TARP or “Trouble Asset Relief Program”, as it is known in full, was a cleverly figured out scheme by the government of the United States of America (Dimsdale, 2), unlike the construction of area 51. Honestly, much credit should be given to the then government for this ingenious plan. This program was officially signed into law by the then president W. Bush on the 3rd of October 2008 and was part of 700 billion dollars of taxpayer’s money to bail out banks (PROPUBLICA, 1). Today we unravel the mystery that is this program.
TARP Money Trail
A liability was almost the term that was used to describe mortgage securities i.e. they had become toxic (MSNBC). Originally, a right of submitting bidding prices was given to banks by TARP. Each time, the administrators of TARP selected only the bids that were considered the lowest of these securities by banks. Unfortunately, it was clear that sooner rather than later, treasury was eventually going to have bought and paid for quite a huge amount. This generated fears from the banks in the sense that there was nothing much for them to gain and hence the shelving of the whole plan.
This seems to have prompted the treasury to jump into plan B. This plan involved the use of about 105 billion dollars of funds in TRAP for the purchase of stocks that had been preferred in 8 different banks. These banks included Citigroup, Morgan Stanley, Wells Fargo, State Street, Merrill Lynch, J.P. Morgan, Gold Sachs and finally the all famous Bank of New York Mellon (USATODAY, 1). Community banks are known to have received up to 92 billion dollars while the bank of America and Citigroup received up to 45 billion dollars combined.
Therefore other than the 20 billion dollars, additional fund was given as a loan to the Reserves that it could launch its TALF (Term Asset Loan Facility) program (Federal Reserve System, 1). This subsidiary or a by the way program was intended to act just as a secondary market. This thus was to enable the all too important banks create new loans as the Fed works on buying the old loans and eventually ensuring that the banks did continue to make profits. All of these hustles by the Feds were so as to restore the much needed trust in the markets that are concerned with our finances (Goodfriend, 4). This very noble move by the Feds has eventually seen a shortening recession.
Warranted Use of TARP Funds
Hey, if someone was to give you just a million dollars right now and even tell you that you were to repay back each and every single cent of it at a later time in future, please do not tell me that you would not spent a few dollars on a bottle of champagne to celebrate your acquisition. Would you not want to buy that pretty car that you have always dreamed of and eventfully lead you to having a date with this pretty girl that you have been competing with someone for their affection? What you would be doing in the long run is buy off any kind of competition and leave you and you alone as the big dog chewing the bone and the rest just some immature puppies fighting over synthetic imitations of a bone. And honestly, this is what these banks have only been doing. Spending a few of your hard earned so called taxpayers’ money for a few things here and there. After all, it is not as if they used the whole 700 billion dollars that they were supposedly supposed to have consumed, they only used about half of that money, surely cut them a slack and congratulate them for having spent wisely.
It is a muddy world out there whereby only the wittiest are now bound to survive and clearly PNC bank has played its game nicely. To ensue that it was part of the biggest 5 banks in the United States of America, the bank set itself on a path of purchasing one of its long term rivals, National City. Let it be known that the rivalry was just due to the NFL between these two cities i.e. Cleveland and Pittsburgh.
The mortgage crisis had certainly become a big hit on the financial position of National City Bank. However National City thought it had seen the proverbial light at the end of the tunnel when TARP funds started trickling in but it was just rather the backlight of a Nokia phone. This was because it was denied funding from TARP (Blinder, 6). PNC seeing the opportunity came in with an offer only a mad man would refuse. They set forth to buy off the Bank. At approximately 5.2 billon dollars in stock, National City was bought just a day after they had been denied TARP money. However the most interesting thing is that while PNC bought it, it used TARP money that it had been given. This begs the question of why would the government not give the TARP money directly to National Bank to enable it continue staying in business but rather choose to give PNC which later paid National City to keep it completely out of business (Adelino et al. 1).
Well the simple answer to this is that first of all, National City was not so good at begging for the money and so maybe the people in charge of the TARP did not really see their dire need for funding. Secondly, on PNC receiving its share of TARP fund, the board of governors clearly saw that this bail out money could be best spent on expansion plans and after all, they have now become the 5th largest Bank in the United State of America and the government would definitely be wiling to spent a few more of the taxpayers money to ensure it does not collapse. The bank has officially joined the big boys club. This move seems to me to be quite justifiable. Furthermore, who cares about the personal rivalry between the two cities, this is business and it is not personal.
It is justifiable that these banks were never really told what to do with the money in the first place. It is no wonder that many of the banks saw this program as a windfall containing no strings whatsoever and hence could use the money even to acquire new properties. Further more the major goal was achieved i.e. liquidity was provided acting as an effective response to the financial crisis globally between 2008 and 2009. So who cares if the major goal was achieved with some outcry? Maybe it is because there was nothing new to be discussed in the media who saw this as a big story.
