Friday, January 9, 2009

What Happened to the TARP? Law Professor Wants Answers

This from the AP:
"These are powerfully important initiatives," said Harvard law professor Elizabeth Warren. "I'm very pleased that the incoming administration is focused on these issues."

She offered no specific advice on how to free up more credit. "It's going to take a variety of tools," she said. "They may have to move through multiple approaches."

The Congressional Oversight Panel she heads released a report Friday featuring questions about how banks are spending taxpayer money, how the money will combat the rising tide of home foreclosures and Treasury's overall strategy for the rescue.

But Treasury's Dec. 30 response "did not provide complete answers to several of the questions and failed to address a number of the questions at all," said the panel's second report.

The new document cited an Associated Press investigation that found none of the banks was willing to disclose what they were doing with hundreds of billions of dollars* distributed through direct injections of federal money.

"For Treasury to advance funds to these institutions without requiring more transparency further erodes the very confidence Treasury seeks to restore," it said.

Appearing Friday on ABC's "Good Morning America," Warren said that Treasury "didn't put any tracking mechanisms on it."
Like a bank that marks the serial number on bills to foil bank robbers? The treasury put in capital via preferred shares. I suppose banking is inherently confusing because they are in the business of "renting" money. A vanilla bank can also "rent money" from depositors. The idea is that the difference between what they pay to "rent money" [borrow] is less then what they charge to "rent money" [lend].

They also have capital which is measured in money.

It is obvious that some banks would have needed to raise outside capital at a higher cost then TARP money to acquire weaker banks, like the WFC acquisition of WB. In those cases, the weaker banks may well have had to call on the FDIC, so money would have been spent out of one pocket or another [the FDIC is "insurance" like Social Security is "insurance"]. Seems like not a bad outcome.

However, it would be interesting for a bank to look at all activity since they received TARP money and simply segregate those that appear to have the highest social benefit. They could then say that they used the Treasury TARP funds for those activities. Workout some loans -- that's TARP money. Lend to small businesses -- That's TARP money. Etc.

At this point, someone in the press might wonder how one could demonstrate that it was TARP funds that were used for a particular loan. The bank would then say that it's true because they say it's true.  The press asks a stupid question.  Something is inherently unmeasurable yet the press, Congress, and a Law Professor want it measured.  Perhaps it takes an equally stupid answer from a bank to move the discussion to something that makes at least a little sense.  I wouldn't want to be that bank -- I'd let someone else go first.

*Note that some banks, in fact, did say something: 
JPMorgan Chase, which got $25 billion, said it plans to lend $5 billion to non-profit and health care companies in the coming year.
Maybe they should have said they were going to lend all $25 billion to non-profit and health care companies as well as low income individuals, via credit cards [with interest at 20%+].

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