Tag: TARP

Taxpayer-Funded Lobbying

There’s lots of outrage in the blogosphere over revelations that some of the biggest recipients of the federal government’s $700 billion TARP bailout have been spending money on lobbyists. Good point. It’s bad enough to have our tax money taken and given to banks whose mistakes should have caused them to fail. It’s adding insult to injury when they use our money – or some “other” money; money is fungible – to lobby our representatives in Congress, perhaps for even more money.

Get taxpayers’ money, hire lobbyists, get more taxpayers’ money. Nice work if you can get it.

But the outrage about the banks’ lobbying is a bit late. As far back as 1985, Cato published a book, Destroying Democracy: How Government Funds Partisan Politics, that exposed how billions of taxpayers’ dollars were used to subsidize organizations with a political agenda, mostly groups that lobbied and organized for bigger government and more spending. The book led off with this quotation from Thomas Jefferson’s Virginia Statute of Religious Liberty: “To compel a man to furnish contributions of money for the propagation of opinions which he disbelieves is sinful and tyrannical.”

The book noted that the National Council of Senior Citizens had received more than $150 million in taxpayers’ money in four years. A more recent report estimated that AARP had received over a billion dollars in taxpayer funding. Both groups, of course, lobby incessantly for more spending on Social Security and Medicare. The Heritage Foundation reported in 1995, “Each year, the American taxpayers provide more than $39 billion in grants to organizations which may use the money to advance their political agendas.”

In 1999 Peter Samuel and Randal O’Toole found that EPA was a major funder of groups lobbying for “smart growth.” So these groups were pushing a policy agenda on the federal government, but the government itself was paying the groups to lobby it.

Taxpayers shouldn’t be forced to pay for the very lobbying that seeks to suck more dollars out of the taxpayers. But then, taxpayers shouldn’t be forced to subsidize banks, car companies, senior citizen groups, environmentalist lobbies, labor unions, or other private organizations in the first place.

Bailouts Could Hit $24 Trillion?

ABC News reports:

“The total potential federal government support could reach up to $23.7 trillion,” says Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, in a new report obtained Monday by ABC News on the government’s efforts to fix the financial system.

Yes, $23.7 trillion.

“The potential financial commitment the American taxpayers could be responsible for is of a size and scope that isn’t even imaginable,” said Rep. Darrell Issa, R-Calif., ranking member on the House Oversight and Government Reform Committee. “If you spent a million dollars a day going back to the birth of Christ, that wouldn’t even come close to just $1 trillion – $23.7 trillion is a staggering figure.”

Granted, Barofsky is not saying that the government will definitely spend that much money. He is saying that potentially, it could.

At present, the government has about 50 different programs to fight the current recession, including programs to bail out ailing banks and automakers, boost lending and beat back the housing crisis.

We used to complain that George W. Bush had increased spending by ONE TRILLION DOLLARS in seven years. Who could have even imagined new government commitments of $24 trillion in mere months? These promises could make the implosion of Fannie Mae and Freddie Mac look like a lemonade stand closing.

Save Free Enterprise—Starting Now

As Dan Mitchell noted below, the U.S. Chamber of Commerce has launched a “Campaign for Free Enterprise” to stop the “rapidly growing influence of government over private-sector activity.” Chamber president Thomas Donohue told the Wall Street Journal that an “avalanche of new rules, restrictions, mandates and taxes” could “seriously undermine the wealth- and job-creating capacity of the nation.”

Indeed. Given the scope and extent of the Obama administration’s assaults on private enterprise — national health insurance, energy central planning, pay czars, abrogation of contracts, skyrocketing spending, and so on – free enterprise can use all the help it can get. I welcome the Chamber to the fight.

But it would be nice if the Chamber had joined the fight for economic freedom a bit earlier, say back in February when many of us were trying to stop the administration’s massive “stimulus” spending bill. That bill’s official cost is $787 billion; with interest, it would be about $1.3 trillion; and if you assume that its temporary spending increases will be extended, it will cost taxpayers about $3.27 trillion over 10 years.

Back then, Donohue had a few criticisms of the bill, but

The bottom line is that at the end of the day, we’re going to support the legislation. Why? Because with the markets functioning so poorly, the government is the only game in town capable of jump-starting the economy.

