We have all witnessed Congress approve the $700 billion dollar bank bailout.
A few months ago, it was literally in the news every moment. The news was reporting that this bailout was of utmost importance and that it needed to be passed immediately especially after the $1 trillion loss the market took the day before.
The purpose of this bailout was to free up credit markets that were frozen and help American banks stay afloat. The Chinese and British were eager for us to pass the bill as well since they were highly invested in our banking system. The bill passed and was finalized a few days after but no news coverage? No website addressing the transparency promised? No accountability?
A few months have passed now and we are on the verge of another $800 billion recovery package but I think we forgot to ask whatever happened to that original $700 billion?
If you have been wondering what became of last years $700 billion bank bailout, you are certainly not alone. With the media focused on President Obama’s proposed economic stimulus plan for the last couple of weeks, the bank bailout package has been overshadowed by more recent suggestions for ways to shore up the sinking economy.
The Troubled Asset Relief Program, or TARP, was originally intended to allow the Treasury Department to step in and prop up struggling banks. Less than half of the cash that was allocated has actually been spent. That could be just as well, given recent reports about the mishandling of the first round of bank bailouts. The bill was sold to the legislators and the public on the basis that the funds would be used to rescue the banks by purchasing mortgage-backed securities and other loan products that had gone bad. Later, the government would recoup its investment, and hopefully even make some money for the taxpayers, by selling off these securities once the economy had picked up.
This is not what happened, however. After the TARP bill was approved in early October 2008, Treasury suddenly changed its strategy, and announced that it would be making direct investments in troubled banks and other financial institutions instead. So far, the Treasury Department has acquired $279.2 billion in preferred shares of 319 financial institutions. It also holds warrants on common stocks in 230 entities; most of these are currently out of the money.
There have been accusations of unfairness and favoritism with respect to the money that has been distributed to date. Some are also claiming that Treasury overpaid for the securities it purchased. The program’s Congressional oversight panel last week released a report that states that in 2008, the US government spent $254 billion on shares in financial institutions. However, despite assurances that Treasury would make purchases at market value, these shares were worth only $176 billion when they were acquired.
It is proving very difficult to obtain clear information about the bailout program and how it is being administered, according to the panel. Separately, there have even been concerns raised about possible fraud in one of the TARP programs.
The largest single bailout check was the $40 billion handed over to insurance giant AIG. According to the oversight panel, this holding was worth just $14.8 billion, or 37 percent of face value. AIG was roundly criticized for hosting a lavish corporate junket shortly after receiving the funds. Other TARP recipients have come under fire for paying huge executive bonuses, or for using the bailout money to buy other ailing banks.
Morgan Stanley, for example, received $10 billion for $5.8 billion worth of shares, and is now acquiring Chinatrust Bank. Bank of America was given $15 billion, and then bought Merrill Lynch, which itself received $10 billion. Other notable TARP recipients include Citigroup, which got $25 billion, and then another $20 billion a few weeks later. Wells Fargo received $25 billion, as did JP Morgan Chase, while Freddie Mac and Goldman Sachs were each handed $10 billion.
With the second half of the TARP money, plus an expanded bank rescue package, due to be distributed over the next few months, calls for much tighter oversight and increased transparency are growing louder. On that score, Treasury will have to do a lot better than the vague plans it has outlined so far.
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