[Updated to include various links and further information]
Treasury Secretary Paulson has announced his plans to shift focus on the use of the $700 billion in bailout funds authorized by Congress from purchase of troubled mortgage-backed assets to assisting non-bank institutions and "explor[ing] ways to reduce the risk of foreclosure." Economist's View, Uncovering the TARP, Nov. 12, 2008 (providing a substantical excerpt of Paulson's statement). See also Associated Press, Paulson Says Treasury is Shifting Focus of Bailout, NY Times, Nov. 12, 2008.
It is not clear what is ultimately intended in this shift of focus--in particular, why are they still just "exploring ways to reduce the risk of foreclosure" while actually lending to banks. They are still "exploring" and "considering" and "working to design and evaluate a number of proposals to induce further modifications" rather than acting. And other reports today indicate a likely decision not to go along with the FDIC plan. See Edmund Andrews, White House Scales Back a Mortgage Relief Plan, NY Times, Nov. 12, 2008. To aid families and mitigate the economic crisis, we need a significant program that reaches broadly to orovide real assistance to a substantial percentage of households threatened with foreclosure and it needs to happen very soon.
We are left with a sketchy idea of the other remedies proposed. It is clearly a decision NOT to use the TARP funds as initially projected primarily to purchase toxic waste assets from banks' balance sheets, but to expand the group of institutions eligible for taxpayer bailout funding. Given the mention of credit card companies, one presumes that means at the least organizations like American Express (a credit card company), which is seeking more than $3 billion, will be approved. See AmEx Said to Request $3.5 Billion in Taxpayer Aid, Wall St. Journal, Nov. 12, 2008. It's not clear whether it means Paulson has reconsidered his view that the bailout should not be extended to major other industries that are desperate for operating cash (GM comes to mind).
What is worrisome from the sketchy statement in the Times is the emphasis on using the federal funding perhaps as a "matching" fund to get private investors back into the market.
"We are carefully evaluating programs which would further leverage the impact of a TARP investment by attracting private capital, potentially through matching investments. In developing a potential matching program, we will also consider capital needs of non-bank financial institutions not eligible for the current capital program." (See Economist's View excerpt).
Is Paulson considering using funds to finance hedge funds or private equity or other kinds of joint ventures? Just what does he have in mind?
Equally vague is the statement about securitizations and using TARP funds to back triple-A assets as a way of getting credit to consumers and supporting renewed financing of mortgages through mortgage-backed lending.
"While this securitization effort is targeted at consumer financing, the program we are evaluating may also be used to support new commercial and residential mortgage-backed securities lending." (See Economist's View Excerpt)
One has to wonder if it is wise to use taxpayer financing to ensure that banks will once again be intentionally cut off from the customers to which they lend through a revived securitization process. At the least, one would wish for an accompaniment of better regulation of securitizations and the credit-rating agencies, to prevent the speculative bubbles that caused the problems with these securitizations before.
My unease with this comes from the lack of genuine accountability for the TARP program and the fact that Paulson is basically a free marketarian who "grew up" in the heady financial speculation world of Goldman Sachs and appears to be no fan of the kinds of deep changes that are needed, including a return to real bank and insurance company regulation, control over the "too big to fail" scope of do-everything financial institutions, and coordinated regulation of the most speculative engines of systemic risk--derivatives and hedge and private equity funds. See, e.g., Megan Barnett, Hedge Funds Get a Pass, Portfolio.com, Mar. 2008.
Under Paulson's plan, there were already too few strings attached to the bailout funds (permitting dividends to shareholders paid with taxpayer money, resort conferences of AIG executives, too high executive pay, and too-good-to-be-true deals for bailout recipitents). See, e.g., Naked Capitalism's post describing the sweetening bailout of AIG, with Goldman as the winner, Goldman Big Winner IN Government's Revised Bailout of AIG, Nov. 12, 2008. Under Paulson, the focus had already shifted to permit bailout funds to be used by healthy banks to acquire other banks (not necessarily weaker banks) and thus further consolidate the financial system. The focus on acquisitions was furthered by the Treasury's concommitant notice (without authority, in my view, much like Bush's "signing statements" that he will not enforce selected portions of laws he signs) that it would not enforce the anti-abuse provisions governing use of acquired NOLS under section 382(l) for banks. The funding and the advantageous Treasury decision on nonenforcement of NOL abuse provisions resulted in significant benefits to Wells Fargo in its purchase of Wachovia and to PNC Financial in its acquisition of National City Corp. This acquisition use means that taxpayer funds that have already been given out to banks (and foregone tax revenues, in the NOL nonenforcement situation) may simply serve as a cheap financing for wealthy investors to gain control of more vulnerable or smaller financial institutions.
Various members of Congress were concerned that Paulson and his group of Bush agency heads were not wisely applying the law to accomplish the two-fold objective that brought about the legislation--freeing up credit to ease the economic crisis and helping homeowners avoid foreclosures. See John Dunbar, Shifting Focus of $700B Bailout Stirs Concern, AP Oct. 26, 2008. And, of course, the possibility of misdirected uses of taxpayer bailout funding had originally prompted me to suggest that Congress should create a powerful oversight board that provided Congress real input into the decisions on use of the TARP funds and did not leave the decisions entirely to executives appointed by the Bush Administration.
Now Paulson's new statements suggest yet another way that the taxpayer funding may permit wealthy investors to leverage their money to gain control of non-financial institutions. Is the bailout--enacted to loosen the credit markets--turning out to be just another way of permitting the "haves" to exploit the system for their own benefit? Or instead, is Paulson's statement simply an acknowledgment that the economic crisis is much bigger than "just" the credit freeze and the sudden stinginess of lending institutions, so that government action will be needed to invest in key industries beyond financial institutions, including perhaps the auto industry and others? Again, a more powerful oversight board, one that would permit Congress and even nongovernmental organizations to weigh in on the wisdom of these decisions, would give me more confidence for the long term.
Speaking of confidence, it appears that the gyrations in the Treasury's plans for easing the economic crisis are themselves cause for concern on Wall Street. Today, the stock market closed down again, and part of the reason appears to be investors' concern that Paulson's approach is too ad hoc to address the economic woes in a telling way.
Sam Stovall, chief investment strategist at Standard & Poor’s Equity Research, described Mr. Paulson’s approach as “ad hoc,” and said that investors, hungry for a steady, deliberate recovery plan, were not happy. Jack Healy, Dow Down 411 on Investor Worries, NY Times, Nov. 12, 2008.
Recent Comments