Moving target for some TARP recipients

By DAVID MOON, Moon Capital Management, LLC
February 1, 2009


In the past couple of weeks, various recipients of government TARP funds (the Troubled Asset Relief Program) have come under fire for things like million dollar office renovations, a new jet, big bonuses and opportunistic acquisitions. The Wall Street Journal reported that of the 13 largest bank recipients of TARP funds, lending has increased at only three of them.

If the banks don't loan money, it's going to be hard for many parts of the economy to get back on their feet.

Politicians are now critical of the banks that took the government money and now appear unwilling to use it as intended.

Not so fast with that condemnation.

It's hard to criticize someone for missing a moving target, especially those who are shooting against their will.

Congress originally passed the Emergency Economic Stabilization Act of 2008 on October 3. The original intent for the funds provided by the Act was to 'purchase, and to make and fund commitments to purchase, troubled assets from any financial institution.' The Act provided the Treasury the authority to 'restore liquidity and stability to the financial system.'

Barely ten days later, Treasury Secretary Hank Paulson and President Bush moved the target. Rather than proceed with the original plan of becoming a market maker for illiquid debt securities, the Treasury would buy stock in banks around the country.

On October 13, Paulson summoned the heads of nine large banks to Washington where he informed them that the U.S. government would be buying stock in each of their companies. If reports are accurate, the companies weren't given a choice or allowed to negotiate the terms.

Paulson was the Godfather, with an offer they couldn't refuse. It was for their own good and the good of the country.

Current criticism of the recipient banks is widespread. On January 9, a Congressional report found there was 'no evidence that the Treasury had used TARP funds to support the housing market by avoiding preventable foreclosures.'

True. But neither has the Treasury used TARP funds to achieve other laudable goals like feeding the homeless, conducting cancer research or buying everyone a hybrid vehicle. (Someone's likely considered the car thing, though.)

Like paying off individuals' mortgages, these were never among the original specified purposes of the government bailout funds. (There were, however, housing issues addressed in the Act's regulatory language, aimed at easing mortgage qualifications.)

The Act does include specific funding provisions for rum producers in Puerto Rico and $6 million for makers of kids' wooden arrows, however.

When a business takes on shareholders, there are certain obligations the managers of the business owe those shareholders. The government told the heads of those nine banks those rules in the Godfather meeting.

But when that shareholder is the federal government, playing by the rules doesn't matter. An 800-billion-pound gorilla tends to ignore the rules. After all, the newly confirmed Treasury Secretary admittedly underpaid his own personal taxes for years ' until being considered for this post.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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