When going to Washington to ask Congress for $25 billion to help you out of jam because your company is going bankrupt, it's probably best to leave the private jet at home.

...the chief executives of the Big Three automakers opted to fly their company jets to the capital for their hearings this week before the Senate and House -- an ill-timed display of corporate excess for a trio of executives begging for an additional $25 billion from the public trough this week.

"There's a delicious irony in seeing private luxury jets flying into Washington, D.C., and people coming off of them with tin cups in their hands," Rep. Gary L. Ackerman (D-N.Y.) advised the pampered executives at a hearing yesterday. "It's almost like seeing a guy show up at the soup kitchen in high-hat and tuxedo. . . . I mean, couldn't you all have downgraded to first class or jet-pooled or something to get here?"

The Big Three said nothing, which prompted Rep. Brad Sherman (D-Calif.) to rub it in. "I'm going to ask the three executives here to raise their hand if they flew here commercial," he said. All still at the witness table. "Second," he continued, "I'm going ask you to raise your hand if you're planning to sell your jet . . . and fly back commercial." More stillness. "Let the record show no hands went up," Sherman grandstanded.

Image by Flickr user kilobar used under a Creative Commons license.

Today the Senate approved, by a voice vote, a 7-week extension for unemployment insurance and six more on top of that in states where unemployment is higher than 6 percent. The bill, HR 6867, cleared the House Oct. 3 368-28.

The bill now goes to President Bush, who is expected to sign it.

Update (Fri., Nov. 21): President Bush has signed the bill into law.

There's been a lot of buzz in Washington and around the country the last couple of years about earmarks. It's the new four letter word of politics, with practically every Senator and Representative talking publicly about how awful they are. Yet earmarks in and of themselves are really not the problem. It is the process by which they are enacted that is usually where we run into trouble. The secretive, back-room addition of an earmark to legislation at the last minute, without review, in order to reward powerful special interests, campaign contributors, or other politically connected individuals or groups is where the real proble lies.

The best way to combat that is through transparency, and because of the efforts of a few individuals and organizations, the information on the size and scope of earmarks has improved considerably. Taxpayers for Common Sense (TCS), a watchdog group here in Washington, was at the forefront of publishing earmark information. On February 14, 2008, they published a complete database of FY 2008 earmarks, made available on their website for downloading in an excel file.

This week, the group Legistorm has joined in the earmarks game as well, with a searchable website that allows users to have better access to peruse the database put together by TCS. They launched the website this week and it builds upon the TCS work to promote better access to earmarking data. And lucky for all of us, the new site and the TCS data includes executive branch earmarks - or those earmarks requested by the president. Most of this data is left out of an earlier attempt at earmark transparency put up by OMB.

It looks as though both Legistorm and TCS will continue to have their work cut out for them next year. The House Republican caucus rejected a proposed short-term moritorium on earmark requests today:

For the second year in a row, the House GOP caucus Thursday rejected an effort to limit its members' requests for special projects, or earmarks, in this case a short-term moratorium.

Check out the new resource and search through tens of billions of dollars in earmarks.

After $290 billion in TARP funds committed, President Bush and the Senate are just now getting around to installing the TARP Inspector General. Working quickly to confirm Bush's choice for Special Inspector General for TARP (SIGTARP), Neil M. Barofsky, the Senate Banking Committee got down to business and heard testimony from the nominee yesterday(BNA [$]):

Barofsky, testifying before the Senate Banking Committee, said that, if confirmed by the Senate, he will be calling on TARP contractors and asset managers to provide his office with "real-time information" to guard against misuse of public funds.

Barofsky also said he will review past TARP-related transactions, including contracts already reached between Treasury and private parties, and said his office will be vigilant in rooting out conflicts of interest.

"I think it will be a top priority, if I am confirmed, to make sure that there is strong and vigorous enforcement of the conflict of interest provisions and to make sure that those provisions are sufficient," Barofsky told Committee Chairman Christopher Dodd (D-Conn.).

This is all very reassuring to hear, even if the nomination is way overdue.

Barofsky also told Sen. Robert Menendez (D—N.J.) that, under the EESA, he would, as Special Inspector General "would have full and complete access" to any documents held by the Treasury Department.

Any chance those documents make it to the public?

