Where Will $700B Bailout Actually Go?

Lawmakers Gripe That Treasury's Plans For Gov't Funds Deviate From Original Proposal

(AP)  First, the $700 billion rescue for the economy was about buying devalued mortgage-backed securities from tottering banks to unclog frozen credit markets.

Then it was about using $250 billion of it to buy stakes in banks. The idea was that banks would use the money to start making loans again.

But reports surfaced that bankers might instead use the money to buy other banks, pay dividends, give employees a raise and executives a bonus, or just sit on it. Insurance companies now want a piece; maybe automakers, too, even though Congress has approved $25 billion in low-interest loans for them.

Three weeks after becoming law, and with the first dollar of the $700 billion yet to go out, officials are just beginning to talk about helping a few strapped homeowners keep the foreclosure wolf from the door.

As the crisis worsens, the government's reaction keeps changing. Lawmakers in both parties are starting to gripe that the bailout is turning out to be far different from what the Bush administration sold to Congress.

In buying equity stakes in banks, the Treasury has "deviated significantly from its original course," says Alabama Sen. Richard Shelby, the top Republican on the Senate Banking, Housing and Urban Affairs Committee. "We need to examine closely the reason for this change," said Shelby, who opposed the bailout.

The centerpiece of the Emergency Economic Stabilization Act is the "troubled asset relief program," or TARP for short. Critics note that tarps are used to cover things up. The money was to be devoted to buying "toxic" mortgage-backed securities whose value has fallen in lockstep with home prices.

But once European governments said they were going into the banking business, Treasury Secretary Henry Paulson followed suit and diverted $250 billion to buy stock in healthy banks to spur lending.

Bank executives hinted they might instead use it for acquisitions. Sen. Christopher Dodd, chairman of the Senate banking committee, said this development was "beyond troubling."

Sure enough, a day after Dodd, D-Conn., made the comment, the government confirmed that PNC Financial Services Group Inc. was approved to receive $7.7 billion in return for company stock. At the same time, PNC said it was acquiring National City Corp. for $5.58 billion.

"Although there will be some consolidation, that's not the driver behind this program," Paulson recently told PBS talk show host Charlie Rose. "The driver is to have our healthy banks be well-capitalized so that they can play the role they need to play for our country right now."

Other planned uses of the bailout money have lawmakers protesting, although it is only fair to note there is nothing in the law that they just wrote to prevent those uses.

Sen. Charles Schumer, D-N.Y. questioned allowing banks that accept bailout bucks to continue paying dividends on their common stock.

"There are far better uses of taxpayer dollars than continuing dividend payments to shareholders," he said.

Schumer, whose constituents include Wall Street bankers, said he also fears that they might stuff the money "under the proverbial mattress" rather than make loans.

Neel Kashkari, head of the Treasury's financial stability program, told Dodd's committee this past week that there are few strings attached to the capital-infusion program because too many rules would discourage financial institutions from participating.

As the bank plan has become a priority, the effort to buy troubled assets has receded from the headlines. Potential conflicts of interest pose all kinds of problems in finding qualified companies to manage that program.

"Firms with the relevant financial expertise may also hold assets that become eligible for sale into the TARP or represent clients who hold troubled assets," Kashkari said.

The challenge was made plain when the Treasury hired the Bank of New York Mellon Corp. as "custodian" of the troubled assets purchase program. The bank will conduct "reverse auctions" to buy the toxic securities on behalf of the Treasury. The lower the price they set, the better chance sellers have of getting rid of the devalued securities.

On the same day it hired Mellon, the Treasury also picked the company to receive a $3 billion investment as part of the capital-infusion program. The same bank hired to help manage part of the economic rescue plan became a beneficiary of it.

With the Nov. 4 election nearing, lawmakers decided it was important to remind the government officials running the bailout program about parts of the law aimed at helping distressed homeowners by offering federal guarantees to mortgages renegotiated down to lower monthly payments.

"The key to our nation's economic recovery is the recovery of the housing market," Dodd said. "And the key to recovery of the housing market is reducing foreclosures."

