GMAC, CIT provide more reasons to roll up TARP

November 2, 2009

Treasury Secretary Timothy Geithner has the option of extending his authority to spend TARP money until October 2010. Congress should forcefully discourage him from doing so, even if it means stripping that authority.

The bankruptcy of CIT despite a $2.3 billion TARP infusion provides one reason. But the story of GMAC is even more compelling. Treasury has already sunk $12.5 billion into it, with perhaps another $5.6 billion on the way. Then there’s GMAC’s FDIC-guaranteed debt.

And given the amount of taxpayer dough on the line, government has become a less-than-silent partner. The FDIC, according to the Wall Street Journal, has ordered GMAC to abandon key components of its new business strategy — offering high rates to depositors and making more auto loans to borrowers with lower credit ratings — because it considers them too risky.

Conflicts and bad incentives abound. Sheila Bair of the FDIC is inclined to caution, given the taxpayer risk. Yet she also needs the company prosperous enough to make good its obligations.

GMAC might indeed be incentivized to take more risk than is prudent, counting on a continuation of the government backstop. But perhaps those risks are actually what GMAC should be doing to revitalize its business. When market discipline and the profit motive are entangled by government subsidy, clarity can prove elusive.

The GMAC bailout is part of the wider bailout of GM and Chrysler. The Bush administration started it in fall 2008 to keep the swing states of Michigan and Ohio in play. Then Team Obama signed on, not wanting to risk the potential jump in unemployment, especially among union autoworkers. But few in Obamaland thought GM and Chrysler to be “systemically” important.

The end result is a sort of crony capitalism where TARP money — originally meant for buying toxic bank assets — is propping up a politically sensitive sector of the economy while subjecting it to political control.

“Slush fund” may be too inflammatory, but recall that the administration is also proposing helping small business by funneling TARP money to community banks that increase lending to the sector. Small business, by the way, has been opposing both the president’s healthcare and cap-and-trade energy plans.

TARP was conceived in a time of crisis. The White House says the crisis has ended. Let TARP end with it.

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