U.S. should batten down the TARP

By J Saft
May 15, 2009

James Saft Great Debate – James Saft is a Reuters columnist. The opinions expressed are his own –

The U.S. faces a lengthening series of request from industries and interests seeking shelter under the Troubled Asset Relief Program, most of which it should dismiss out of hand.

YRC Worldwide, a large trucking company, told the Wall Street Journal it will seek $1 billion in TARP funds to help relive it of its pension obligations.

YRC said that about half of the $2 billion it will owe in pension payments over the next four years covers the costs of retirees who worked not for it but for other companies, now vanished, that are part of a multi-employer pension plan.

That’s certainly an irony but doesn’t seem to be the basis for a claim on the public purse.

YRC is not systemically important and its pension woes, presumably the result of negotiation and free agreement, must be its own responsibility.

Next up: states and municipalities.

California Treasurer Bill Lockyer has asked Tim Geithner to provide assistance under the TARP, warning of a hit to public services and infrastructure if the money is not forthcoming.

Lockyer wants the TARP to provide insurance to banks who themselves provide insurance backstopping California’s short-term borrowings. That insurance would cover the banks in the event of a default by California making the deals a surefire moneymaker for the banks.

Lockyer says that because of the credit crunch the banks are imposing too high fees for their letters of credit. That is true, but only up to a point.

The real issue is that California, because of the recession and its own decisions about taxing and spending, is not a particularly good bet.

While California is most certainly systemically important, and while keeping government spending ticking over in a recession is arguably a good thing, this plan is not the way to do it.

As proposed, it is a subsidy to California and to the banks, or in other words one subsidy too far. Like so many other of the government actions during the crisis, this short-circuits market discipline and encourages risk taking in search of private gain but with public insurance.

If the U.S. wants to bail out California, by all means do it, but take responsibility for the decision and do it directly.

– At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. –

14 comments

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The last line of this article says it all for me, and I completely agree.

The TARP is pandoras box, once opened it is un-closable. TARP 2.0, TARP lite, TARP-just-dont-call-it-by-that name, and so on and so forth, will grace us for generations to come. Although looking at the Farm Aid bills that have been around for decades, TARP the prequel has been with us in one form or another since the dawn of time.

Posted by nyongesa | Report as abusive

This is an opinion column, so here’s mine:

I may have been mistaken in thinking the movie Wall Street would be viewed as a how-not-to fable, whereas an apparently large number of individuals seem to have taken it all-too literally as an MBA user’s guide.

In all seriousness: the admission by any corporation that it is incapable of accounting for, having misappropriated or otherwise frittered away any funds designated for pension payments to its employees should be grounds for immediate asset forfeiture and global foreclosure, with the pensioners deemed first-in-line creditors.

Negotiation and free agreement must be proven, not presumed, since gross violation of trust is a crime which, in a nation of laws, can never go unpunished.

As an efficiency measure, I’d suggest the TARP switchboard be outfitted with direct extensions to the FBI white-collar crimes division. Visualize the instant savings to the taxpayer!

Of course, feel free to correct me if I’m wrong in thinking that balancing the budget and rigorous elimination of corruption are by no means mutually exclusive objectives.

Posted by The Bell | Report as abusive

It will be tough sledding for the next few years as some industries were operating on just credit and little or no cash in hand. They were broke and just didn’t know it.

For future planning we need to concentrate on making this a country where businesses and individuals have enough money to ride out a downturn, and not go back to the normal of it being a money lenders country. Living on the edge as far as governments, individuals, and businesses never did work, and never will work. I know as my business went through a severe downturn in Oregon in 1981 and rode it out until 1984 at which time I liquidated it. Some businesses were in a better cash position and made it through. This time I am in a better position to make it through. I think that if we concentrate on putting stability into the system we can rebuild the economy to a more stable entity.

Posted by f belz | Report as abusive

You are absolutely correct. The Obama administration is making huge mistakes by bailing out California along with the Banks and everyone else——He will be a one term president if the economy doesn’t improve in the next year, or if it gets worse.

Most economists have stated repeatedly that the financial systems has to fixed before the economy will improve. It’s not happening because the Banks are stuff full of bad debt and the economy is worsening ie more job losses, commercial real estate losses, credit card losses etc. They are following the route of Japan with Zombie banks and a decade High unemployment and low GDP.

They need to do what the Germans are presently doing ie Take the toxic debt off their balance sheets—freeze it over a twenty year period until someone wants to buy it. Let the bad banks fail no matter how big they are—-and then recapitalize the good banks. This way the financial system can be fixed in a short time frame and the economy will rebound faster. My bet is Germany will be the first to emerge out of this recession/depression first and in better shape than the United States.

