Troubled Asset Relief Program Essay
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When assessing the values of the proposed legislation, lawmakers knew that the bill was going to be very complex in that it is dealing with very difficult issues. The public was assured that much time and effort had gone into assessing these issues such as: “…fairness and equity, banking regulation, executive pay, job losses…moral hazard, 401(k) values, and the proper role of the state (Couch, Foster, Malone, Black, 2011). ”After all things considered, it was realized that the motivation behind most cast votes was hardly as complicated as expected.
In actuality, it was quite simple (Couch, Foster, Malone, Black, 2011). In November 2008, Secretary of the Treasury Henry Paulson indicated that stimulating the market for consumer credit would be a major priority in the second allocation. December 2008, President Bush used executive authority to declare that funds from the TARP program be spent any way Secretary of Treasury Henry Paulson deemed necessary to ease the financial burden. Mid January 2009, Paulson issued temporary rules for reporting and record keeping requirements under the executive compensation standards of the Capital Purchase Program.
Paulson also announced a new set of guidelines disclosing conflicts of interest with TARP contracts. The Senate accepted the changes to TARP that regulated firms from paying out bonuses with TARP funding. Christopher Dodd of Connecticut proposed this amendment to the economic stimulus act. Fannie Mae and Freddie Mac was nationalized by the Federal Reserve and Treasury department, the world’s largest insurance company, AIG, was bailed out. This alone extended the insurance deposit to $3. 4 trillion dollars in money market funds for the government. Levinson, 2009) Then Paulson set out for the largest government save in history by buying out $700 billion dollars of contaminated securities from troubled banks. In Paulson’s original 3 page plan, Wall Street would have had uncontrolled access to public revenues at very little cost (Levinson, 2009). The original version was rejected by the House and then modified by the Senate (Levinson, 2009). Banks that were not in desperate need could make loans and supply liquidity was to get TARP funding. OneUnited Bank did not meet the requirement to receive the TARP funds.
The bank was in trouble financially but was involved with two major legislators: Congressman Barney Frank from Massachusetts and Congresswoman Maxine Waters from California. These two served on the House Financial Service Committee as chairman and the third highest Democrat in seniority respectively. Waters husband at one point was a director at the bank. Waters had made investments with the bank and her husband had owned stock in the firm (Schmidt, 2009). Waters called the Treasury Department on behalf of OneUnited and the bank received $ 12 million in funds from TARP.
This was made possible by a special provision written into the bailout. Wall Street Journal reporter Susan Schmidt explained, “A provision designed to aid OneUnited was written into the federal bailout legislation by Mr. Frank, who is chairman of the financial services panel. Mr. Frank said he inserted the provision to help the only African-American owned bank in his home state” (Schmidt 2009). The American financial system had changed over the last decade. Wall Street, an independent investment bank that relied on high leverage, is no more.
Lehman Brothers Holdings Inc, what used to be the fourth largest investment bank in the United States has went bankrupt. On September 15, 2008 Lehman Brothers filed Chapter 11. This was caused by a massive exit of a large portion of its clients, major loss in stock, and depreciation of assets by credit rating agencies. Barclay agreed to purchase Lehman’s North American banking and trading divisions, along with the headquarters building in New York. All other Lehman Brothers franchise’s was bought out as well by Nomura Holdings (Levinson, 2009).
An automobile task force was formed by President Obama that was chaired by Treasury Secretary Tim Geithner and Larry Summers. Members of this newly created task force included: Secretaries of Transportation, Commerce, Labor, Energy, the director of the Office of Management and Budget, the administrator of the EPA, the director of the White House Office of Energy and Climate Change and lastly the chair of the Council of Economic Advisors. Stephen Rattner was selected to head the team (Shepardson and Trowbridge, 2009).
Chrysler and GM were instructed to submit plans of restructuring to the group for approval. Rattner recognized the complication of the task and also that his team was inexperienced in the automobile industry. He said, “We’ve learned a lot about how car dealers work, and how companies get paid when they sell a car to a dealer, and why there are a certain number of dealers more than are optimal” (qtd. in King and Stoll 2009). Obama seemed pleased with the progress the group he created was making. In a radio interview Obama criticized Bush and his actions but praised his own efforts.
