"A senior Republican senator is seeking an investigation into potential conflicts of interest "

Let's see if we can understand this story from the FT. First, here's my post about the problems with TARP:

"Saturday, October 4, 2008

Problems With The Bailout

From the NY Times article "For Treasury Dept., Now Comes Hard Part of Bailout", I see the following problems with the plan as envisaged:

1) Possible conflicts of interest with the administrators of the plan.

2) Overpaying for assets.

3) Doesn't do enough to ease credit markets or makes it worse.

4) When the assets are eventually sold, there is a huge and unanticipated loss.

5) Lobbying by hedge funds, etc.

Are there others? "

See Problem 1:

Also, read my post here about William Gross, who's my guy, and I still thought there could be problems.

Now, from the FT:

"A senior Republican senator is seeking an investigation into potential conflicts of interest among former Goldman Sachs executives serving at the US Treasury and whether any officials exceeded their authority by implementing a controversial tax change without the approval of Congress.

Chuck Grassley, the most senior Republican on the Senate finance committee, asked Eric Thorson, inspector-general of the Treasury, to investigate the "independence" of several Treasury officials who formerly worked at Goldman Sachs and serve as advisers to Treasury secretary Hank Paulson, the former chief executive of the Wall Street bank.

Mr Grassley said in a letter to Mr Thorson that there was reason to be concerned that “relationships” between the officials and board members at two merging banks, Wells Fargo and Wachovia, gave the “appearance of preferential treatment”.

Good work Sen. Grassley. You're right on the ball.

"Mr Grassley singled out Robert Steel, a former Goldman official who worked under Mr Paulson at the Treasury before he became chief executive of Wachovia.

Mr Grassley is specifically concerned with a change in the tax code the Treasury initiated in late September that saved some institutions tens of billions of dollars and paved the way for Wells Fargo's acquisition of Wachovia.

Citigroup was at the time also bidding for Wachovia, but was ultimately trumped by Wells Fargo, in part because it would not have received any benefit from the tax change because of its losses.

The September 30 “notice” by the tax authorities, which fall under Treasury's jurisdiction, altered a section of the tax code that had previously prevented tax-motivated acquisitions of loss-making corporations. In effect, the notice eradicated a limit on the amount of taxable income an acquiring bank could deduct after a takeover.

It has been estimated that the change could save Wells Fargo nearly $20bn (€15.9bn, £13.6bn)."

If you want to understand this, read my recent post here.

Back to the FT:

"Mr Grassley, who has a reputation for aggressively uncovering and pursuing tax evasion, has a previous working relationship with Mr Thorson, who served as chief investigator for the Senate finance committee and whom Mr Grassley once praised for having “integrity and courage”.

Last week, Mr Paulson defended the code change and said it had been done through an “administrative process” that was “quite legal”. The Treasury secretary said that the previous tax policy was “impractical and unworkable” in the current economic environment.

The Treasury said on Sunday it was reviewing the letter. Wachovia said “to the best of our knowledge” the company was not involved in the tax change. It added that Mr Steel did not have a severance agreement."

Okay. Good for Grassley. But please, nobody tell me this wasn't expected. The problem with TARP was that you had to hire people from some of the firms involved in the crisis, and the plan, the way it was constructed, as a hybrid plan, looked arbitrary, and reeked of cronyism. Calling Charles Krauthammer in my recent posts about his article on the Auto Bailout. TARP was pushing consolidation, meaning that it had to look like it was favoring some banks over others. That was one of the problems about letting insolvent banks fail, as Anna Schwartz wanted. It could look like some banks were being saved while others cut loose, and the solvency of the bank could meld into an issue of preferential treatment. Were they really solvent/insolvent?

This was a huge negative with the plan from the beginning, as was the problem of lobbying, which has also been serious.