U.S. should batten down the TARP
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. —