Obama made reference to not just writing GM and Chrysler a blank check but holding these companies accountable for the funds they received. The task force had rejected the initial plan that Chrysler had submitted but accepted its revised plan. Chrysler filed Chapter 11 and as a condition closed 789 of its dealerships. A list of dealers that was subject to closure was sent out to all dealerships with a messaging stating: “With regret, this letter is to inform you that on May 14, 2009, we are filing a motion in bankruptcy court rejecting the Sales and Service Agreement (s) between Chrysler Motors LLC and the dealerships listed above” (qtd. n Valdez-Dapena 2009). Company officials realized that the decision to close dealerships, in particular those with franchises, was difficult but needed. The vice chair said at the time it was the most difficult decision in business that he had ever made. The criteria used to determine which dealerships was to be closed was never made clear. The process was suppose to be a function of the numbers, data driven matrix assessed with a number of key metrics is the terminology used by Steven Landry, executive vice president (Shepardson and Trowbridge 2009).
Dealerships owned by McLarty-Landers-Johnson were not closed even though they did not meet Chrysler’s performance data. Robert Johnson, former owner of Black Entertainment Television, is one of the firms owners and a major contributor to the Democratic Party. Mack McLarty, a former aide to Bill Clinton, is another owner. After this was brought to the public eye, accusations were being made that dealerships owned by individuals with ties to the Republican Party was becoming targets and would be closed (Shepardson and Trowbridge 2009).
The Treasury Department made statements that the federal government had not played a role in which dealerships were set for closure. Chrysler officials made claim that it became clear that there was no wisdom in closing twenty five percent of its dealers and that it really was not their decision. Officials made reference that they were under pressure from the Obama task force (Shepardson and Trowbridge 2009). It is well known that most everything surrenders to pressure or political pressure to be more specific.
Bureaus and agencies are no exception. Examples of such surrender have been noticed in IRS audits and enforcement activity, the Federal Emergency Management Agency, the Environmental Protection Agency and by antitrust authorities. The noted influence of politics dates back to the Vietnam War (Couch, 2011). “Public-choice theory asserts that politicians are motivated by a desire for reelection and that this desire shapes which policies are pursued and how they are implemented (Couch, 2011). As a result of this desire to please voters, governmental policy goals are misguided. Their purpose is not to find a solution but instead to build a forum in which to base their next winning election. Other examples of political pressure include things such as Obama’s automobile task force, and governmental branches. “In short, politics trumps economics” (Couch, 2011). An investigation of the Chrysler dealership closing was done for the percentage of votes cast for Obama in each state.
Electoral votes at state level and the number of congress persons in the House of Representatives for the dealerships district was used as additional measures for political influence (Couch, 2011). Also factored are the individual dealership characteristics, like profitability and level of customer service. If a dealership was located in a highly depressed area with high unemployment rates it would more than likely be closed (Couch, 2011). When all the facts had been put together it was evident that dealerships offering political support for Obama would remain open.
This evidence was gathered at both state-level and dealership-lever. This would suggest that the Obama administration was more than just concerned with the long-term success of Chrysler, but was most concerned with protecting the Obama supporters from negative consequences (Couch, 2011). The US Treasury Department to buy preferred stock with funds from TARP within approved institutions earning a 5% dividend for the government. The plan was to stimulate the economy by making the right hand side of the balance sheet of the institution be matched with increased bank business loans.
The institutions were being pressured by regulators to not increase or to reduce the liabilities of the assets. The economy in the United States has improved since the TARP was employed. The 2010 fourth quarter GDP had a 2. 8% growth (Gabby, 2011). The financial markets are signaling progress in the economy: “Between March 31, 2009 and March 31, 2011, the Dow Jones Industrial Average rose approximately 62% from 7,609 to 12,320 and for the four largest banks – JP Morgan Chase, Bank of America, Wells Fargo, and Citigroup – their March 31, 2011 vs. March 30, 2009 share prices were: $46. 10 vs. 24. 85 (+86%); $13. 33 vs. $6. 03 (+121%); $31. 71 vs. $13. 37 (+137%); and $4. 42 vs. $2. 31(+91%); respectively” (Gaby, 2011). The United States four largest banks had a combined total of $4. 8 trillion in assets as of March 31, 2009. If these four had failed the loss to tax payers would have been in excess of $2 trillion. TARP injected $239. 5 billion into roughly 35 financial institutions and 23 of the institutions earned a 5% dividend. By the end of the October 2010 78% of the TARP funds had been repaid. If interest and dividends are included the percentage rises to 102% (Gabby, 2010).