Sheila Bair, who heads the Federal Deposit Insurance Corp., responded that her agency is working "closely and creatively" with Treasury officials to "realize the potential benefits of this authority."

[cyberus-2009]

I''m all for taking stock interest as security in any company, be it automotive industry, bank, other "financial entity" or even Sam''s Garage down the street that gets taxpayer money. And bankruptcy should reflect that that money is FIRST in line should it happen.
As long as the money is being repaid ON SCHEDULE they can continue running themselves, miss a payment and the stock interest moves from security to active interest. At that point a set of "Taxpayer Interest Bylaws" should kick in requiring that cuts start from the top for starters.

[cjs_cnet_xyz]

If the government can loan money to these banks with a poor credit rating, then the banks should be restricted from charging such high credit card rates. The money that the government loans to these banks is TAXPAYER money. The banks then turn around and loan it on credit cards at 20-30% resulting in a large number of taxpayers indentured to debt. The government needs to shorten the amount of gain percentage for the banks in this government-supported usury scheme.

[stevador39]

Why are the men who created this mess still in charge of the rescue, that''s Greenspan, Paulson, and Bernanke. The methods that they used to create the problem, low interest rates and loose credit, are the methods they claim will solve the problem. They are dogmatic and irresponsible.

[andor3]

"KEEPING UP THE AMERICAN DREAM BY LIVING BEYOND YOUR INCOME..."

What? Virtually all Americans do this. All businesspeople do. It is called investment. You assume your income will increase and make decisions based on that. Get a little reality in your perspective. Few Americans own homes and not many even cars--the bank owns them and leases them under a mortgage contract. Almost no one could buy a hose based on present income and savings, or a car, and maybe not a TV or any major purchase. Buying something now on credit is the basis of business and the foundation of American culture. Criticizing people for doing what they are advised to do by "experts" and doing what everyone else is doing makes no sense.

[aicohnx2]

"Yeah, you are a dumb azz, the IRS can no more touch a bank account outside the US anymore than can Canada touch a bank account here. Wake up and please leave the bong alone until after you stop commenting "

PCReversed:

You have no idea what you''re talking about. Of course the US Justice department has access to foreign courts. They can go there, freeze accounts & siphon them off in a heartbeat IF they know & can prove who owns those accounts or can get access to that information through a court order BEFORE the assets get moved someplace else.

For that reason, you''re far better off in a jurisdiction that doesn''t consider tax evasion a crime, and where divulging banking info can put you in jail.

Beyond that, however, you''re better off with a multi-jurisdiction multi-layered (e.g., foundation owning a corporation) asset protection plan. This is so that when the feds go to a foreign court and allege money-laundering &/or drugs, you have a way to cope.

You do what you want. You are obviously ignorant & don''t even have somebody smart helping you out. I''ll sleep better with the plan I''ve laid out here, because FinCEN has tentacles going everywhere.

[oleander8]

To: Posted by tootall1014

Your rant would be better directed at the criminals that got rich from the financial crisis - and not at the taxpayers that are bailing them out (against their will, I might add).

[perk235]

tootail1014 is blaming individuals for this massive problem. Don''t you think we could have paid off the 7% of defaulted mortgages in this country with $1 trillion? Do the math.

The problem is the gambling banks did with derivatives. Once that house of cards began to fall, banks began to fail.

[swingset4u]

Does this question really have to be asked? We all know where this money has gone.... Nuff said!

[nor-one]

Boy people are dumb!! The politions are *** you over again. Does nobody see the similarities between what''s happening to this bail out plan and our being sucked into Iraq? We started with a "mushroom cloud" and wound up killing over 4000 inocent citizens for nothing. That fed the military complex billions. Now before shrub gets his rear end handed to him the business community(banks, wall street etc.) want their fair share of your money, or what ever is left. It''s the same old formula, keep the idiots scared and you can steal them blind while you tell them it''s necessary to save the country. Just wave a flag and hold your hand out.

[iphyt4u]

The money is going to Bush''s partners in crime. Banks, Insurance Companies, Mortgage Companies, Defense Contractors, Pharmecutical Companies, and Oil Companies.