Meanwhile, Senators Claire McCaskill (D-MO) and Chuck Grassley (R-IA) have introduced legislation to ostensibly aimed at strengthening SIGTARP. Their bill "will allow the IG to quickly begin hiring staff without going thorough the normal civil service process" and "expand the authority of the IG to cover any and all action conducted as part of the Troubled Asset Relief Program, including assistance to homeowners and foreclosure mitigation efforts." (h/t POGO blog)

Reuters: "Quick approval sought for US bank bailout watchdog"
DowJones Newswire:"Dodd Pledges To Move Quickly On Confirmation Of TARP Inspector"

(AP Photo/Lauren Victoria Burke)

House Majority Leader Steny Hoyer (D-MD) provides us with a teaching moment (BNA [$]):

House Majority Leader Steny Hoyer (D-Md.) said Nov. 18 House Democrats still hope to adhere in 2009 to the pay-as-you-go budget rule they put in place at the start of the 110th Congress, but acknowledged the troubled economy and other priorities may outweigh it.

"We will continue to be committed to the principle of pay-as-you-go," Hoyer said at a speech at the National Press Club. "The reality, however, is that recovery legislation will raise the deficit in the short term. Fiscal hawk that I am, I still believe that that is the right course, because a wide consensus of economists tells us that deficit spending is both the way out of a recession like this one and the way to prevent even more catastrophic decline."

Hoyer makes the classic mistake of believing that PAYGO stops all deficit spending. What PAYGO actually does is (theoretically) prevent deficit increases resulting from tax cuts or increases in mandatory spending. Much of the proposed spending in the Senate's latest stimulus package (like unemployment insurance and infrastructure spending) would increase discretionary spending, which does not have to be offset with revenue increases or spending cuts.

However, some of the spending proposals in the Senate package do increase mandatory spending (like increased Medicaid spending) and would have to be offset in PAYGO-land. But to say that this would wreck the economy is, well, just plain wrong.

Keynesian economics tells us that increasing budget deficits (or reducing budget surpluses) spurs economic growth. Fidelity to PAYGO, because it enforces deficit neutrality, would be economically neutral. True: 100 percent deficit-neutral budget changes would be a mistake, as now is the time to increase the deficit to boost economic growth, but adherence to PAYGO would have no impact on the economy.

So, yes, deficit spending is absolutely necessary right now. Adhering PAYGO, however, would not stop Congress from pursuing this course of fiscal policy.

Image by Flickr user foundphotoslj used under a Creative Commons license.

The National Journal has been reporting this week that current Congressional Budget Office (CBO) Director Peter Orszag is in line to head up the Office of Management and Budget in the upcoming Obama administration. Orszag formerly served as a senior economic adviser during the Clinton administration and held a post in the economics studies program at the Brookings Institution.

Orszag has been impressive in his two year stint as the head of the CBO, which he began in January, 2007 and I think he would be an excellent choice to run the OMB for Obama. BudgetBlog readers will certainly know that we have high esteem for Dr. Orszag.

Senate Finance Chairman Max Baucus, D-Mont., said Monday that he hopes to make sure a health care overhaul proposal he released last week is paid for over a 10-year period. But he left open the possibility that it would not comply with pay-as-you-go budget rules over five years, or perhaps at all.

"There are going to be some upfront costs, but they'll be investments," Baucus said after speaking at a Brookings Institution seminar on health care reform. "Over 10 years, some of the bulk of the upfront investments will be offset by cost reductions. But that's over a 10-year period."

The budget rules, which Democrats adopted at the beginning of the 110th Congress, generally require legislation authorizing new spending to be offset with spending decreases elsewhere or with tax increases. Democrats have often pointed to the budget rules as evidence of their fiscal discipline.

I've got a bit of an issue with that last sentence - or perhaps my issue is with the Democrats. They do like to cite PAYGO rules as evidence of their fiscal discipline. And it is good they voted to reinstate those rules in early 2007. But to be fiscally responsible, they actually need to follow the rules rather than waiving them whenever they please. Unfortunately, their commitment to PAYGO has been much more rhetorical than real over the last two years. The CQ article goes on to state that Democrats will feel pressure from their supporters, particularly labor unions, to pass health care reform regardless of costs. That's comforting. Who is steering this ship anyway?

