The Insidious Secondary Effects of TARP Funding

The U.S. has historically engaged in less government interference in private sector businesses than most other nations. The Financial Panic of 2008 caused the country to forsake its’ past reluctance to interfere in the private affairs of companies, and TARP money was used for direct government equity investments in major U.S. financial organizations. Although the influx of government money strengthened the balance sheets of these financial institutions, many of waited with trepidation for the other shoe to drop. As the country struggles with the economic downturn, the inherent conflict between the governments role as a regulator, it’s new role as a rescuer of companies, and the interests of private companies have come into sharp focus. Government negotiators, under political pressure for results from impatient voters, have started to use the TARP investments in banks to pressure banks to fulfill what they see as socially desirable outcomes. Here are three important examples:

1) Government pressure on Bank of America (BAC) to go through the Merrill Lynch deal. B of A’s CEO Ken Lewis was placed in a damned if you do, damned if you don’t position. During the negotiations with the government concerning Merrill Lynch, Mr. Lewis was told to not speak publicly of any problems at Merrill Lynch and threatened with removal if he didn’t go through with the deal. Later he was attacked by shareholder groups for not being forthcoming enough about the problems at Merrill Lynch.

2) Treasury pressure on banks to forgive GM (gm) and Chrysler debt. The U.S. Treasury is pressuring some banks, to whom it earlier gave TARP money, to take less than a dollar on secured and unsecured debt in order to accomplish its goal of keeping as much of the automakers in business as possible.

3) The Owners of the Fontainebleau Las Vegas Hotel project are suing banks to continue funding their project. Powerful Nevada Senator Harry Reid mentioned TARP funding in encouraging banks to continue funding this construction project. You may have heard of, or have an account with, some of the banks being pressured. The largest were Bank of America, JP Morgan Chase (JPM), Royal Banks of Scotland ([RBS]], no tarp), and Deutche Bank (DB, no tarp).

The government of the United States was deliberately created with a strong system of checks and balances to maximize liberty and minimize excessive government. One of the primary linchpins of the separation of powers doctrine was to allow private businesses to conduct the commerce of the nation. The government protected private property and insured the defense of the nation, private business conducted commerce, the fourth estate kept the country informed, and the Judiciary resolved disputes. If you doubt the wisdom of this approach, put yourself in the shoes of a dissident in the Soviet Union or Nazi Germany who must now obtain employment from the same organization that is telling him/her to appear in court for crimes against the state.

Some of us would argue that the separation of powers argument alone is enough to justify the government never directly interfering in the affairs of private companies. (Others would say the U.S. has the highest living standard of any large country because of its’ private sector.) We are standing on the edge of a precipice. As the government injects itself more and more into decisions of private companies, it will find more and more reasons to advance its interests and expand its powers at the expense of the other parties. Fickle voters will whipsaw the interventions of government in non optimal and contradictory directions. Is the amelioration of short term economic problems worth the loss of our liberty?

Disclosure: Author is Long JPM. No positions in BAC, DB, RBS, or GM.

Comments

[Jasper M:]

"Is the amelioration of short term economic problems worth the loss of our liberty?"
Clearly not.
And yet . . . .
I wonder if these sort of stupidities are not something free societies must resign themselves to occasionally endure. Freedom necessarily includes the freedom to make mistakes. Including dumb mistakes. Incredibly obvious, relentlessly stuuuupid mistakes, the sort we will remember with embarrassment for decades. And warn our children about.
Call it "The teenager model" of civics.
That said, when our Founding Fathers handed over the keys to this nation, they DID include a pretty good set of owners' manual. It's still there, in the glove compartment. Doubtless we will refer to it, from time to time, whenever we are feeling suitably chastened.

Apr 26 03:25 PM

[sr9web:]

Uh, are we concerned about affects or effects here...

Apr 26 10:19 PM

[Perry1961:]

BAC shareholders should sue the Fed and Treasury, just to see what the Supreme Court would have to say. It might take decades to get a ruling....but still.

Apr 27 05:06 AM

[jeeper:]

Perry Wrote "BAC shareholders should sue the Fed and Treasury, just to see what the Supreme Court would have to say. "

Gee, do we still have a Supreme Court? They've been so invisible I forgot they exist. Or do they?

Apr 27 11:00 AM

[Thomas J. G...:]

Jasper, good thoughts on allowing for, and not over reacting, to failure. One thought I have been coming to lately is that things aren't really that bad. I think it's clear too many borrowed too much in the U.S. (Merkel, Denninger, Schif) and that some financial organizations (not all) used excessive leverage on subprime etc. I'm not seeing a new business failure every day now. Maybe TARP money saved the day or maybe it wasn't that bad in the first place.

Apr 27 12:08 PM