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Susan Walsh/AP
Treasury Secretary Henry Paulson

Banks Don’t Want Public Looking Underneath the TARP

December 23, 2008 10:29 AM
by Anne Szustek
Banks tapping into the $700 billion TARP have been less than eager to disclose how they are spending their federal bailout funds.

Examining the TARP

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An Associated Press poll of 21 banks that had received at least $1 billion in funds of the $700 billion Troubled Assets Relief Program (TARP) focused on four key questions of transparency: “How much has been spent? What was it spent on? How much is being held in savings, and what’s the plan for the rest?”

The result? The banks were less than forthcoming with disclosure of how they are divvying up their share of federal funds.

When questioned, Bank of New York-Mellon spokesperson Kevin Heine told the AP, “I just would prefer if you wouldn’t say that we’re not going to discuss those details.”

JPMorgan Chase, which has had $25 billion in TARP funds allocated, told the wire service that it was “declining” to provide information, although it did mention that $5 billion was going toward health care and nonprofits. And Citigroup and Bank of America, two of the top TARP recipients, apparently gave skeletal, public relations-laden answers focused on loan liquidity and shoring up their balance sheets.

Bank of America came under flak earlier this month for its role in the closure of Chicago’s Republic Windows & Doors factory. Workers staged a six-day sit-in after the factory closed with just three days’ notice, rather than the 60 days required by federal law. According to Republic statements, it had unsuccessfully tried to negotiate its debt with Bank of America, its creditor, so that it could close as per labor guidelines. Politicians pointed at banks being able to provide lending as the raison d’être of the bailout in the first place.

The sit-in ended after Bank of America agreed to provide a $1.35 million credit line so that furloughed workers could receive their end-of-benefit agreements. But the controversy also helped to draw Congress’ attention to the accounting for TARP funds—or namely that none is required.

The Treasury Department has allocated $250 billion of the TARP—the government program created by the bailout bill passed by Congress in October—to buy up shares of troubled banks. Half of that $250 billion, called the Capital Purchase Program, has been taken up by eight major U.S. banks. Forty-four other banks are queuing up for another $47 billion of that money. And, according to Forbes, possibly hundreds of smaller banks will be seeking the remaining $78 billion.

The first $250 billion was guaranteed under the original bailout bill. The next $100 billion was requested by President George W. Bush. The Treasury is putting a large chunk of that $100 billion toward the purchase of $40 billion of AIG preferred stock.

On Friday, President George W. Bush announced that the U.S. government will provide General Motors and Chrysler $13.4 billion in emergency funding, to be drawn from the TARP. Also, an additional $4 billion will be available for the car companies in February.

As for the remaining TARP funds, Paulson announced Nov. 12 that it was go toward freeing up the consumer credit market. But Congress hopes to have more solid regulations in place before the funds are disbursed.

Elizbeth Warren, a Democrat-appointed congressional monitor for bailout funds, told the AP, “It is entirely appropriate for the American people to know how their taxpayer dollars are being spend in private industry.”

One of the more pertinent parts of Paulson’s change in bailout strategy is that it means the TARP is no longer going to be used to buy up so-called toxic mortgages, a main feature of the bailout bill in its original form.

“Illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards,” Paulson said Nov. 12. “This is creating a heavy burden on the American people and reducing the number of jobs in the economy.” He did not offer specifics about how the money would be used toward that end.

The credit crunch’s impact was evident in American Express’ transformation on Nov. 10 into a bank-holding company, a step that would make what was known as the country’s largest independent credit card company eligible for emergency government lending.

Morgan Stanley and Goldman Sachs, the two U.S. investment banks left standing after Lehman Brothers’ plunge into the history books, converted into bank-holding companies in order to tap federal rescue funds.

Besides the U.S. auto industry, other nonfinancial sectors have voiced interest in receiving TARP funds. The school district of Olmsted Falls, Ohio has applied for $100 million in federal bailout funds. Plus the cities of Philadelphia, Atlanta and Phoenix have reportedly asked for TARP funds.

Background: The original bailout bill

In light of extreme Wall Street volatility in early September, marked most notably by mortgage companies Fannie Mae and Freddie Mac coming under U.S. conservatorship, longstanding investment bank Lehman Brothers’ bankruptcy and an $85 billion government loan to flailing insurer AIG, Treasury Secretary Henry Paulson unveiled a plan to buy up $700 billion in securities backed by illiquid mortgage debt.

The original bailout bill, also known widely as TARP or the “financial rescue package,” granted Paulson the right to buy up “residential or commercial mortgages and any securities, obligations or other instruments that are based on or related to such mortgages.” A supplement from the Treasury department expanded this to encompass “other assets, as deemed necessary to effectively stabilize financial markets.”

The proposal was meant to inject liquidity into the mortgage markets to ensure that banks have greater access to funds for lending.

Banks have traditionally relied on securities markets to purchase bundles of mortgages from them, freeing up funds to make further loans. If securities markets are frozen, however, banks are unable to resell mortgages, and thus have little money with which to make further loans.

Most borrowers today, regardless of their financial condition or credit history, are having great difficulty obtaining the financing needed to operate their businesses.

Historical Context: Reconstruction finance corporation

Established in 1932, the governmental Reconstruction Finance Corporation made to several flailing banks during the Great Depression, as well as bought up $1.3 billion in stock in 6,000 banks. A similar undertaking would be worth some $200 billion today, New York University economist Richard Sylla told The New York Times.

Reference: Emergency Economic Stabilization Act of 2008

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