Posted by mark jamison | Report as abusive

The global financial debacle must be a huge embarrassment for free market ideologists as the much vaunted capitalist economy is begging to be put on welfare state life support.

The problem with the mixing of capitalism and socialism is that only specific people and corporations benefit from the socialism aspect-taking money from the taxpayers to bail out specific entities. Millions of people and businesses are excluded from these life support programmes-hundreds of thousands of people losing jobs, closing business, going bankrupt and been foreclosed on their homes. Ah well, to bad that they are not “too big to fail”.

It seems that there is a hope that the “worst is behind us” and I am sorry to say that this is not the case. The destruction caused by the financial tsunami will take a long time to repir. And more than likely there is still more destruction to come. Perhaps this is why the stress tests were done on the banks as preparation?

Looking at the BIGGER picture, perhaps we should dust off some of the old texts that tell us about the kind of things that God did in those days when He got fed up with the spiritual degeneration of His children. In my view, we are reaping what we have sowed.

The core of everything is the realisation of what we are and why we are on Earth passing through this experience. A spiritual reawakening of humankind is what is needed. That will solve a zillion times more than any TARP programme can do.

Posted by Greg | Report as abusive

To argue that in a system where a central bank controls interest rates, circumventing market forces, we actually have a free market is misleading. I believe we can lay blame for this debacle on those that manipulate interest rates and control the money creation. If it weren’t for the cheap money and the frenzy to lend, encouraged by the money creator, we would not have gotten where we are today.

I do agree with the socialism issue though in that too many people now feel entitled to these benefits and too many people manipulate the system and commit fraud. It was a bad idea to create so many social safety nets in the first place, but with career politicians it was apparently irresistible. Eliminating them will be something of a conundrum but will ultimately need to happen, drawing the line will be difficult and politically suicidal.

What really bothers me is the degree to which our present administration apparently shows disregard for the law, specifically contracts. The Chrysler ordeal exemplifies the path we’re presently taking and it will end in tears. The foundation of our great nation is being assaulted no less than by our president. We truly have begun the downward spiral.

I had hoped that when TARP funds were returned it would begin to shut down that program and put behind us the disgrace of our government having to enter into the private sector at all. Really it’s embarrassing to see that our government can’t step aside for the good of the economy and let the chips fall where they may. It would have been tough for a while but it would have ended far sooner and on a stronger foundation than where we’re headed now. Now we’re headed down a road where the term zombie can literally be applied to anything.

But according to what Sen. Reid seems to think the TARP funds (principal) returned to the Treasury now appear to be a revolving account, to be lent out again over and over, potentially to be exhausted when they’re all pumped into AIG-like entities where the expectation is that there will be no money to recoup. We have already seen this at Chrysler where fed. loans are not to be repaid, and I’m sure the same will happen at GM as well.

This is an abysmal mess we’ve gotten in to, likened to bailing out the ever failing child who can’t get their act together no matter what. I have to ask when we will finally cut the cord?

Posted by steve | Report as abusive

What chaps my you know what is one key thing: the US government takes dollars from taxpayers to bail-out FOR PROFIT corporations! Where is the least bit ‘f “free market” in that?!?

Yeah, I know, they are too large, too important, blah, Blah, BLAH!! What it really boils down to is they are too well connected politically, and that the federal government really doesn’t give a crap about taxpayers / citizens.

I’d rather have my tax dollars spent bailing out homeowners who through no fault of their own got screwed by the obscenely greedy banks!

But hell will freeze over, and the Earth rotate backwards, causing the sun to rise in West, before that happens! or so it seems!!

I think taxpayers helping bail out states

Posted by Tim | Report as abusive

I have heard of “if it sounds too good to be true it probably is”, does it have an opposite like “if it sounds too horrendous to be true it probably isn’t?” No! Damn!
I was wondering when the pensions “issue” would raise it’s ugly head – that was one that was quite often mentioned when times were good as being on the rocks with massive shortfalls in funding not that long ago. It sent a cold shiver down my spine thinking of all those (leveraged) mergers and aquisitions.
Coupling that, with the “credit crunch” or should that be “credit made from thin-air” problem and combining that with the automation of many jobs meaning many jobs that were around quite recently won’t be from here on in (I recall seeing a Harvard professor being interviewed on the role of computers in business in 1988 – I think – slamming his fist in to has hand saying “redundant” each time he went through his long list of jobs), it’s going to have to be time to reinvent the wheel… or teach machines to shop.
Who/what is the government going to tax to repay the TARPs/(bail-outs in the UK)?

