What the Treasury Should do with the Returned TARP Funds
Posted by Michael A. Kamperman on July 17, 2009
We should not have let Goldman Sachs, J.P. Morgan, and the other banks payback the TARP funds until lending returned to near normal levels in the economy as a whole. These companies greatly benefitted at taxpayer risk from the avoidance of a systemic meltdown in the financial system. They are still benefitting from the FDIC guaranteed bonds they issued to secure below market interest rates. And of course, no one benefitted more than Goldman Sachs when they received 100 cents on the dollar for their subprime “hedges” from the AIG bailout. What Goldman Sachs, J.P. Morgan, and the other banks did with the TARP funds was they sat on them. Rather than extending credit to the real economy and taking on some lending risk for the good of the country with the TARP funds, these companies dramatically tightened credit standards for the good of themselves. The banks are now the only lending game in town. They must step up and fill the lending void. You can lead a horse to water, but you can’t make him drink. Now that they are returning the TARP money what should the Treasury Department do with the funds?
No doubt Treasury will continue to prop up the largest zombie banks with some of the funds. But this is not enough to help the economy. The shadow banking system the Treasury has decided to kill off with its decision not to rescue CIT accounted for over 70% of the lending in the U.S. in recent years. Treasury should take the funds and re-acquire Fannie Mae and Freddie Mac and make them a single agency of the federal government once again. Then, Fannie Mae should begin guaranteeing jumbo mortgages of up to $2 million for securitization. Additionally, the new Fannie Mae should enter the auto securitization market and begin to guarantee pools of new and used auto loans. Fannie Mae should require a downpayment and verification of income and assets before guaranteeing a loan. Additionally, in order to reduce foreclosures Fannie Mae should refinance any mortgage in America with no appraisal. Why shouldn’t ordinary Americans who are working hard to make payments on their underwater mortgages not receive the same support the Treasury was so anxious to extend to Goldman Sachs?
Ironically, this proposal would not only benefit the Main Street economy; it would also benefit the Wall Street economy. While I think Treasury has done more than enough at this point for Wall Street, it has not come close to doing nearly enough for Main Street. One other idea to help Main Street would be for the Treasury to partner with private capital and start a brand new well capitalized bank to compete with Goldman Sachs, J.P. Morgan, and the other banks. One of the reasons the banks are not lending is there are not enough lending dollars available for the whole economy. Hence, the banks are able to lend all of the money they need to even with extremely tight credit standards. By starting a new bank with zero legacy issues and FDIC guaranteed bond funding Treasury would place a powerful new competitor in the market that would force the existing banks to loosen their credit standards or lose market share. If Goldman Sachs and J.P Morgan do not want to loan out Treasuries money, then let’s give the money to a new bank that will.
