EDITOR NOTE: The saga continues regarding the $454 billion that was supposed to make up a good chunk of the CARES but instead ended up in a slush fund over which Steven Mnuchin solely controlled, otherwise known as the Exchange Stabilization Fund (ESF). Now, that fund has been handed over to our new Treasury Secretary Janet Yellen, though it’s much smaller; more like $200 billion, according to the author below. Think of the ESF operating like a trading account; one that has no real oversight other than the president’s approval. Aside from the $20 billion Mnuchin used to bail out Wall Street, nobody really knows what the former Goldman Sachs banker did with those funds. Even less certain is what “professor” Yellen might do with it, if anything, once she takes control of the fund. It’s likely to contribute, in one way or another, to more fiscal spending.
Remember all the hubbub in the fall of last year when then U.S. Treasury Secretary Steve Mnuchin demanded in a November 19 letter that the Fed return all of the money from the CARES Act that it had not used for emergency lending programs. Mnuchin’s stated reason for the demand was because he was going to turn the unused funds over to the general fund of the Treasury so that Congress could reappropriate it for other purposes.
At the time, Mnuchin made it sound like the Fed had been sitting on the bulk of the $454 billion that the CARES Act had allotted to be used as loss-absorbing capital for the Fed’s emergency lending programs. In reality, Mnuchin had never turned over the bulk of the CARES Act money to the Fed, but had parked it instead in a Treasury slush fund known as the Exchange Stabilization Fund (ESF). It should be noted that there was not one word in the CARES Act legislation that authorized Mnuchin to put the money in the ESF. (See Research Arm of Congress Confirms that Mnuchin Never Released Bulk of CARES Act Money Earmarked for Fed’s Emergency Loans.)
The size of the ESF is decidedly important for this reason: under current law (31 U.S.C. §5302) the decisions on how to spend the billions in this slush fund belong to the Treasury Secretary and “are final and may not be reviewed by another officer or employee of the Government.” The law also provides that the Treasury Secretary “with the approval of the President, may deal in gold, foreign exchange, and other instruments of credit and securities the Secretary considers necessary.”
Since publicly traded stocks are “securities,” that language would appear to give the U.S. Treasury Secretary the power to intervene in propping up the stock market without the ability of “another officer or employee of Government,” say, like, the Government Accountability Office, having the ability to review or conduct an audit of what’s going on in that regard. Quarterly statements from the ESF are provided to the public, but they simply show where things stand on the last day of the quarter. A lot can go on with the money in the ESF in the prior three months.
The control of the ESF now passes to U.S. Treasury Secretary Janet Yellen, who will have $489.96 billion less than Mnuchin to play with in the slush fund – thanks to Mnuchin’s efforts. Here’s how we did the math:
According to the ESF financial statement of September 30, 2020, there was an asset balance of $682,173,847,532.84. By December 31, 2020, that asset balance had declined to $254,413,542,397.14 – a shrinkage of $427.76 billion. But the December 31 ESF financial statement indicated that the Fed was still using $114 billion of the CARES Act money for its emergency lending programs and included that as assets. That was, indeed, true at the time. The Fed’s most recent H.4.1 financial statement shows that the $114 billion in its emergency lending programs from the Treasury is now just $51.8 billion (see Table 1, footnote 14), indicating that the Fed has returned another $62.2 billion to the Treasury. If you add the $62.2 billion to the $427.76 shrinkage, you get a whopping $489.96 billion.
If Yellen does decide to use her $200 billion slush fund to intervene in markets, how would she go about placing trades? It’s not likely she’s going to use a Robinhood app on her mobile phone. Yellen won’t have to furrow her brow about where to place her trades. That’s all been conveniently worked out long ago by the crony New York Fed, which explains this about its relationship with the ESF:
“ESF operations are conducted through the Federal Reserve Bank of New York in its capacity as fiscal agent for the Treasury.” The New York Fed also notes: “ESF accounts and activities are subject to Congressional oversight. The Treasury provides monthly reports on U.S. intervention activities and a monthly financial statement of the ESF to Congress on a confidential basis.”
According to past comments from members of Congress, what goes on in the ESF has been as clear as mud to Congress.
The vast majority of Americans have never heard of the Treasury’s Exchange Stabilization Fund but it’s been around since 1934. It was created during the Great Depression to stabilize the dollar by engaging in foreign exchange interventions. That mandate morphed significantly from that point forward. (You can read the official version of its interventions here.)
As recently as March 31, 2007, the year prior to the Wall Street crash of 2008, the ESF had assets of just $45.9 billion. Even with Mnuchin’s haircut in what he’s turning over to Yellen, the ESF has grown by 454 percent in 14 years.
It’s unlikely we’re ever going to know exactly what former Goldman Sachs banker Steve Mnuchin was doing with the ESF during the Trump years. But we do know this: Five days before Congress passed the CARES Act on March 25, 2020, President Donald Trump issued an Executive Memorandum giving Mnuchin complete discretion to use $50 billion in the ESF as Mnuchin solely saw fit. The Memorandum was dated Friday, March 20. At that point in time, Trump’s beloved Dow Jones Industrial Average had lost more than 8,000 points from its close on December 31 of the prior year. Also during the same week, Mnuchin had already tapped $20 billion of the ESF to bail out Wall Street. As Mnuchin’s letter of November 19 to Fed Chair Powell confirms, Mnuchin gave (or committed) $10 billion from the ESF to the Fed’s Commercial Paper Funding Facility on March 17 and another $10 billion to another Fed emergency lending program, the Money Market Mutual Fund Liquidity Facility, on March 18.
Had President Trump been re-elected, as his administration expected, the CARES Act provided that Mnuchin would not have to turn over his gargantuan slush fund to the Treasury’s general fund until January 1, 2026. The CARES Act reads as follows:
“Deficit reduction. On January 1, 2026, any funds described in paragraph (1) that are remaining shall be transferred to the general fund of the Treasury to be used for deficit reduction.”
Read our full coverage of the Fed’s ongoing bailout of Wall Street, beginning on September 17, 2019 (months before the pandemic began) here.
Editor’s Note: In case the December 31, 2020 ESF financial statement disappears from the Treasury’s website, we’ve archived a copy here.