Posted by Peter H | Report as abusive

For some reason my intuition is that germany may be the big surprise myself when this is all over. they have the courage and the populace can grasp enough major issues that europe will see some real reform. Alas the US will continue to be boom, bust. My money will b in europe where my returns are likely to be slower at periods, but not suffer from the extreme downside. like the turtle and the hair I will end up the winner in the long run.

As for TARP, nobody should be surprised that folks are lining up for free money. i would too if I could. One of the reasons our government is so hell bent on supporting the markets is pension liabilities. This is a huge shoe due to fall. companies will see their profits evaporate as they have to fund pension losses. expect some government rule that changes accounting or something to avoid the issue. This has been and will always be the major reason I have felt all this money being directed towards wall street could go directly to the citizens (in some manner) with greater effect and we should let corporations deal with the mistakes they made.

Fund pensions (trim benefits) directly reduce taxpayer debt loads. the current policies are designed to bail out our insolvent banking system, not to fix the structural issues.

Posted by dcb | Report as abusive

in reply to the comments below. in reality the markets haven;t been free and that is one of the problems. risks get taken and each time the government rides to the rescue. long term capital management, savings and loan crisis, latin america debt crisis, greenspan interest rate policy, government intervention in housing. Each has taught those with capital that they can take risks without suffering the consequences. we make the same mistake once again. each crisis has precipitated a bigger crisis down the road. the next chip to fall the dollar (I believe). When you take the government running to the rescue and the simple fact that those who made piles of money from their mistakes never have to return it, you get this mess. Hell pay me millions that I don’t have to worry about giving it back, and I’ll take risks with the money you give me that would make your hair stand on end. Therefore, we aren’t really dealing with a free market. NOTE I AM JUST PUTTING FORTH AN ARGUMENT, I MAY NOT BELIEVE EVERYTHING I WRITE IT IS JUST AN ALTERNATIVE VIEW.

May 15th, 2009 1:17 pm GMT – Posted by Greg

The global financial debacle must be a huge embarrassment for free market ideologists as the much vaunted capitalist economy is begging to be put on welfare state life support.

The problem with the mixing of capitalism and socialism is that only specific people and corporations benefit from the socialism aspect-taking money from the taxpayers to bail out specific entities. Millions of people and businesses are excluded from these life support programmes-hundreds of thousands of people losing jobs, closing business, going bankrupt and been foreclosed on their homes. Ah well, to bad that they are not “too big to fail”.

It seems that there is a hope that the “worst is behind us” and I am sorry to say that this is not the case. The destruction caused by the financial tsunami will take a long time to repir. And more than likely there is still more destruction to come. Perhaps this is why the stress tests were done on the banks as preparation?

Looking at the BIGGER picture, perhaps we should dust off some of the old texts that tell us about the kind of things that God did in those days when He got fed up with the spiritual degeneration of His children. In my view, we are reaping what we have sowed.

The core of everything is the realisation of what we are and why we are on Earth passing through this experience. A spiritual reawakening of humankind is what is needed. That will solve a zillion times more than any TARP programme can do.

Posted by dcb | Report as abusive

Problem is that the current system has nothing to do with capitalism or communism. It’s oligarchical crony capitalism only to the benefit of the anointed of the Wall street cabal but at expensive of everyone, like said.

What’s the difference between capitalism and communism? In communism they nationalize the banks and then push them to bankruptcy then become capitalists. In capitalism they push the bank to bankruptcy and then nationalize them then become communists.

Posted by Youri Carma | Report as abusive

Has any one considered the effects of printing more and more currency? On the surface the circumstances couldn’t be further apart, however there are warnings to be heeded from the the Wiemar Republics flooding of Deutsche Marks in the 1920s. Again this action was in response to a crisis, the abject poverty visited upon Germany by the Treaty of Versaille.

The U.S. carried very little debt in the 1930s. We were the worlds largest producer and exporter of crude oil. This is no longer true. History is replete with examples of nations that go to war or build empires over resources.

The U.S. is 4% of the worlds population and we consume somewhere near 45% of the worlds resources. We are the largest consumer of oil at around 26%. We export most of our oil and import higher quality crude. We probably in the balance import 64% of the crude we consume. This is simply not sustainable.

As a nation we must wake up to these facts and more. We must then resolve to sacrifice in order to bring real change, energy independence and sustainable use of resources. Otherwise Russian President Medvedev will be proven right. War will erupt for control of fossil fuels throughout central Asia.

Posted by Anubis | Report as abusive

So tired of Private sector not taking their own responsibility for their bad investments- worst the Obama’s Admin taking public money and handing it to the private. TARP is set up for Corp thieves, especially in times of economic chaos.

Posted by Yo | Report as abusive