What Should Be Done With The Next $350 Billion of Taxpayer Bailout Money: Criteria for TARP II

It’s difficult to make the case that the first $350 billion bailout of Wall Street — so-called “TARP I” — fulfilled its goals, unless one argues that the Street would have imploded without it, which is pretty much what Hank Paulson is saying these days. And since it’s impossible to prove a counter-factual, especially when the Treasury was never clear about TARP I’s goals to begin with, Paulson may have a point. But the easier and probably more correct argument is that American taxpayers wasted $350 billion.

No one knows exactly where it went — at least two recent reports reveal that the Treasury had no idea — but we do know the money did not go to small businesses, struggling homeowners, students, or anyone else needing credit, which was the major public justification for the bailout. In all likelihood, on the basis of the skimpy evidence we now have, the money went instead to bank shareholders in the form of dividends; to bank executives, traders, and directors as compensation (directors of major Wall Street banks continued to pull down an average of $350K each in 2008 merely for sitting in on a handful of board meetings at which they obviously didn’t oversee very much); to some holders of bank debt; and to platoons of lawyers, accountants, and other financiers who have advised the banks about other places to park the rest of the money in the meantime.

Congress is now about to give the next Treasury secretary an additional $350 billion, as the second tranche of the bailout. One hopes that the new administration will use it better. Some suggested guidelines:

  • 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.
  • 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.)
  • Prohibit any bank that gets TARP II funds from issuing dividends, purchasing other companies, or paying off creditors.
  • 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.
  • 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.
  • Insist that at least 90 percent of the TARP II money be used for new bank loans. If the banks cannot find suitable borrowers, they should return the money.

You may judge these conditions harsh. I think them prudent. They may force a number of big banks to go into chapter 11 bankruptcy, which would not be the end of the world but perhaps the beginning. At least then we’d find out what was on their balance sheets, because they’d have no choice but to sell off some of their junk, even at fire-sale prices (believe me, if the price is low enough, there are investors around the world who will buy them); they’d have to negotiate with their creditors and pay some of them off; many of their CEOs would be fired and directors replaced, which they should have been already; and most of their shareholders would be wiped out, which is unfortunate for them but, hey, they took the risk. In other words, these provisions would force the banks to clean up their balance sheets. This is the only way to get them to start lending again.

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IMeanwhile, Congress should attach to TARP II — or to the upcoming stimulus bill — a small change in the bankruptcy law allowing homeowners to renegotiate their mortgages on their primary residences (as owners of second homes and commercial real estate can already do). The practical effect will be to give homeowners more bargaining leverage with their mortgage banks, and save at least 800,000 homes from foreclosure. Yes, in theory, holders of mortgage-backed securities will take a hit but as a practical matter they’ve already taken a hit because the securities (and the securities in which they’re wrapped) are already deemed to be junk. At the least, this change will put a bit of a damper on the rising number of foreclosures. A home that’s occupied by a family paying something on their mortgage is far better than a home that’s empty, on which no one is paying anything.

robert_reich.jpgby Robert Reich

Robert B. Reich is Professor of Public Policy at the Goldman School of Public Policy at the University of California at Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton.

This article first appeared on Robert Reich’s Blog. Republished with permission

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Comments

  1. Newt says

    For god’s sake, we need to just let the banks go out of business, THEN buy up the assets. Giving them our money and trying to monitor what they do with it will NOT prevent abuse. Banks are using the TARP corporate welfare bill to hurt the very homeowners who are paying for the bailout.

    Last summer, my home was in foreclosure. My bank offered to revise my mortgage so I could keep my house, and I made payments toward that goal. But as soon as the bailout bill passed, they refused to abide by the offer they made before they had our tax money to beef up their foreclosure department. By giving them a tax-based infusion of funds, we enabled them to disregard the verbal agreements they gave homeowners and to vigorously pursue foreclosure instead. They refused to roll the rest of my payments into my principal, and suddenly demanded a lump sum that they knew I couldn’t make, ensuring that they could take my house. To add insult to injury, our tax money infusion into the banking system facilitated their greedy attack.

    If we give them the other $350 billion, they’ll be able to hire even more lawyers to foreclose on American homeowners at risk. Our middle class can’t help it that BushCo policies created an economic crisis that resulted in millions of job losses. Why should we have to keep paying corporate welfare to the scoundrels who created this mess? Pres. Obama wants to limit CEO pay, but that’s just a band-aid. We need to create programs that help our middle class, not the super rich.

    We should cancel the rest of the bailout bill immediately! We should put the rest of the $350 billion into the stimulus plan with the specific purpose of providing relief to American homeowners, not banks. We could buy at-risk mortgages and let homeowners pay back the government, or pay the banks to renegotiate more reasonable terms. Or the government could buy mortgages and sell them to credit unions, so profits come back to the local communities, not large international banks and their billionaire investors. We own the government; hard working Americans should benefit from what ever solutions we pay for. We need to solve the root of this economic problem, the mortgage credit crisis. All we’ve done so far is make middle class Americans (and our children and grandchildren) pay for more obscene theft from the middle class to the super rich. Please demand that our government use our tax money to help regular Americans during this crisis, not the greedy rich investors who caused this problem. At the very least, our tax money shouldn’t be used against us as we struggle through the current economic crisis.

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