Archive for Sunday, October 26, 2008

Uses for $700 billion bailout money ever shifting

October 26, 2008


— First, the $700 billion rescue for the economy was about buying devalued mortgage-backed securities from tottering banks to unclog frozen credit markets.

Then it was about using $250 billion of it to buy stakes in banks. The idea was that banks would use the money to start making loans again.

But reports surfaced that bankers might instead use the money to buy other banks, pay dividends, give employees a raise and executives a bonus, or just sit on it. Insurance companies now want a piece; maybe automakers, too, even though Congress has approved $25 billion in low-interest loans for them.

Three weeks after becoming law, and with the first dollar of the $700 billion yet to go out, officials are just beginning to talk about helping a few strapped homeowners keep the foreclosure wolf from the door.

As the crisis worsens, the government's reaction keeps changing. Lawmakers in both parties are starting to gripe that the bailout is turning out to be far different from what the Bush administration sold to Congress.

In buying equity stakes in banks, the Treasury has "deviated significantly from its original course," says Alabama Sen. Richard Shelby, the top Republican on the Senate Banking, Housing and Urban Affairs Committee. "We need to examine closely the reason for this change," said Shelby, who opposed the bailout.

The centerpiece of the Emergency Economic Stabilization Act is the "troubled asset relief program," or TARP for short. Critics note that tarps are used to cover things up. The money was to be devoted to buying "toxic" mortgage-backed securities whose value has fallen in lockstep with home prices.

But once European governments said they were going into the banking business, Treasury Secretary Henry Paulson followed suit and diverted $250 billion to buy stock in healthy banks to spur lending.

Bank executives hinted they might instead use it for acquisitions. Sen. Christopher Dodd, chairman of the Senate banking committee, said this development was "beyond troubling."

Sure enough, a day after Dodd, D-Conn., made the comment, the government confirmed that PNC Financial Services Group Inc. was approved to receive $7.7 billion in return for company stock. At the same time, PNC said it was acquiring National City Corp. for $5.58 billion.

"Although there will be some consolidation, that's not the driver behind this program," Paulson recently told PBS talk show host Charlie Rose. "The driver is to have our healthy banks be well-capitalized so that they can play the role they need to play for our country right now."

Other planned uses of the bailout money have lawmakers protesting, although it is only fair to note there is nothing in the law that they just wrote to prevent those uses.


Jaylee 9 years, 7 months ago

economy reclines back until it falls.there are no do-overs.messy, questionable government creates means for do-over, then does it.deplorable bill writing and children in the driver seat of government mess up do-over.what has happened here is the government threw out the life raft to the drowning, but the raft has a couple dozen holes in it and we are only going to see the VERY topical possibility for utilization of that raft for a short........... short period of time.we're still gonna drown.

Janet Lowther 9 years, 7 months ago

They should have demanded voting stock.Then the government could have said "NO" to some of the more outrageous proposals.I don't like the whole idea of government intervention much, but the whole economy is so dependent on the fractional-reserve banking system which is in such deep do, we'd be looking at a LOT nastier recession than we are expecting at the moment if we were to suddenly demanded that banks be responsible.When is someone going to run on a sound money platform? I don't think anyone has since McKinley. . . And I'm not sure anyone has seriously taken on fractional-reserve banking in the whole history of the US.

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