a legal fiction. They couldn't do it so it is an invalid act. And that would put it on, I guess potentially Republicans or others to sue the Treasury Department. But that raises a whole bunch of questions about legal standing and other legal arguments.

So if they wanted to be very aggressive, as aggressive as Mnuchin has been, they may think about taking that act. My guess is they won't do that unless it becomes necessary. Because there still is some funds kicking around in the Exchange Fund that could be used to restart some of these programs, albeit on a much smaller scale. So my guess is that it's more likely they'll do that and then see what happens. And then if the other shoe drops and we're back in crisis like we were in March of this year, it wouldn't surprise me to see them seriously contemplating taking extraordinary effort, particularly if the Senate won't play ball, and put in the necessary legislative relief.

- All right. Some very strong words there from Neil Barofsky, former Special Inspector General for the Troubled Asset Relief Program. Neil, thank you so much for joining us today.

NEIL BAROFSKY: Thank you for having me.