Thursday, May 21, 2009

Grilling Phillip Swagel

Phillip Swagel appears to be a bright nice guy. Picture a younger version of the late Mr. Rogers, sans the sweater, and wearing a suit instead.

Nevertheless, this mild mannered man is a major league technocrat for the state. Picture a guy sans the sweater who can justify any financial or economic position, if it will help justify the acts of the evil doers and, in turn, they promote him to a position that will enhance his resume.

Swagel was Assistant Secretary for Economic Policy under Henry Paulson at the Treasury Department from December 2006 to January 2009.

He served as chief of staff at the White House Council of Economic Advisers from July 2002 to February 2005, and was a senior economist at the Council from August 2000 to July 2001.

Swagel was also previously an economist at the Federal Reserve Board and the International Monetary Fund.

Swagel spoke at a luncheon today before the Washington D.C. based National Economists Club. I was there and had the opportunity to ask Swagel a couple of questions.

After his prepared remarks, I asked him:
I'm curious about your thoughts on the change in the way the Bear Stears situation was handled versus the Lehman situation versus the Citigroup situation versus the Washington Mutual situation. Further, I have noticed that JPMorgan Chase was involved in two of these situations and that they came out of the stress tests without requiring any further capital. How much capital were they able to gain as a result of the acquisitions of Bear Stearns and Washington Mutual?
As for the differences in the different deals, he gave the standard reply. There were different circumstances for each. Blah, blah, blah.

As for what capital contribution benefit JPMorgan Chase received as a result of the acquisitions of Bear Stearns and Washington Mutual, he said he didn't know and that he hadn't seen any data on it. I replied, "I haven't seen any data on it either. Do you know where I can find it?"

An awkward silence. He said he didn't know but he would try to find out for me.

He finally went into total retreat and said this was finance and he was an economist. My reply, "Well, then let me ask you an economics question. Was there any concern at the Treasury about the slowdown in Fed money growth during the summer of 2008?"

He tried to answer with, "Well the Treasury is always in touch with the Fed and we are always monitoring every aspect of the economy."

I wouldn't let him get away with it. I pushed, "Do you know what money growth was in the summer of 2008?" His answer. "No." I pushed, again, "Do you know what money growth was in the first half of 2008?" His answer. "No."

I remind you this was the Assistant Secretary for Economic Policy at the Treasury Department during this period. Money growth dropped from a 12% annualized rate early in the year to 1.4% during the summer, in the midst of a housing crisis.

Clearly, Swagel was not at the Treasury to monitor the economy. He was a tool used to come up with the justifications for the machinations of the real insiders, e.g., Paulson.
Paulson didn't care what caused the downturn. He cared about how to shovel money to Goldman and JPMorgan. And when it comes to justifications for why all that occurred, Swagel has microscopic details (pdf).

After the formal luncheon broke, I pushed a little more, privately. I asked if there were any memos at all in the Treasury by anyone raising the question of why Bernanke had slowed money growth to 1.4% during the summer of 2008. He said, he hadn't seen any.

If no one at the Treasury was looking at something as simple as the dramatic drop in money supply, then how can anyone conclude anything other than that they were all there to find props for Hank Paulson theft?

Still on the sidelines, I pushed once more. "Given that JPMorganChase did not need to raise any capital after the stress tests, don't you think an investigation should be conducted to see how much the acquisitions of Bear Stearns and Washington Mutual resulted in an increase in capital for JPMorganChase?", I asked.

There was a bit of dancing around the question, but I persisted and I think he finally nodded, and, under his breath, I think he said "yes."
UPDATE: The answer to the question, of how much of a capital benefit was the takeover of Washington Mutual to JPMorgan, appears to be at least $29 billion.


  1. Swagel states:

    "Political constraints were an important factor in the reluctance at the Treasury to put
    forward proposals to address the credit crisis early in 2008. The options that turned into
    the TARP were written down in an initial form at the Treasury in March of 2008—to buy
    assets, insure them, inject capital into financial institutions, or to massively expand
    federally guaranteed mortgage refinance programs in order to improve asset performance
    from the bottom up. But we saw little prospect of getting legislative approval for any of
    these steps in early 2008 (even a massive program to avoid foreclosures). The political
    constraint was such that legislative action would be possible only when Secretary Paulson
    and Chairman Bernanke could go to Congress and attest that the crisis was at the
    doorstep, even though by then it could well be too late to head it off."

    Yet, Paulson states in an address given in March of 2008:

    "Most of the proposals I've seen would do more harm than good --- bailing out investors, lenders or speculators who, instead of getting a free-pass, should be accountable for the risks they took. Let me be clear: I oppose any bailout. I believe our efforts are best focused on helping homeowners who want to stay in their homes."


    "One of the tools of HOPE NOW is the American Securitization Forum's fast-track framework for subprime ARM borrowers that was announced in December.

    Why are we focused on this small group of borrowers? Because they represent a disproportionate share of foreclosures."

    There is a program named "Hope Now":

    "The new protocol announced in December is designed to address this volume problem by streamlining some borrowers into refinancing or modification, so that resources are available for more difficult situations.

    The SEC signed off on this protocol on January 8th. Although it is complex, some servicers were able to implement it right away, while others required more time to work through the legal, operational and accounting issues. Overall, more than half of the HOPE NOW servicers had implemented the protocol by the end of January."

    The result of this will be:

    "It is important that everyone who agreed to this protocol follows through on their commitment. I won't look kindly on industry free riders. My measure of success will be that a borrower who has made all the payments at the initial rate, but can't afford the reset and reaches out for help, avoids going into foreclosure."

    In short, there is no correlation between the words of these 2 people. Swagel is desperately trying to CYA when Paulson's own words show that this is all a form of "Managed Care": "No Bailouts!"

    This is nothing less than astonishing. We have been through an Economic Coup that is culminating in a massive transfer of money to favored accounts. "If the government is stealing trillions, a few billions to friends won't even be noticed."

    The consequences of this are staggering.



  2. Wenzel,

    These kinds of posts are particularly unique and awesome. Thanks for your hard work and courage, as well as intelligence, in asking tough questions to these people. It's informative factually and psychologically-- figuring out what's going on, and why they're doing it.

  3. very good write-up. Thank You.