Or they might even have started defending free enterprise last fall, instead of going all-out to push the TARP bailout through Congress.

Converts to the cause of limited government are always welcome. But we might not need a $100 million Campaign for Free Enterprise if American business had opposed big government when the votes were going down in Congress. Still, better late than never.

Fed to BoA: ‘We Will Not Leave You in the Lurch’

Thursday, the House Committee on Oversight and Government Reform questioned Ken Lewis about Bank of America’s purchase of Merrill Lynch and the subsequent injection of tens of billions of taxpayer funds into Bank of America.

While much of the hearing focused on Lewis’ leadership of Bank of America, the hearing also touched upon the more important questions of government regulators pressuring BoA to purchase Merrill even after BoA realized that Merrill’s losses were greater than expected.

One of the basic tenets of sound regulation, exercised in the public interest, is that regulators remain at “arm’s length” from the entities they regulate. As defined by Black’s Law Dictionary, “arm’s length” relates to “dealings between two parties who are not related or not on close terms and who are presumed to have roughly equal bargaining power; not involving a confidential relationship.”

If anything, it appears that BoA and the federal government were in a bear hug, rather than at arm’s length. As described in Lewis’ notes on one of his many conversations about the Merrill deal with Fed Chairman Ben Bernanke, Bernanke told Lewis, “We will not leave you in the lurch.” Given the funds subsequently injected into BoA, one can say that Chairman Bernanke is at least a man of his word.

One of the significant problems arising from extensive government ownership of private entities is that in regulating those entities, the government no longer has the ability to be a neutral, objective arbitrator. Whether it is BoA or GM, government officials will come under increasing pressure to see a positive return on the taxpayer’s investment. One should not be surprised if that pressure manifests itself by government officials favoring the very companies they have invested in.

While BoA has been saved, it appears that the rule of law has been “left in the lurch.”

An Overdue Reckoning in the Auto Sector

Bloomberg reports:

General Motors Corp., facing a probable bankruptcy filing by June 1, is telling 1,100 “underperforming” U.S. dealers they will be terminated as the automaker starts shrinking its retail network.

Most of the closings will occur by October 2010, and none are happening now, Detroit-based GM said today. The targeted outlets will have until the end of the month to appeal the decisions, GM said, without specifying the stores on the list.

The shutdowns are the biggest U.S. automaker’s first step toward paring domestic dealers to a range of 3,600 to 4,000 from 5,969 by the end of 2010.

To be sure, it is a very sad day for thousands of workers and businesses around the country.  But we’re in the midst of a deep recession, which may be nowhere deeper than in the auto sector.  Demand for cars and light trucks has absolutely tanked, which means the economy has an excess supply of inventory, productive capacity, and retail capacity.

Dealerships are closing, as they should be. Chrysler’s in bankruptcy, as it should be. GM is headed for bankruptcy, as it should be.

But this all should have happened long ago…

…long before President George W. Bush had the chance to circumvent the wishes of Congress to give Chrysler and GM more than $19 billion (not including GMAC) from the TARP allotment,

…long before President Obama had the chance to promise billions more and assume a large operational role for the U.S. government in Chrysler’s and GM’s future operations,

…long before President Obama had the chance to create a huge moral hazard by strong-arming Chrysler’s preferred lenders into taking pennies on their loan dollars, while giving preference to claimants of lesser priority,

…long before Ford, Toyota, Honda, BMW, Kia, and the rest of America’s automobile industry were implicitly taxed by the government’s insistence on preventing two firms from exiting the market or substantially reducing their presence in accordance with established bankruptcy provisions.

And most certainly, long before other businesses in other industries started to get the idea that failure is the new success.

“Gangster Government” at Work

With the Obama administration preferring to rely on politics rather than the law to “fix” the auto industry, bondholders have discovered that the new politics of this administration is quite a bit more brutal than the old politics practiced by the Bush administration.

Henry Payne and Richard Burr write of “gangster government” using not just demagogic public attacks on greedy bondholders but apparent threats of regulatory sanction to get its way in bankruptcy court.  They explain:

The holdout debtholders sought the refuge of the courts, where decades of bankruptcy law promised that secured lenders would receive just compensation for their investment. But then Obama called in his fixers.

