Many Americans were initially reluctant to support the $700 billion Troubled Assets Relief Program that Congress passed last October. Indeed, the legislation lacked a clearly defined purpose and cost a huge sum of money, most of which came from taxpayers. When the government abandoned its initial plan of how to use the money — using the funds to buy distressed mortgages, collateralized debt obligations and other forms of debt from failing banks — opponents of the plan felt vindicated. They were right: The government never had a clear plan of how to use taxpayers’ money, and the American people had essentially signed a $700 billion blank check.
Instead, the government used TARP funds to inject billions of dollars into the nation’s banking system. The government expected banks to use this money to both cover soaring debts and lend new funds to businesses and consumers. Bank of America received $15 billion, while Citigroup, JPMorgan Chase and Wells Fargo all received $25 billion from the federal government.
Instead of instilling markets with a sense of security and confidence, however, the government’s plan sowed more uncertainty. First, bank executives questioned the ultimate use of the funds. How could banks use the funds to both make new loans to businesses and consumers and keep a large amount of money on hand to cover future loan defaults? These two goals oppose each other, and contradictory government directives concerning the use of the funds continue to cause confusion throughout the banking industry.
More troubling — for several major financial institutions — was that the initial round of bailout funding was not adequate. The government offered Citigroup additional loans of $20 billion and offered to guarantee $306 billion of troubled assets on Citigroup’s books Nov. 24. Thus, if any of these loans went bad, the government would refund Citigroup for any losses. Furthermore, the government provided an emergency $85 billion loan to insurer American International Group to prevent the company from collapsing. AIG needed even more money to cover its debts, however, and the current government funding package now amounts to a $150 billion loan and a direct investment of $40 billion into AIG.
For many Americans, the government’s haphazard use of nearly a trillion dollars of taxpayers’ money is extremely worrisome. At times, the government appears to simply be throwing money at the problem while lacking a coherent, comprehensive plan to insure the stability of our financial system.
Thus, instead of placating investor and public concern about the state of the U.S. economy, TARP and similar government bailouts have instead raised troubling questions. Investors now wonder whether government officials have enough expertise to craft a viable solution to the financial crisis. Furthermore, given that the initial outlay of billions in government funds proved insufficient to cover mounting bank losses, the public also worried that banks were unable — or unwilling — to gauge the true size of their distressed assets. In any event, the government’s strategy to deal with the crisis was to simply hand over hundreds of billions of dollars at a time without demanding major concessions from banks.
To avoid another public relations debacle, the incoming administration must educate taxpayers about how their money will be used. In announcing new funding for banks, possible legislation might explain that an exact amount of funds will be used by a given institution to cover a precise amount of distressed debt. The legislation should then list the consequences of not providing that financial company the necessary funds (such as a chain reaction of bank failures).
Americans need to know exactly where their money is going and for what purpose. Many forget that a major goal of TARP was to instill the public with confidence that the banking sector was solvent. In that regard, the current legislation has in fact caused more uncertainty and made the crisis of confidence worse.
Andrew’s column runs biweekly Thursdays. He can be reached at a.golden@cavalierdaily.com.
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