Lawmakers reworked financial portfolios after talks with Fed, Treasury officials

When the proposal went to the Senate, lawmakers began to make revisions and additions. Several Democrats wanted to attach spending provisions, including one that would extend unemployment benefits. Republicans warned that the passage of the plan was being placed in jeopardy.

Paulson worked the phones to salvage the deal. He called Senate Minority Leader Mitch McConnell (R-Ky.) three times on Jan. 28, and McConnell called Paulson once that day. On Jan. 29, Paulson called McConnell five more times.

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FULL COVERAGE | The Washington Post examines the intersection between the personal
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The next day, Paulson again called McConnell five times, and McConnell called him three times. The bill had become bogged down in the Senate as lawmakers continued to spar over adding spending measures to the package.

The next day, Paulson called McConnell twice. Senate Democrats pledged to force votes the following week over whether to expand the package, setting the stage for what the White House, Paulson and McConnell had been hoping to avoid: a showdown that could scuttle the deal.

“The stimulus train is grinding to a halt here in the U.S. Senate,” McConnell told reporters on Jan. 31.

That day, McConnell would later report making four trades, each worth between $15,000 and $50,000 in his portfolio, rearranging four mutual funds. He reported selling shares in a one international fund, buying shares in another and reconfiguring his investments in two domestic funds. He hadn’t made a trade since Nov. 20, 2007, and he would not make another until April 14, 2008.

That year, McConnell had 44 other calls and three meetings with Paulson. McConnell made 11 other transactions during the year, including two that exceeded $15,000.

McConnell declined requests for an interview. His spokesman, Michael Brumas, said the senator does not own specific stocks, to avoid the appearance of a conflict, and he does not make his own trades to his funds, relying instead on the advice of an investment adviser.

The adviser, who works for Merrill Lynch in Louisville, Barry Barlow, said he conducts periodic readjustments of McConnell’s portfolio. The moves he made at the end of that January were suggested by Merrill Lynch, not the senator. Barlow said he couldn’t recall whether he spoke to McConnell before the readjustment, but he said the senator frequently tells him to stay away from purchasing individual stocks, to avoid the appearance of a conflict.

“He invests in broad-based mutual funds with hundreds of securities,” said Barlow, who was given permission to speak about the trades by McConnell.

McConnell’s attorney, Russell Coleman, said the trades were authorized by a staff member who worked for the senator. She relayed Barlow’s request to McConnell, who then gave Barlow permission to make the trades, Coleman said.

“They never spoke directly to the senator,” he said. “It’s an important distinction.”

Bailing on bonds

During the spring and summer of 2008, another sector of the economy began to wobble: the market for municipal bonds, which local and state governments sell to raise capital. Normally considered to be one of the safest investments on Wall Street, the muni market was falling victim to the economic crisis.

As chairman of the House Financial Services Committee, Rep. Barney Frank (D-Mass.) had the power to hold congressional hearings and introduce legislation aimed at calming and reforming the bond market. In March, he held a congressional hearing titled “Municipal Bond Turmoil: Impact on Cities, Towns and States.” In June, when the bond market was still in turmoil, Frank introduced two overhaul bills. Bond experts said the market was running scared.

“Investors were leaving en masse. Their fear was everything was coming apart at the seams, and this was next,” Marilyn Cohen, co-author of “Surviving the Bond Bear Market: Bondland’s Nuclear Winter,” told The Post.

Frank told The Post that problems with the bond market were twofold. Rating agencies were applying tougher standards to municipal bonds than private-sector investments, resulting in less favorable ratings. And bond insurers were taking on riskier investments, causing them to accumulate historically high debt. Investors feared the insurers would begin defaulting on bonds.

Despite Frank’s efforts, both bills stalled and fears about the bond market continued.

On Friday, Oct. 17, Paulson called Frank after the markets had closed. Frank said that the discussions probably centered on the $700 billion Troubled Asset Relief Program, known as TARP, and how banks would qualify for funds, the details of which Paulson revealed that following Monday, Oct. 20.

“We had one fight over TARP, and it was over the use of funds,” Frank said. “I wanted some of them to help with foreclosures.”

That day, Frank instructed his broker to raise cash for him, and the broker liquidated nearly $93,000 in Massachusetts municipal bonds in three separate transactions. The investments represented nearly 10 percent of his financial portfolio, according to his financial disclosure form. He said he moved the money into his campaign coffers because his support for TARP that year had placed him in a politically vulnerable position.

Under congressionally imposed rules, Treasury secretaries cannot make the moves that Frank did.

That year, Frank had seven other calls and three meetings with Paulson.

Frank said he worked in Congress to lower interest rates on municipal bonds, working against his own interests, and said his conversations with Paulson had nothing to do with his personal financial decisions.

“Were these things tied to the phone calls? No,” Frank said. “They didn’t tell you what was a good investment or a bad investment. They would tell you what was good or bad for the economy.”

Frank said he eventually was reimbursed by the campaign and reinvested in Massachusetts municipal bonds, because bonds are safe and provide good tax benefits. The bond market survived the crisis without defaults.

“To the extent that people said, ‘Oh, you were protecting your investment,’ I was protecting the financial well-being of Massachusetts,” Frank said. “What the hell else am I supposed to do?”

Deputy graphics director Karen Yourish
and researcher Bobbye Pratt contributed
to this report.