The Republicans have been no better. In the same article, Senate Finance Committee Ranking Republican Charles Grassley (R-IA) states that "paying for health care reform needs to be done in an intellectually honest way for the fiscal health of our country." Is Grassley serious? I almost fell out of my chair when I read that. It leaves me wondering why Grassley hasn't had any problems with eight years of irresponsible, reckless, and downright stupid justifications for passing budget-busting tax cuts at any cost?

He hasn't seem too concerned with the fiscal health of our country when he has repeatedly advocated that since the Alternative Minimum Tax (AMT) was never intended to impact millions of Americans, we might as well not pay for repealing it. That's what fiscal responsibility is about - intentions.

Grassley can't even be honest about the money-suck that is the IRS's private tax collection program, which has repeatedly been shown to cost the government more money than it brings in. Now he's seen the light and wants to be intellectually honest about budgeting and being fiscally responsible? That's not change we can believe in.

Image by Flickr user PhotoJonny used under a Creative Commons license.

Sen. Charles Grassley (R-IA), has asked the Treasury Department's Inspector General to initiate an investigation into the "facts and circumstances" that led Treasury to issue a revised guidance to tax code section that could give banks $140 billion in tax breaks. On Thursday, we noted our indignation about this quiet change in the tax rules governing the implementation of section 382 of the tax code. Grassley, however, thinks something other than Executive overreach may be at work.

...there is reason for concern about the appearance of preferential treatment created by the Treasury Department's decision to issue Notice 2008-83. The Notice, issued just days before Congress voted on the Emergency Economic Stabilization Act of 2008, appears to have had the effect of benefiting Wachovia Corporation executives and Wells Fargo. Robert Steel, the CEO of Wachovia, was a former Undersecretary for Domestic Finance and was a vice chairman at Goldman Sachs prior to that. He joined Treasury in 2006 to work on issues pertaining to Fannie Mae and Freddie Mac. Mr. Steel left Treasury to become chief executive of Wachovia just this summer.

Treasury's issuance of the Notice apparently enabled Wells Fargo to take over Wachovia despite a pending bid from Citibank. Without the issuance of the Notice, Wells Fargo would have only been able to shelter a limited amount of income. Under the Notice, however, Wells Fargo could reportedly shelter up to $74 billion in profits. It also potentially enabled Wachovia's senior executives to qualify for parachute payments that may not have been available under the Citibank deal.

The facts and circumstances surrounding the issuance of the Notice, particularly as it relates to Wells Fargo's purchase of Wachovia Corporation, raise concerns about the independence of the decision makers.

(click to enlarge)

Back in August, I blogged about a report issued by the U.S. Senate Permanent Subcommittee on Investigations about how foreign banks, specifically large European banks, were helping wealthy Americans evade U.S. taxes.

This week on Wednesday, the Justice Department, in conjunction with the Internal Revenue Service (IRS), announced the indicment of Raoul Weill, a senior executive at the Swiss banking giant UBS. Sharp BudgetBlog readers will remember that UBS was one of the European banks named in the Senate investigation released over the summer. Seems like things have come full circle for UBS. From the Justice Department press release:

According to the criminal indictment, between 2002 and 2007, Weil oversaw the Swiss bank's cross-border private banking business that provided services to some 20,000 U.S. clients who reportedly concealed approximately $20 billion in assets from the IRS. Weil, who allegedly referred to this business as "toxic waste," mandated that Swiss bankers grow the cross-border business, despite knowing that this would cause bankers to violate U.S. law.

According to the indictment, when given a choice to wind down, sell or spin off the cross-border business, Weil chose to continue the business because of its profitability. Between 2002 and 2007, the United States cross-border business generated between $200 million a year in revenue for the Swiss bank.

Unfortunately, prosecutors may not be able to obtain the information necessary to convict Mr. Weill or expand their investigation to pursue U.S. clients who participated in tax evasion. Even if they are able to convict Mr. Weill, it's not assured that Switzerland would extradite him to the U.S. According to a report in the Wall Street Journal, the Swiss government has "firmly dug in its heels against the U.S. investigation, citing Swiss laws that generally prohibit banks from revealing the names of clients." The U.S. has demanded that the Swiss government step in to assure the investigation can continue, but doing so would likely hurt the prospects for Swiss banks, which have long served as a refuge for the rich and powerful in their attempts to horde assets.