This TARP money event that is causing a public outcry due to buying other banks hence giving themselves bonuses should not really be such a fuss (Michael, 1). But on the other hand, why the so much outcry? This money as much as is taxpayer’s money has been given to the banks for their use. I mean if I was to give you money to buy pants and instead you opt to buy a bikini, why should I care, they are all clothes. Therefore the fact that these banks have opted for a better option that to them seems more promising, let them be after all, they are soon to pay for this in the Obama Administration (Burns, 1).
Other Bonuses on Bailout Money
Considering other misuse cases that have been reported, then the use of this Money in this way is just fine. It is reported that a majority of the companies that had received bail out money including banks saw an urgent need of addressing other issues first (Attkisson, 3). Rightfully these urgent issues included up to 114 million dollars for lobbying and contributions to fund campaigns. Banks alone did use approximately 1.6 billion dollars in 2007 to compensate their bank executives who mostly reside at the top level. And this is just fine. I mean who would not want to compensate their employees for the hardships that they had to go through first hand (Duchin and Sosyura, 254). These top executives knew first hand that they were almost losing their jobs due to the collapsing market and had suffered psychological torture and more to that had worked really hard to ensure that these banks do not collapse. So giving them a small bonus like 1.6 Billion shillings is not bad after all.
Many more benefits created a fuss. These included salaries, use of jets that belonged to the company and many others (Goldman, 3).Despite all these fuss, these people simply deserved this money because in the first place their employing banks were never told how to spend the TARP fund. The government is in effect giving the banks money without telling them how to use it and when our friend out there in the media catch a glimpse of how their other friend in the banking business are taking home some good well deserved pays, they start causing all this commotion in the news therefore even if it is the taxpayers money (Chase, 1), these top executives are also taxpayers and to think that they also do not feel the pinch that someone is talking home such a hefty pay in the middle of a financial crisis is just a lie. It is only that they are not complaining about it.
It is just clear that everything that these banks are trying to do with their money will eventually face a negative criticism especially in the news. The bailout money that the banks might use to buy other banks or give themselves is just okay since they deserve the money. Moreover, this money was given to them without any strings attached (Kormai, 3). It is funny that even the Obama administration is jealous of this fact that they are thinking of taxing banks in an effort to recover between 120 and 141 billion dollars that they think they will lose as a result of the TARP program (Adelino et al. 25).
Adams Michael. I want My Bailout Money. 2008. Web. 16th December 2010. http://www.naturalnews.com/I_Want_My_Bailout_Money.html
Adelino Manuel et al. Why Don’t Lenders Renegotiate More Home Mortgages? Red faults, Self-Cures and Securitization. 6 July 2009. Web. 16th December 2010. http://www.bos.frb.org/economic/ppdp/2009/ppdp0904.pdf
Attkisson Sharyl. Where is The Bailout Money Really Going? 12 November 2008. Web. 16th December 2010. http://www.cbsnews.com/stories/2008/11/12/eveningnews/main4597233.shtml
Blinder Arthur. Six Errors on the Path to Financial Crisis. New York Times. 24. 2009
Burns Adrian. Huntington’s TARP deal Profitable for Government. 15 December 2010 Web. 16th December 2010. http://www.bizjournals.com/columbus/blog/2010/12/huntingtons-tarp-deal-profitable-for.html
Chase Morgan. Where’s the Bank Bailout Money? 22 December 2008. Web. 16th December 2010. http://articles.cnn.com/2008-12-22/us/bailout.accountability_1_tarp-money-bailout-money-troubled-assets-relief-program?_s=PM:US
Dimsdale John. Where Does Bailout Money Come From? 2008. Web. 16th December 2010. http://marketplace.publicradio.org/display/web/2008/09/17/pm_fed_cash/
Duchin Rael & Sosyura Daniels. TARP Investments: Financial and Politics. Ann Arbor. 1001. 2009
Federal Reserve System. Press Release. March 18 2009. Web. 16th December 2010. http://www.federalreserve.gov/newsevents/press/monetary/20090318a.htm
Goldman David. CNNMoney.com’s bailout tracker. 2009. Web. 16th December 2010. http://money.cnn.com/news/storysupplement/economy/bailouttracker/
Goodfriend Martin. Central Banking in the Credit Turmoil: An assessment of Federal Reserve Practice. Unpublished, Carnegie-Mellon University. 2009
Kormai Johnson. The Soft Budget Constrain. Kyklos 39(1) Wiley Online Library, 1986.
MSNBC. Companies Start Competing for Bailout Money. 26 October 2008. Web. 16th December 2010. http://www.msnbc.msn.com/id/27373962/ns/business-stocks_and_economy/
PROPUBLICA. Where is The Money? Eye on the Bailout. 2010. Web. 16th December 2010. http://bailout.propublica.org/list
USATODAY. Who Has Gotten Financial Bailout (TARP) Money So Far? 5 November. 2009. Web. 16th December 2010. http://www.usatoday.com/money/economy/tarp-chart.htm