Robert Reich says, in his blog, about TARP I, that it looks like American taxpayers wasted $350 billion. He says, “No one knows exactly where it went…. In all likelihood, on the basis of the skimpy evidence we now have, the money went to bank shareholders in the form of dividends; to bank executives, traders, and directors as compensation to some holders of bank debt; and to platoons of lawyers, accountants, and other financiers who have advised the banks about other places to park the rest of the money in the meantime.”
These are Reich’s recommendations of how the second $350 billion, TARP II, should be spent:
- Do not use any of the money to buy stock in — that is, to “recapitalize” — the banks. This is a sinkhole of cosmic proportion. Citigroup, to take but one example, has so far received $45 billion of taxpayer cash since early October (along with some $250 billion in taxpayer-supported guarantees from the Fed for junky assets on Citi’s balance sheets), and is in far worse financial shape than it was three months ago. Perhaps, someday over the rainbow, these shares in Citi along with Citi’s lousy assets will be worth more than taxpayers paid for them. But we’re not in Wonderland yet and probably never will be. Giving Citi or any other big bank more taxpayer money is analogous to giving it to Bernard Madoff. It’s a giant Ponzi scheme. The money will disappear.
- Do not use the money to buy the banks’ “troubled” assets. This might have made sense a year ago when the proportion of such assets — which include mortage-backed securities as well as loans to private-equity partnerships that pissed them away — was relatively small. But these days a huge and growing proportion of bank assets are “troubled.” (It’s also a huge waste of taxpayer dollars for the Fed to exchange them for Treasury bills.)
- Prohibit any bank that gets TARP II funds from issuing dividends, purchasing other companies, or paying off creditors.
- Bar any bank that gets TARP II funds from paying its executives, traders, or directors more than 10 percent of what they received in 2007.
- Require that any bank getting TARP II funds be reimbursed by its executives, traders, and directors 50 percent of whatever amounts they were compensated in 2005, 2006, 2007, and 2008. This compensation was, after all, based on false premises and fraudulent assertions, and on balance sheets that hid the true extent of these banks’ risks and liabilities.
- Insist that at least 90 percent of the TARP II money be used for new bank loans. If the banks cannot find suitable borrowers, they should return the money.
Reich says, “You may judge these conditions harsh. I think them prudent. They may force a number of big banks to go into chapter 11 bankruptcy, which would not be the end of the world but perhaps the beginning.”
In addition, Reich says, “Congress should attach to TARP II — or to the upcoming stimulus bill — a small change in the bankruptcy law allowing homeowners to renegotiate their mortgages on their primary residences (as owners of second homes and commercial real estate can already do). The practical effect will be to give homeowners more bargaining leverage with their mortgage banks, and save at least 800,000 homes from foreclosure.”
Bankruptcy law change is important to motivate mortgage trust investors to bite the bullet and modify loans to make them fixed, affordable and for an amount equal to the value of the home. Requiring lending is another good idea because it is the absence of lending that triggered the economic crisis. Plus they just took the first installment without lending it out. I’m not sure about the paying creditors part as that’s part of businesses. Salaries of CEOs and others are huge compared to what they should be but small compared to the money we are talking about. Getting money back from insiders is an intersting idea although they may have hidden or lost it all. We do need to think of ways to make public where the money went, maybe posting the information on the web where the bloggers can have at it. Most intersting part of all this is the idea that these people aren’t just entitled to get rich without bettering the lot of the rest ofus, a welcome change.