If the smallest of the four largest banks had failed there could have been theatrical to the US banking system and could have had global impacts as well. A modest benefit of the program was that CIT was able to continue lending to small firms during the bankruptcy filing and reorganization. The TARP provided brief support the US banking system and the global financial system. The modern administration has veered from the Constitution. The Emergency Economic Stabilization Act of 2008 created the Troubled Asset Relief Program. This was going to strip 200 pages of pork, tax preferences, and various oversights.
Section 101 authorizes the Secretary of the Treasury “to purchase troubled assets from any financial institution, on such terms and conditions as are determined by the Secretary” (Lawson, 2010). Troubled Asset Relief Program is a constitutional mess; many of the issues with it are common with the current administrative state. Congress did not have the power to enact the program. It violated the non-delegation doctrine. Both the President and Congress may have violated the Appointment Clause during the enactment of the program. Bush also exceeded his constitutional executive power when he implemented TARP (Lawson, 2010).
The major issue with TARP is that there is no Troubled Assets clause in the Constitution. There are other clauses like the Bankruptcy Clause, Copyright Clause but not a clause authorizing the Congress to give power to the government to become a mortgage broker. Government buying mortgages and securities backed by mortgages in not a guideline of commerce with foreign countries (Lawson, 2010) The ability to spend in the Constitution comes from the Necessary and Proper Clause: appropriations of funds are laws “necessary and proper for carrying into Execution” other federal powers.
But in the context of Troubled Asset Relief Program, one has to find some detailed power that is suitable to buy mortgages that can necessarily and properly carry into execution. The entire TARP venture was unconstitutional from the start (Lawson, 2010). We can look back on the financial situation and try to determine the central problem; global imbalances of savings or imports and exports, the Fed’s low rates, a housing bubble, subprime mortgages was not really the issue. In September 2008, the signature event of this financial crisis came to light.
Short-term credit became frozen, inter-banking lending was froze as well as commercial paper markets. If panic had not occurred it is likely that economic contraction after the housing burst would have been no worse than a mild recession (Cochrane, 2009). The most current recession comes from the banking system not lending money and the normal way of doing business is almost extinct. The short-term credit crunch has ended. The recession now seems to be moving into recovery (Cochrane, 2009).
Neil Barofsky, the special inspector general for TARP, told the Center for Public Integrity that his office conducted 142 ongoing criminal and civil investigations. Over the past 2 years the SIGTARP has recovered approximately $152 million in stolen assets. The agency has also saved another $555 million through prevention of fraud. The office investigated the potential of fraudulent use of TARP funds at 64 financial institutes, from small banks to large banks (Hallman, 2011). Barofsky’s most prominent investigation has led to civil securities fraud charges last year against Bank of America Corp. ormer chief executive officer Ken Lewis. The charges were for not disclosing major losses at Merrill Lynch to shareholders. The complaints allege that the bank and its officers hid losses at Merrill in order to complete the 2008 merger of the two institutions, and that the defendants also lied to the government to obtain tens of millions of dollars in TARP funds (Hallman, 2011). From a business manager’s view a program like TARP allows for a company to be ran as poorly as possible and still stay in business. Programs like TARP allow for companies to be irresponsible and very loose with their money.
In some cases TARP would allow a company to file Chapter 11 but still continue to function on a daily basis. To a business manager this would benefit him under many circumstances and allow for big bonus money to be paid out to upper management even if the company is not as profitable as it once was. Bailouts like the TARP allows for bad business practices to continue and managers to continue allow it. References Couch, J. F. , Burton, P. A. , Malone, K. D. , & Black, D. L. (2011). Government behind the wheel more a Matter of politics than of economics.