In his April 30 news conference, Obama singled out Chrysler’s self-described “non TARP lenders” as “speculators” who sought to imperil Chrysler’s future for their own benefit. “I do not stand with them,” Obama thundered. “I stand with Chrysler’s employees and their families and communities… . (not) those who held out when everybody else is making sacrifices.” Michigan Democratic allies like Sen. Debbie Stabenow and Rep. John Dingell piled on, calling the lenders “vultures.”

Then, on Detroit radio host Frank Beckmann’s show May 1, a lawyer for the lenders, Tom Lauria, chillingly revealed how “one of my clients was directly threatened by the White House and in essence compelled to withdraw its opposition to the deal under threat that the full force of the White House press corps would destroy its reputation if it continued to fight.”

Lauria later confirmed the threats came from Rattner and that the target was Perella Weinberg, which had suddenly withdrawn its opposition after the president’s April 30 press conference.

The White House denied the threats, but Business Insider subsequently reported that “sources familiar with the matter say that other firms felt they were threatened as well. None of the sources would agree to speak except on the condition of anonymity, citing fear of political repercussions.”

“The sources, who represent creditors to Chrysler,” continued the Insider story, “say they were taken aback by the hardball tactics that the Obama administration employed to cajole them into acquiescing to plans to restructure Chrysler. One person described the administration as the most shocking ‘end justifies the means’ group they have ever encountered… . Both were voters for Obama in the last election.”

The idea of the White House–with the IRS and SEC at its disposal–threatening investment firms should have sent off alarm bells in America’s newsrooms. Inexcusably, the media establishment largely ignored the hardball tactics. This is the same media that has doggedly reported on President Bush’s U.S. attorney firings and the post-9/11 interrogations of terrorist suspects.

I have no opinion on who should get what as part of Chrysler’s bankruptcy – other than that the taxpayers shouldn’t be paying for America’s version of lemon socialism so common around the world.  But crude political interference by the political authorities in Washington in a bankruptcy case erode the rule of law and administration of justice.  If Obama and company believe that the end justifies the end when it comes to handing the auto companies over to favored interests, who among us is safe from similar action by this or another administration in the future?

Bank Stress Tests: Full of Sound and Fury…

Even with the stress tests completed, the Obama Administration lacks an exit strategy for its deepening involvement in supporting these banks.

What the administration needs to do is give the American people a road map for getting out of the business of owning banks. However, instead of a roadmap, the Administration keeps digging more potholes. Secretary Geithner’s recent remarks, in which he suggested imposing additional requirements before letting banks repay their TARP obligations, raise serious questions regarding the administration’s desire to actually exit the current situation. Treasury should reconsider its position and not only allow banks to repay, but encourage them to do so. The quicker we get these institutions out from under the government, the quicker our financial markets will get moving again.

As the witching hour of 5 pm on the East Coast approaches, when the Treasury will release both aggregate and individual stress test results, the overwhelming feeling in Washington and on Wall Street is one of closure: finally the circus can come to an end. In terms of the actual results, details of which have been leaking for days, the stress tests come close to telling us absolutely nothing we did not already know.

One purpose of the stress tests was to determine if the 19 bank holding companies could withstand “higher losses than generally expected.” However, what started out as extreme economic projections are beginning to look like the consensus forecast. For instance, the stress tests assume a base case level of unemployment of 8.9 percent for 2010, and an extreme “stress” level case of 10.3 percent for 2010. There’s a good chance that we’ll reach that extreme; what the new extreme is, one can only guess, but what we do know is that the banks have not been tested for it.

While the aggregate results have yet to be released, it is a good bet that they will fall somewhere within the range of exactly just how much TARP funds Treasury has left. We can expect Treasury to announce capital shortfalls of just over $100 billion, while the real shortfalls are likely to be in excess of $200 billion. Treasury is understandably reluctant to go back to Congress for additional TARP funds, so it will likely do its best to stretch its existing resources.

One way of stretching those resources is converting preferred equity holdings into common stock. How this is to be done, and what kind of voting rights Treasury will have is yet to be seen. As Treasury has repeatedly said it will not let any of these banks fail, shifting the government’s holding from preferred to common equity is little more than an accounting game that fails to address the underlying economic realities at many of these institutions.