The TARP Trojan Horse
|February 18, 2009||Posted by Jeffery J. Smith under Progress Report, The Progress Report|
The TARP Trojan Horse
A $700 billion slap in the face
Bankers are a mixed lot. Some take public money, some criticize the governments deal, and some show contrition. We trim, blend, and append three 2009 and one 2008 article from: (1) BBC, Feb 10, on contrition; (2) New York Times columnist and Nobel laureate Paul Krugman at his blog, Sept 24, on Bush’s TARP; (3) ProPublica, Feb 13, on Obamas TARP by Paul Kiel; and (4) the American Spectator, Feb 16, on a Trojan Horse by Ted Frank of the American Enterprise Institute.
by BBC, by Krugman, by Kiel, and by Frank
- Former banking bosses say ‘sorry’
Former Royal Bank of Scotland chief executive Sir Fred Goodwin told MPs he “could not be more sorry”.
The testifying bank chiefs also said the bonus culture had contributed to the crisis and needed to be reviewed.
Sir Goodwin was paid $3 million last year but none was bonus. Andy Hornby, former chief executive of HBOS, did not take a bonus last year. Sir Fred added he had lost around £5m on the value of his bank shares in 2007, although he stressed that he was not complaining.
Goodwin oversaw a number of acquisitions that made Edinburgh-based RBS one of the world’s biggest banks. Sir Tom McKillop, former RBS chairman, admitted his bank’s much-criticized purchase of Dutch rival ABN Amro had been a “big mistake”. The size of RBS, together with its lack of cash following the purchase, made it particularly susceptible to the credit crunch. RBS is now nearly 70%-owned by the taxpayer after a government rescue package was put in place at the end of last year.
Lord Stevenson, former chairman of HBOS, said the mistake the bank made was a failure to predict the credit crunch, which effectively froze access to new funds. The MPs asked why a HBOS group risk manager was sacked in 2007 for raising questions about the levels of risk the bank was taking on.
JJS: Showing no contrition are big Yank bankers.
- A $700 billion slap in the face
Bushs bailout of banks, the $700 billion TARP, was to buy bad paper from everyone, not just institutions in trouble, while taking no ownership. In fact, they said they dont want equity warrants precisely because they would lead financial institutions that arent in trouble to stay away. So were talking about a bailout specifically designed to funnel money to those who dont need it. In sum, TARP is something for nothing, it asserts government chiefs, who even said two years ago, the housing market is at or near a bottom, know true values better than the market, and it still fails to recapitalize banks that estimate $800 billion or more losses on home mortgages.
- TARP Lives! Treasury Continues Bank Investments
The Bush programs and acronyms live on in Obamas bank bailout. The Treasury has been investing in 20 to 50 banks each week. Last Friday, it invested $239 million in 28 banks. The investments were made under the same terms as past Treasury investments, meaning the executive compensation limits President Obama announced last week do not apply. Nor will they apply to any future investments made under the so-called Capital Purchase Program — which will be quite a few, since Treasury plans to use $250 billion for the program.
Most of the new investments are relatively small. The biggest last week was $55 million to New Jersey’s Lakeland Bancorp; the smallest was $301,000 to Freeport State Bank in Harper, Kan. But some major financial institutions are still waiting to see if they’ll be approved, such as insurance companies that have acquired banks in order to qualify for the program.
A full list of bailout participants is viewable here click here
JJS: Some bankers have their own gripes about TARP.
- The TARP Trojan Horse
Little wonder some banks steer clear of TARP, and equity holders should be wary of those that jump in. TARP’s “Securities Purchase Agreements” each contain a Trojan Horse clause, Section 5.3, stating that Treasury may “unilaterally amend” the agreement to comply with changes in federal statutes. In short, Congress has the power to retroactively amend the terms of the bailout.
Back in the 1980s when dealing with the Savings & Loan crash, Reagan administration regulators changed rules and closed formerly compliant S&Ls. Todays Congress could, for instance, demand that TARP recipients abstain from foreclosures of Democratic constituencies. If TARP could help, political uncertainty hurts its chances.
Of course policymakers should avoid addressing financial problems with short-term solutions that only forestall and magnify the eventual pain. Beyond such economic sense is political integrity. The Obama administration should delete Section 5.3 from the Securities Purchase Agreement.
Jeffery J. Smith runs the Forum on Geonomics.
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