Don't Let The Banks Suck Up More Bailout Money

In many ways, the stimulus package debate has been overshadowed somewhat by the request for the second half of the bailout money, orchestrated by both the current and the next President. I think the reason for this is that we're starting to hear a steady drumbeat from banks that need more cash infusions to survive in this economic climate. The first tranche of money hasn't fixed the balance sheets of these companies, and it indeed might have encouraged them to take larger write-downs because they could absorb them. Bank of America is asking for billions in US aid because they claim not to have known the extent of the rot inside Merrill Lynch when they bought it. Citi is about to fall over if they don't get more funds. And that's just the beginning.

On Tuesday, Mr. Bernanke publicly made the case that one of the most unpopular and most scorned programs in Washington — the $700 billion bailout program — needs to pour hundreds of billions more into the very banks and financial institutions that already received federal money and caused much of the credit crisis in the first place [...]

Since last September, no major banks have failed and the credit markets have thawed somewhat.

But analysts said the problems are still acute, if less apparent on the surface. Banks have received $200 billion in fresh capital from the Treasury since last fall and have borrowed hundreds of billions of dollars more from the Fed. But in the meantime, the economy fell into a severe downturn last fall that is likely to continue until at least this summer.

Industry analysts estimate rising unemployment and business failures will lead to another $500 billion to $750 billion of losses in coming months. That could bring total losses from the credit crisis to $1.5 trillion to $1.8 trillion, twice as high as earlier estimates.

Bernanke expanded upon this at a speech this week, saying that the recovery package would be "doomed" if the financial and credit markets weren't fixed. And we're starting to see the same kind of wrangling for more bailout money from the financial sector and their establishment cheerleaders, warning that even more than the $700 billion allocated must be put into the banks.

I agree with Atrios - the time has come to talk about nationalization. There is no oversight over this huge amount of money lent by both the TARP program and the Fed, which is only now coming under scrutiny. It's been a slush fund of close to $2 trillion dollars, without a sense of who got that money or where all of it is going.



I think we'll finally see a look into just what the Fed is up to as a result of that grilling.

Indeed, Treasury is already promising more money to the banks before they are even authorized by the Congress to do so. Sadly, the way it has been structured, it will be very unlikely for Congress to stop the delivery of the other $350 million. They have to vote affirmatively to keep it away from the President, which the Senate will do today, but the President can veto, and then override would require a 2/3 vote. I don't think you'll see that kind of support for holding back the money in Congress.

What ought to be done is that Congress should establish some oversight, and the TARP funds should be committed in a radically different way. On the first point, Barney Frank has worked to draft a bill putting restrictions on the bailout money, which include limiting executive compensation and demanding information on where the money is going. But top Democrats feel that the bill doesn't need to become law and that it should be seen more as a guideline, and Obama ought to be trusted to do the right thing. This isn't about taking someone at his word, this is about Congress fulfilling its oversight duties. So that should clearly be passed as a statute with the force of law instead of wishful thinking.

On the second point, here's Robert Reich:

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.

Absolutely. Obama says that the second tranche will be used to limit foreclosures. That's simply a wiser use of the money rather than throwing it into the sinkhole provided by the banks. It would provide a bottom-up stimulus and generate actual economic activity. Reich has an excellent suggestion for how this could be done.

Meanwhile, 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.

And the money from TARP could be used to sweeten the pot for lenders to get moving on these workouts, though ultimately they're going to have to take a haircut.

This ought to be a bright line for progressives. Bankruptcy and foreclosure reform ought to be a part of this bill - and we should be willing to fight for it. Thomas Geoghegan, the progressive candidate running to replace Rahm Emanuel in IL-05, has a petition calling for no more blank check bailouts.

We call on Congress to reject President Bush’s request for another $350 billion blank check bailout. The Congress must follow their constitutional role and provide guidelines and restrictions on any money given to banks and Wall Street. These include:

Give priority – directly if possible – to help people keep their homes.
Get public interest representatives or directors on bank boards in all of the banks receiving money.
Penalize any bank that has been hoarding money from the first bailout
In a time of economic hardship, with people losing their jobs, health care, pensions, and homes, Americans need economic security. We need a raise in social security, less debt, and single payer universal health care reform.

I recommend signage.