White House Signals that TARP Money Might Be Used for Bailout
By Chris Haak
President Bush, probably (and fortunately) eager to avoid the black eye on his administration’s legacy should GM and Chrysler declare bankruptcy and eventually fold, has changed his position in light of the failure to pass the Detroit rescue package in the Senate last night. Until today, Bush had been opposed to using some of the $700 billion in TARP (Troubled Asset Relieve Program) money – intended originally to purchase troubled assets from financial institutions, but actually used for the government to take a stake in financial institutions – to fund the immediate cash needs of Chrysler and GM. Treasury Secretary Henry Paulson had previously indicated that he was not in favor of using TARP funds on the auto industry, but since his boss is now coming out in favor of doing so, “in light of Congress’ inaction,” Paulson would probably do what he’s told to do. In fact, the Treasury Department issued a press release that said, “Because Congress failed to act, we will stand ready to prevent an imminent failure until Congress reconvenes and acts to address the long-term viability of the industry.”
White House spokeswoman Dana Perino said something that many proponents of the bridge loans have been saying all along; setting aside ideological differences, bankruptcy will tank the economy: “Given the current weakened state of the U.S. economy, we will consider other options if necessary — including use of the TARP program — to prevent a collapse of troubled automakers. A precipitous collapse of this industry would have a severe impact on our economy, and it would be irresponsible to further weaken and destabilize our economy at this time.”
GM, which had been obviously disappointed in the failure of the previous bill in the Senate, expressed gratitude and optimism that the White House was working to deal with the issues on its own. In fact, CNN reported today that White House officials threatened Senate Republicans last night with the prospect of being forced to use TARP money to help the automakers if the bill failed to pass the Senate. TARP is already a hot topic among members of Congress, who are frustrated with the way the money has been used and that many banks are using it to bolster their balance sheets without being any more willing to lend money to consumers or businesses. Of the first tranche of $350 billion approved by Congress, all but $15 billion has been allocated to financial institutions, which conveniently allows enough money to fund the short term loans for Detroit. Secretary Paulson is hoping to not need to tap the second $350 billion, punting the decision on how much to pay out and how to do it to his successor, Timothy Geithner.
Financial institutions that accept TARP money must also accept certain conditions on the use of the money, as well as certain executive compensation and other limits. It is not yet clear what conditions would be attached to the money if it were to be provided to the Big Three (or GM and Chrysler alone at this point), but my guess is that the Treasury Department would impose similar conditions to those at least in the proposed House bill.
Once the 111th Congress is sworn in on January 6, Democrats will have a larger majority in both the House (where the rescue plan already had plenty of votes) and the Senate (where the House proposal was put to a procedural vote, which was to determine if there was enough support to advance the bill further; that vote was 52-35 with 42 Democrats and 10 Republicans voting “yes” and 3 Democrats and 32 Republicans voting “no.” There will be at least seven additional Democratic Senators after January 6, so it’s entirely likely that not only will the companies be back in Washington asking for money again, but that their request will be met more favorably.
Probably because of suddenly less-bleak prospects for a bailout, GM’s stock was down only about 5% in midday trading, and the Dow Jones Industrial Average was down only about 1%. I’m glad that this part of my market predictions from earlier today were incorrect. Stay tuned for the latest news on this very dynamic subject.
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