The mortgage market is still paralyzed after dumping $350 billion of taxpayers hard-earned money into the big banks. Now, Obama and his crew are working hard to make sure Congress doesn't block access to the second $350 billion. But, it is time to really take a hard look at the policies that govern how that money has been, and will be, spent. Largely, with the government's aid and your tax money, the banks that were "too big to fail," have gone on a shopping spree buying up other companies in financial trouble and making them even bigger.
Republicans are attempting to block access to the second half of the TARP funds. The Obama team has been trying to convince Congress to proceed with the funding by promising that it will be better spent than the first round.
There has been widespread discontent in Congress that the first $350 billion was squandered with purchases of stakes in ailing financial lenders and using it for struggling U.S. automakers, while doing little to thaw the credit markets.
But Obama's team has promised the remaining money would be better spent and accounted for and his advisers indicated to Republican senators on Wednesday that it would not be used to help other struggling sectors outside the financial industry.
Even before the money has been secured by the Treasury, at least one bank who squandered its share of the bailout money is begging for more. Bank of America, which purchased Countrywide, has threatened that it might abandon its deal to buy Merrill Lynch because things look worse than they thought. That, according to the government is not an option.
Bank of America told regulators in December it might abandon the takeover because of Merrill's worse-than-expected results, and the bank is in talks to get more U.S. aid, said three people familiar with the matter. The government insisted the Merrill deal proceed because its collapse would renew turmoil in the financial system, said the people, who declined to be identified because talks are private.
Combined, Bank of America and Merrill Lynch received $25 billion in bailout money. And, the deal to purchase Merrill Lynch was rushed through the same weekend that the government decided to let Lehman Brothers fail.
What brain trust came up with this plan? What sense does it make to bailout troubled companies and encourage them to buy other failing companies? They were already described as "too big to fail," and the government helped them get bigger and take on more risk.
When the problem is that we have financial companies too big to fail, the solution is not giving them money to buy other struggling businesses. The more appropriate strategy would have been to break them up and allow smaller companies to buy up the pieces and grow. There are many smaller, regional banks that were not mired in subprime debt that could have made better use of the TARP funds to expand. The result would have been smaller companies, that aren't too big to fail, that could have emerged stronger with a larger market share.
Basically, we have spent $350 billion and we are in the same sinking ship that sprang a leak many months ago. Money that was supposed to be used to buy risky mortgage backed securities to free up capital for the finance industry to start lending money again, has instead been used for acquisitions.
In addition to the Bank of America/Merrill Lynch deal, there have been several other acquisitions by companies that have received TARP funds. Wells Fargo received $25 billion and it just completed its acquisition of Wachovia. PNC got $7.7 billion and bought National City. Morgan Stanley got $10 billion and it just acquired a controlling interest in Smith Barney from Citigroup. Ironically, CitiBank was going to buy the banking operations of Wachovia before Wells Fargo made a better offer to buy the entire bank holding company.
If Congresses releases the other half of the $700 billion bailout funds, it must make sure that the money goes to provide meaningful foreclosure relief. They have to put an end to the merger and acquisition mania. So far, it seems that the $350 billion we spent just bought us a bigger shovel to dig a deeper hole.
Robert A. Franco
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