WHERE IS THE BAIL-OUT MONEY GOING AND WHO IS PAYING FOR IT?
Thursday, November 6th, 2008Where is the Bail-Out money going and who is paying for it?
The following is an article from the Sacramento Bee Newspaper, November 2, 2008 as written by Kevin G. Hall.
Washington-After a bruising battle to get it throught a doubting Congress, the Bush administration’s $700 billion Wall Street rescue plan to purchase distressed mortgages and other bad assets has morphed into something else entirely.
Today, the Emergency Economic Stabilization Plan, signed by President Bush on Oct 3, involves the government taking direct equity stakes in banks, and at lease one bank used the money to buy a rival.
The taxpayer money also is expected to be used to buy takes in life insurance companies and may soon even go to help two stuggling Detroit automakers merge.
In short, what once was disparagingly referred to as a bailout for Wall Street now looks like a broader bailout of all sorts of troubled businesses. Some lawmakers and outside analysts question whether that’s serving the public interest as instended-or whether it’s becoming a taxpayer-financed giveaway to favored firms.
“I could say I told you so,” said Rep. Joe Barton, R-Texas, who helped lead a revolt against GOP leaders that sank the $700 billion plan on its first pass. “It was so open-ended and we put so little accountability into it; they can basically do whatever they want to with the money.”
Lawmakers in both parties worried when the Tresury Department announced on Oct 14 that $250 billion of the $700 billion plan woul dbe used to inject cash directly into troubled banks That pushed Treasurey’s previous emphasis on purchasing troubled mortgage assets to the back burner.
Some $125 billion was used to take equity stakes in the nine lartest US banks, and lenders across the nation can ask, through Nov 14, for more. at least a dozen other banks have done so.
In an interview with McClatchy Newspapers, Mass. rep Barney Frank, the House Financial Services Committe chairman, who shepherded the legislation through Congress, disagreed that the plan has morphed beyond its original intent.
“Buying equity was alwys in the plan,” he insisted. Still he said he would hold a Nov 18 hearing to look at some of the developments that are troubling other lawmakers.
Among them is the case of Pittsburgh based PNC Financial Services, which used some of its $7.7 billion in taxpayer money to purchase Cleveland based lender National City for $5.8 billion on Oct 24.
That raised a question: Did the taxpayer money spur more lending, as the plan was intended to do, or did it just let one strong bank, PNC, get stronger by absorbing a waker rival? Some experts think that’s just fine.
“I think it is very positive if it’s a healthy bank buying a wak bank, and it’s an all-stock deal,” said Bert Ely, an expert on banking regulation. PNC’s purchase of National City was in the taxpayer interest because it promoted an orderly and needed consolidation in the banking section, he said.
However, on the same day as the PNC deal, the American Council of Life Inserers confirmed that Treasury was considering giving cash to some big insurance companies whoe failure could pose risks to global finance.
Yet another concern is that banks that receive cash from the government were allowed to continue to pay dividends to shareholders. That raises the prospect that taxpayer money will be funneled not to new lending but to investors who buy bank stocks. That’s unlikely, the Bush administration insists.
Now, in perhaps the bail-out’s strangest twist, reports last week said that negotiations to merge General Motors and Chrysler hang on the government providing cash injections into the carmakers’ auto-financing arms. For that to work, thought, the auto-finance arms first must convert themselves into commercial banks to be eligible.
It’s all a far cry from Treasury’s sales pitch of September-that the rescue plan would provide a two-for-one, rescuing banks and homeowners in one fell swoop.
“It really highlights that if you are not working from a set of core principles, you can drift. And this rescue package has drifted,” said Vincent Reinhart, a former top Federal Reserve director and now a senior fellow at the American Enterprise Institute.
Other experts are more forgiving. “I think Treasury’s thought is that whatever risk they may run by creating confusion about the program is outweighed by the risk of failing to plug the holes in the financial dike, on a csae-by-case basis, as they seem to be emerging,” said Robert Litan, an expert on regulation and banking for the Brookings Institution.
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