Friday, April 23, 2010

Permanent TARP?

The $700 billion TARP (Troubled Asset Relief Program) faced enormous public opposition prior to being signed into law by President Bush on October 3, 2008. Slated to end December 31, 2009, Treasury Secretary Timothy F. Geithner extended the TARP program until October 3, 2010.

Although one of the goals of the bailouts was to jump start lending, a January 30, 2010 report to Congress by TARP Special Inspector General Neil Barofsky says that, “Lending continues to decrease, month after month,” and that a separate TARP program announced in March designed specifically to boost loans to small businesses “has still not been implemented by Treasury.”

The U.S. Government now owns 61 percent of General Motors as a result of the company exchanging stock for $52 billion in TARP money. $6.7 billion of that total was considered a loan and has been repaid with interest, but that figure is misleading. The Treasury Department is still in possession of $45.3 billion in GM stock.
The government also holds 9.9 percent of Chrysler on a $12.5 billion investment,
GMAC: 56.3 percent after investing $17.2 billion.
Citigroup: 27 percent after investing $25 billion.
Small banks: $69.1 billion invested in 641 small banks.
AIG: 79.8 percent in return for $47.5 billion invested, plus an additional $63 billion in loans from the Federal Reserve.
Fannie Mae: 79.9 percent after providing $75 billion.
Freddie Mac: 79.9 percent after providing $57 billion.
(Above table appears at

What these amount to are low-interest U.S Treasury (taxpayer) loans to institutions with irresponsible lending and accounting practices. The 'Too big to fail' mentality allows America's largest financial institutions to engage in overly risky behavior knowing that they will be rescued by the federal government should things go badly. A taxpayer-funded safety net does little to discourage such behavior.

Now Congress is seeking to make bailouts a permanent function of the federal government.

On Thursday, April 22 Senate Majority Leader Harry Reid (D Nev.) filed for cloture ( a parliamentary procedure effectively blocking filibuster) of the Restoring American Financial Stability Act of 2010 (S 3217). Cloture carried and the bill will now move through the Senate for amendment.

The law would create a permanent $50 billion 'Orderly Resolution Fund' within the Treasury. The fund, stewarded by the Federal Deposit Insurance Corporation would, "make available…funds for the orderly liquidation of [a] covered financial institution.”

The administration argues that it doesn't amount to a bailout because shareholders in a distressed institution would not be compensated, but the failing firm’s other creditors would be eligible for a cash bailout. Another argument touted by the bill's sponsor Senator Chris Dodd (D CT.) and other Congressional Democrats is that the fund would come from fees charged to big banks, not new or increased taxes. The difference here is in terminology only; Ultimately the cost will be borne by depositors.

Meaningful reform is needed on Wall Street, but legislation should be created in a bi-partisan manner. Inclusion of Republican and Independent lawmakers with everyone acting in the interest of American taxpayers will help to ensure that we don't have a repeat of the health care debacle.

Call, fax or email your Senator today. Let them know where you stand on this issue.

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