New oversight for the bailout funds
CNN reports that the new Treasury Secretary and occasional taxpayer, Tim Geithner, will put in place new rules that ‘restrict lobbying related to the $700 billion Troubled Asset Relief Program.’ (TARP) He has also taken some additional steps to strengthen oversight.
The article talked about a poll two business college professors conducted that indicated that only 40% of respondents thought that the former Treasury Secretary was acting in the best interests of the country.
I would take issue with those results. It may be the result of a media campaign that spent more time talking about corporate abuses than the science behind Mr. Paulson’s decisions.
The bottom line is that there is a general feeling of suspicion regarding the government bailout and a demand for transparency coming from the Congress and the taxpayers. That’s fine; it’s taxpayer’s money after all. It may also prove to be a burden on the next generation. It has to work as intended and the destination of every dollar has to be known. If the purpose of the bailout is to reignite lending by banks, then that has to happen.
The remaining $350 billion of the bailout funds will surely find its way to the banks also. The FDIC chief, Sheila Bair has said that the government would create an aggregator bank to purchase the troubled assets of banks.
Bad bank, good bank, needy bank
The new administration is likely to use the ‘bad bank’ model. According to an article on CNBC.com, the bad bank idea is gaining momentum. The bad bank would purchase non-performing or illiquid assets from the banks. In this scenario, if the government can buy the assets at a bargain price, there is the possibility of repaying the taxpayer. The government has the capability of holding the assets to maturity.
The CNBC article quotes an economist from Goldman Sachs, who says that banks worldwide have absorbed losses of about $975 billion. The economist claims that the worst of the global credit crisis is ‘far from over.’ Another industry analyst quoted in the article states that the eight largest financial institutions need ‘up to $1.2 trillion in new common equity and that the government is the only entity that can provide bridge capital to get past the current crisis.’
What can we summarize from these opinions? Much more bailout ahead.
There is currently no guarantee that the remaining $350 billion of TARP money would be used for the ‘bad bank’ concept. Watch for further announcements. As a Citibank shareholder, I’m reluctant to see the banks nationalized. There are those in influence who would like to move towards this model. Whatever occurs, more taxpayer money is sure to be expended.