It is unclear how much trouble Mr. Weill has gotten himself into, but if convicted of the felony charge of conspiring to defraud the U.S. government, he could serve up to 5 years in jail. Somehow that doesn't seem to me like enough for stealing $1.2 billion from the American people.

Jail time for Mr. Weill aside, the broader hope is that this case will open up Swiss banks and indeed the international banking industry generally, so we have a more honest, transparent, banking system that is held accountable to laws and regulations. That's the hope, but I'm not holding my breath.

This is just unacceptable:

The financial world was fixated on Capitol Hill as Congress battled over the Bush administration's request for a $700 billion bailout of the banking industry. In the midst of this late-September drama, the Treasury Department issued a five-sentence notice that attracted almost no public attention.

But corporate tax lawyers quickly realized the enormous implications of the document: Administration officials had just given American banks a windfall of as much as $140 billion.

...

"Did the Treasury Department have the authority to do this? I think almost every tax expert would agree that the answer is no," said George K. Yin, the former chief of staff of the Joint Committee on Taxation, the nonpartisan congressional authority on taxes. "They basically repealed a 22-year-old law that Congress passed as a backdoor way of providing aid to banks."

...

The notice was released on a momentous day in the banking industry. It not only came 24 hours after the House of Representatives initially defeated the bailout bill, but also one day after Wachovia agreed to be acquired by Citigroup in a government-brokered deal.

The Treasury notice suddenly made it much more attractive to acquire distressed banks, and Wells Fargo, which had been an earlier suitor for Wachovia, made a new and ultimately successful play to take it over.

The Jones Day law firm said the tax change, which some analysts soon dubbed "the Wells Fargo Ruling," could be worth about $25 billion for Wells Fargo. Wells Fargo declined to comment for this article.

The good folks at Citizens for Tax Justice have put together a handy guide on what the IRS ruling says and why it's just so very wrong (quoting directly):

• The IRS has apparently usurped the legislative role of Congressional tax writers.
• The new rules give an artificial competitive advantage to banks that can afford to expand now .
• The change could be incredibly costly to federal taxpayers.
• The new rules present an unnecessary and harmful challenge to already-stressed state governments.

Image by Flickr user TheTruthAbout... used under a Creative Commons license.

CQ Politics:

[Speaker of the House Nancy] Pelosi [(D-CA)] and Senate Majority Leader Harry Reid , D-Nev. — whose chamber will return for a post-election session next week — have called for Congress to pass an economic stimulus package and Tuesday added plans for billion of dollars in new aid for Detroit's struggling automakers. But Pelosi and House Majority Leader Steny H. Hoyer of Maryland have said they won't bring the House back unless President Bush and Senate Republicans agree to allow a stimulus and the auto industry aid to become law.

In separate statements, House Speaker Nancy Pelosi (D-Calif.) and Senate Majority Leader Harry Reid (D-Nev.) asserted the need to hold a post-election session to bolster efforts to help the beleaguered auto industry.

"I am confident Congress can consider emergency assistance legislation next week during a lame-duck session," Pelosi said in a statement, "and I hope the Bush administration would support it."

Rethinking the crux of the financial markets crisis and its solutions, Treasury Secretary Henry Paulson announced today that the $700 billion Troubled Asset Relief Program (TARP), originally intended to take toxic financial assets off the books of lending institutions to spur market liquidity, will not be used to purchase such assets.

Over these past weeks we have continued to examine the relative benefits of purchasing illiquid mortgage-related assets. Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources, in helping to strengthen our financial system and support lending. But other strategies I will outline will help to alleviate the pressure of illiquid assets.

This statement ultimately undermines the "Do Anything" approach to legislating. When Paulson made his initial pitch for a Wall Street bailout, lawmakers correctly balked. While we noted that Congress should proceed deliberately, they instead rushed a legislative counter-proposal and quickly passed it. And although various objections to such a bailout were offered, one offered by economists was that the underlying problem (and its ultimate solution) of the financial markets crisis was not entirely clear.

