8-PAC Weekly Wastebasket: Banking Bailout Bucks

This week the Treasury Department released $125 billion of the $700 billion bailout package to nine banks. This cash infusion will buy taxpayers preferred shares in the banks and increase the capital and liquidity at those institutions. Already, more than thirty banks have received or been promised $163 billion.

But what are taxpayers really getting for this money? The promise that was made in the bailout was that if taxpayers provided cash to relatively healthy banks, these banks would start lending again, defrosting of the frozen credit markets.

But because Treasury wants the banks to take the money, they have attached fairly weak strings. There is no actual requirement to lend the money provided by the feds and there are some weak restrictions on executive compensation. While Treasury has begged the banks not to sit on the money, it is entirely up to them whether they actually use it to lend more money out, or pay dividends, or use it as a cushion. And so far, the money is going to pay either bank dividends, satisfy old debts, or to shore up their bottom lines, none of which address the underlying problem of the frozen credit markets. We get it-banks are a business and see their job as looking out for their shareholders.   But now that taxpayers are significant investors, they should be working in the nation’s interests as well.

Government officials have been quick to point out that they don’t want the strings attached to the funds to be so onerous that no one wants the money. Last week, Neel Kashkari, the official charged with managing the bailout, warned the Senate Banking Committee that “if we came in with very specific guidance on you must do this, you must do that, we were afraid that we would discourage firms — discourage healthy institutions from participating.”

But there is a difference between onerous and non-existent. We can’t afford to provide money for nothing. The banks and other borrowers are asking taxpayers for the money, they need to have some responsibility too. Using nearly half of the $163 billion to pay dividends to stockholders, instead of kick-starting the credit markets, leaves taxpayers with the short-end of the stick.

Another reason to have strings attached is that easy money attracts flies. Already, non-financial sector industries, such as the automakers, are lining up for dollars. And many in the government seem to be inclined to help, arguing that since the automakers have financing arms they are banks – except of course their main business is to make cars.

By moving into other sectors of the economy, Uncle Sam is poised to enter the tricky world of picking winners and losers among industries. Helping banks is one thing – money is fungible and providing cash infusions provides grease for the whole financial system. But deciding to directly bailout American automakers could lead down the primrose path for cash injections into large sectors of the economy. Now that taxpayers have invested $700 billion as part of our efforts to limit this economic downturn and get our economy back on track, government officials and congressional leaders need to send a resounding message to Wall Street-stop sitting on your hands and get back to work. Any bank that takes a piece of this $700 billion pie must make it their patriotic duty and start moving the money again.

Let us know what you think.

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