Courtesy of Pam Martens
Fed Chair Jerome Powell (left) and Treasury Secretary Steve Mnuchin
Five days before Congress passed the CARES Act on March 25 of this year, President Donald Trump issued an Executive Memorandum giving U.S. Treasury Secretary Steve Mnuchin complete discretion to use $50 billion in the Treasury’s Exchange Stabilization Fund (ESF) as Mnuchin solely saw fit. The Memorandum was dated Friday, March 20. On the prior Tuesday and Wednesday of that same week, Mnuchin had already used $20 billion of the Exchange Stabilization Fund to bail out Wall Street. As Mnuchin’s letter of November 19 to Fed Chair Jerome Powell confirms, he 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.
Most Americans have never heard of the Treasury’s Exchange Stabilization Fund (ESF), a slush fund available to the sitting U.S. Treasury Secretary since 1934. The ESF has grown from $94.3 billion in assets prior to Trump taking office to $682 billion as of September 30, 2020. As recently as March 31, 2007, the ESF had assets of just $45.9 billion, meaning it has grown by a factor of more than 14 times in 13 years.
The size of the ESF slush fund matters because 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 certainly sounds like the Treasury Secretary would have the right to intervene in buying up stocks to shore up the stock market, effectively making the Treasury Secretary a Plunge Protection Team of one.
The Dow Jones Industrial Average had closed on the first trading day of March at 26,703, then preceded to lose 7,529 points by the close of trading on March 20 as the COVID-19 crisis escalated. By March 23, CNBC was reporting that the S&P 500 had plunged 30 percent in 22 trading sessions, the fastest decline in history, noting further that the “second, third and fourth quickest 30% pullbacks all occurred during the Great Depression era in 1934, 1931 and 1929, respectively.”
If Mnuchin did want to use his ESF slush fund to intervene in markets, how would he go about placing his trades? The insidious New York Fed tells us 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 shares this: “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.”
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