Thankfully (I think), the TARP legislation was written with enough flexibility that it allows Paulson to abandon the explicit purpose of the program in favor of adopting strategies (like injecting capital into banks in exchange for equity). Paulson continues to search for an appropriate solution.

For better of worse, Congress crafted a law that gave the Treasury Secretary authority to throw $700 billion at, well, whoever for whatever. Will it work? Who knows? Congressional hearings and empirical research might have helped identify the problem and solution sooner. Instead, Washington decided to the correct course of action was to freak out and throw bails of cash at whoever is asking for it.

A learning moment? Hmmm...

Image by Flickr user kenyee used under a Creative Commons license.

Argh! More bad news about the Defense Contract Audit Agency (DCAA), the watchdog at the Department of Defense that is supposed to watch out for waste and fraud within the agency's enormous contracting apparatus.

DCAA was in the news a lot this summer (see here, here, here, and here) after information surfaced showing the DoD spends too little on contract oversight and interferes with current auditors to restrict the length and scope of investigations. It doesn't look like things have improved much since then.

The Associated Press reported yesterday that defense contractors, particularly the Bechtel Group, had "chronic failures" in handing over financial records and other documents to the DCAA needed to perform audits.

The article also cites Raytheon, Northrup Grumman, and KBR as giving the DCAA trouble. In the widely publicized KBR incident over the summer, top officials at the DCAA would not back up auditors who balked at over $1 billion in unsubstantiated payments.

One auditor quoted in the AP article from yesterday hits the nail on the head about why strict oversight by agencies like the DCAA are so important:

The Bechtel episode illustrates how tolerant the agency can be when defense contractors slow the government's access to paper records and databases. There is no way to know how often DCAA withholds payments because it does not keep track. And it has not used its subpoena power in 20 years.

"We have been basically on the trust system for years," said the auditor who attended the May meeting. "It did not work on Wall Street and it is not working for federal contracts," said the two-decade veteran of the agency who spoke on condition of anonymity because DCAA employees are not allowed to publicly discuss their work.

Trust system? Seriously? What ever happened to "trust but verify?"

On the Depart of Treasury Emergency Economic Stabilization Act (EESA, AKA TARP) website, the Department has posted, according EESA law, a list of transactions made under TARP. And here they are, all $125 billion* worth of them:

Also in accord with the law, Treasury has released its First Tranche Report to Congress. Among other things, the report includes:

• A description of all the transactions made during the reporting period.
• A description of the pricing mechanism for the transactions.
• A justification of the price paid for, and other financial terms associated with, the
• transactions.

However, ProPublica, is one step ahead of Treasury. In addition to transactions completed under TARP, ProPublica is tracking which banks have are participating in TARP's Capital Purchase Program but have yet to receive funds. Their tally indicates that Treasury has committed over $172 billion to banks.

The Congressional Budget Office reported in its Monthly Budget Review for October that the federal budget deficit for that month will be $134 billion. But CBO predicts that when the Treasury Department releases the official deficit number later this month, it will be $232 billion.

The $98 billion gap is the product of differing interpretations on how purchases under the Troubled Asset Relief Program (TARP) should be scored. According to CBO:

...the stock investment and associated warrants should not be recorded on a cash basis but on a net present value basis, accounting for market risk, as specified in the Emergency Economic Stabilization Act. CBO's preliminary estimate of $17 billion for the present value cost is included in its estimate of $134 billion for the October deficit.

So far, Treasury has purchased $115 billion in bank stocks. Treasury says that this will increase the budget deficit by $155 billion, while CBO says it should increase the deficit by $17 billion.

This is an interesting development, as the potential impact on the budget deficit could be hundreds of billions of dollars, depending on whether Treasury follows the law, and uses a present value calculation -- the method employed in CBO's estimate, or if it continues to use a cash basis of accounting. There are a number of ramifications that could result from these accounting differences.

• A larger budget deficit figure may impose constraints on future fiscal policy
• Cash-basis accounting of these assets deviates from current practice. For example, a student loan is not counted as a cash expenditure, but as an asset, as the government expects to see the principal repaid
• The future sale of purchased bank stock would appear to decrease the budget deficit. This could open the door to manipulation by an administration seeking political gains to be had from decreasing the federal budget deficit.