With $300 billion dollars of the $700 billion bailout already spent, the race is on among companies to get in on the handout.
Last week, the US auto industry tried to stake its claim to the $400 billion left on the table by asking for a $25 billion government loan. As recently as last Thursday, Democratic lawmakers were working on a bailout package to help the US auto industry while Republican members of the house stood strongly opposed to such a measure. (Source USA Today 11/13/2008)
House minority leader, John Boehner of Ohio, said that a government bailout of Detroit automakers would be “neither fair to taxpayers nor sound fiscal policy” without requiring dramatic reforms of the auto manufacturers. (Quoted in the Wall Street Journal 11/13/2008)
Republicans are quick to point out that Congress has already set aside $25 billion in loans to help automakers modernize their plants in order to manufacture more fuel efficient cars, but that money has yet to be released due to red tape. Republicans have suggested passing legislation to free up these funds more quickly rather than pass a new bailout measure on top of these already approved loans. (Wall Street Journal 11/13/2008)
Needless to say there is a lot of resistance in Washington to using TARP funds (an acronym for Troubled Asset Relief Program) to aid the auto industry, but when you take a look at where the funds have been spent; there are more questions that are potentially raised.
Originally TARP, or as I like to call it, the governments’ corporate cheese line, was proposed with the intention of buying up smelly assets from banks in order to set a floor on the pricing of these securities. The idea was that this would allow banks to better price these illiquid securities (a fancy way to say that no one would buy them) and bring liquidity back to the markets ultimately making credit more readily available.
This initial bill was rejected by congress as you may recall.
The bill sponsors added in some freebies and other goodies to members of congress who were opposed to the bill initially, in order to get the bill to pass the Senate by a 74-25 margin. Now that the program has been in effect and money has been handed out, Treasury Secretary Hank Paulson has decided to change course. Instead of using these funds to buy ‘illiquid securities’, Paulson has now decided to use the TARP money to buy shares of stock in banks in order to help them boost their balance sheets with the thought being that the move will help get credit markets moving again and make credit more generally available. (Source: Reuters 11/13/2008)
But, if you examine where some of the ‘cheese line’ money has gone, you can’t help but wonder if the original intent is being accomplished.
Take the example of Citigroup. Citigroup’s CEO left the company in November of 2007 with $100 million in compensation. (Sources: Times Online 11/09/2007; seekingalpha.com 11/14/2008). After his departure, the company proceeds to write down $60 billion in credit. The company then gets billions of dollars in equity capital from the government to ‘bail them out’ presumably with no strings attached. Now, the company is taking over a smaller and better run institution – Chevy Chase bank, and is still paying a dividend to stockholders.
This kind of activity was predicted by the CEO’s of many smaller, regional banks. Camden Fine, the chief executive of the Independent Community Bankers of America, was quoted in “The Guardian” (October 27, 2008) as saying that it was unfortunate that the US Government had imposed few conditions on the way that this bailout money was to be used by the banks who received it, other than not raising dividend payments to shareholders.
“When you have taxpayers’ money used by larger banks to purchase otherwise healthy banks, that just promotes the kind of consolidation that got us into this mess in the first place,” said Fine.
“These taxpayer funds are intended to unfreeze the credit markets and to open up local economies — not to help investors in one bank buy out investors in another.”
This situation begs the obvious question; do we have another government administrative failure here?
You decide. But, according to “Bloomberg”, banks have gone to the Federal Reserve with questionable assets and received trillions of dollars in loans at low rates in return; however, the Federal Reserve isn’t saying what assets it’s taking on. As a result, “Bloomberg” is suing to find out under the Freedom of Information Act. (Bloomberg LP vs. Federal Reserve, US District Court, Southern District of New York)
So, while we don’t know for sure, it’s possible that this entire situation has already gotten a lot larger than $700 billion. If the Federal Reserve is taking ‘illiquid securities on as collateral for loans at the current rate federal funds rate of 1%, the price tag to taxpayers could be a lot more.
Then there’s AIG. After the company received an $85 billion loan from the government which was later increased to $123 billion (Source: Wall Street Journal November 10, 2008), company executives were caught partying at an exclusive resort in Phoenix. (Source: ABC News 11/10/2008). According to the ABC story, the company spent $343,000 on the executive retreat while instructing the resort to keep the event as secret as possible, hiding any reference to AIG.
These are just two examples, but it all smells bad to me.
What’s happened to the principle that my Mom used when attempting to change my behavior?
Reward the behavior that you want and punish the behavior you don’t want.
Seems to me that the government has rarely, if ever, used this principle. Might be time to start. I think we’d all be better off.
We’re not doing anything for the banks that followed and adhered to sound banking principles; rather we’re giving the greedy bankers money to take over those sound banks, in essence giving them an opportunity to do what they’ve already done again – this time subsidized by taxpayers – with few strings attached.
And while I’m on the topic, what are we doing to help homeowners who have a current mortgage, bought only houses that they could afford, and put 20% down when they bought the house?
Hear that silence?
We’re doing nothing.
In my view, as a capitalist at heart, this government intervention can only postpone the inevitable. The US will continue to decline in the world pecking order.
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