Susan Walsh/AP
Treasury Secretary Henry Paulson

The Bailout Bill: Where’s the Money Going?

November 12, 2008 03:59 PM
by Anne Szustek
Banks and financial institutions are lining up to get a share of the $700 billion Troubled Assets Relief Program. But after so many changes, who exactly is getting what?

Examining the TARP

The Treasury Department has allocated $250 billion of the $700 billion of the Troubled Assets Relief Program (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.

Some members of Congress are pushing to spend some of the remaining $60 billion in President Bush’s request to help keep the Big Three U.S. carmakers afloat. Despite acknowledging the role the auto industry plays in the U.S. economy, Treasury Secretary Henry Paulson voiced hesitance to allocating TARP funds to car manufacturers.

“We need a solution, but the solution has got to be one that leads to viability,” Paulson said Wednesday during a news conference.

As for the remaining $350 billion in the $700 billion TARP, Paulson announced Wednesday that it will now go toward freeing up the consumer credit market.

“Illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards,” Paulson said Wednesday. “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.

But the most pertinent part 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.

The latest evidence of the credit crunch’s impact was American Express’ transformation on Monday 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.

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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