The massive TARP (Troubled Asset Relief Program approved by Congress in early October. Approximately half of the $700B has been spent and the incoming Obama Administration is now asking Congress for the balance.
Now, one might expect being handed a $350B check to go out and fix the economy might have come with some conditions around accountability and transparency. Well, if you expected that - you were wrong. You'd be hard pressed to find anyone in the Treasury department who can explain where the money went. But if the going in criteria for that $350B was to keep the economy from total collapse, I suppose you could argue the first half of the TARP payment was a success. Credit is now flowing or, perhaps, oozing is a better word but the defaulted mortage securities are still unresolved.
Robert Reich has a couple suggestions for what to do with this next round of $350B:
1. Do not use any of the money to buy stock in -- that is, to "recapitalize" -- the banks. This is a sinkhole of cosmic proportion. Citigroup, to take but one example, has so far received $45 billion of taxpayer cash since early October (along with some $250 billion in taxpayer-supported guarantees from the Fed for junky assets on Citi's balance sheets), and is in far worse financial shape than it was three months ago. Perhaps, someday over the rainbow, these shares in Citi along with Citi's lousy assets will be worth more than taxpayers paid for them. But we're not in Wonderland yet and probably never will be. Giving Citi or any other big bank more taxpayer money is analogous to giving it to Bernard Madoff. It's a giant Ponzi scheme. The money will disappear.
2. Do not use the money to buy the banks' "troubled" assets. This might have made sense a year ago when the proportion of such assets -- which include mortage-backed securities as well as loans to private-equity partnerships that pissed them away -- was relatively small. But these days a huge and growing proportion of bank assets are "troubled." (It's also a huge waste of taxpayer dollars for the Fed to exchange them for Treasury bills.)
3. Prohibit any bank that gets TARP II funds from issuing dividends, purchasing other companies, or paying off creditors.
4. Bar any bank that gets TARP II funds from paying its executives, traders, or directors more than 10 percent of what they received in 2007.
5. Require that any bank getting TARP II funds be reimbursed by its executives, traders, and directors 50 percent of whatever amounts they were compensated in 2005, 2006, 2007, and 2008. This compensation was, after all, based on false premises and fraudulant assertions, and on balance sheets that hid the true extent of these banks' risks and liabilities.
6. Insist that at least 90 percent of the TARP II money be used for new bank loans. If the banks cannot find suitable lenders, they should return the money.
Mr. Reich notes these conditions may send a number of banks into Chapter 11 bankruptcy, but argues this is the only way to get some insight into the bank's financials, separate the wheat from the chaff, force the banks to clean up their balance sheets, and clear out some incompetent management.
Comments