The Federal Government loves abbreviations. Give them a chance and they can abbreviate anything or any program. So it came to be that the Emergency Economic Stabilization Act of 2008 was shortened to ESSA. Then to further abbreviate, a part of ESSA titled the Troubled Assets Recovery Program also was shortened to TARP. The legislation was proposed by the Bush Administration in September 2008 to stop the mortgage crisis, which, by spring 2008, was becoming a huge financial drain on the banks.

Basically, TARP was created to purchase assets from financial institutions. The assets can’t be described as good assets, since they were “troubled” and were not selling on the open market. A majority of the troubled assets were in the subprime mortgage programs for residential and commercial properties held by banks and investment banks.

According to Public Law 110-343, enacted Oct. 3, 2008, as an act of Congress signed into law by President Bush, it’s an “Act to provide authority for the federal government to purchase and insure certain types of troubled assets for the purposes of providing stability to and preventing disruption in the economy and financial system and protecting taxpayers, to amend the Internal Revenue Code of 1986 to provide incentives for energy production and conservation, to extend certain expiring provisions, to provide individual income tax relief, and for other purposes. This law was not the first time the federal government came to the aid of the banking industry. Back in the 1930s, the Reconstruction Finance Corporation or RFC was chartered during the Herbert Hoover administration and made loans to distressed banks and bought stock in 6,000 banks to the tune of $1.3 billion. After the economy stabilized the government sold its bank stock to private investors or the banks and it was estimated to have “broke even” on the deal. Even under President Ronald Reagan, the government took an 80 percent stake in the nation’s seventh largest bank, Capital Illinois Bank and trust. What brought about their insolvency? Continental made large loans to oil drilling and service companies in Oklahoma and Texas, which were riding a high tide of speculation of even higher priced gasoline.

Congress authorized $700 billion to purchase the troubled assets which were backed by “collateralized debt obligations” or CDOs (another abbreviation). Last month my article talked about all of the characters involved in the crisis from politicians to CEOs. Although they may have been the drivers, the Collateralized Debt Obligation was the bus. CDO and structured asset-backed securities (ABS) were developed in the 1990s to help banks stay more liquid. They no longer held a 30-year mortgage to term, nor did the mortgage companies, but instead the mortgages were packaged and then split into shares which could be bought and sold on Wall Street. The second part of this error in judgment was allowing insurance companies like AIG to insure an investor’s stake in the package. Billions were spent and billions were made insuring the risk.

Here in Montana our banks were pretty conservative when it came to the booming housing market. Here in Sidney, we saw prices rise but nothing compared to other areas in western Montana. When the housing market started to slow down many houses in Montana and elsewhere in the nation were no longer worth what the homeowner paid. Homeowners trying to get out from under the debt of an overpriced house quickly went to foreclosure. Foreclosures meant that the companies holding the mortgages weren’t going to get paid, banks and investment companies holding the CDO weren’t going to get paid and finally, the insurance company insuring the collateralized debt obligation did not have the assets to cover the defaults.

Congress had to act fast and immediately upon passage, $250 billion of the $700 billion was doled out to banks and firms “too big to fail.” Another $50 billion was given to automakers in December 2008 to stall impending bankruptcy for Chrysler and General Motors, and the final $300 billion was spent on January 15, 2009, to shore up more financial institutions.

So what are the TARP goals?

• Keep Families in their homes by helping up to 5 million responsible homeowners refinance to keep their mortgages affordable, and create a $75 billion loan modification program to help up to 4 million families avoid foreclosures.

• Fund Treasury Investments in which the U.S. Government, through the Department of Treasury, invests in preferred equity securities issued by qualified financial institutions.  The treasury’s intent is to provide immediate capital to stabilize the financial and banking system and to support the economy.

• Reform the regulations. Find out what went wrong and start making regulations that make sense and will stop the abuse of the system and taxpayers.

• Start lending to small businesses and others. Hopefully this will unlock up to $1 trillion of new lending and unfreeze currently frozen credit markets. 

There were individual programs developed such as the Public-Private Investment Program, the Capital Assistance Program, the Asset, the Capital Assistance Program, the Asset Guarantee Program, the Targeted Investment Program, the Automotive Industry financing program and the Systemically Significant Failing Institution Program.

So with all of this money and all of these programs what has happened in a year?

The effects of the TARP have been widely debated in large part because the purpose of the fund is not easily understood. For example, a review of investor presentations and conference calls by executives of some two dozen US-based banks by the New York Times found that “few banks cited lending as a priority. Further, an overwhelming majority saw the program as a no-strings-attached windfall that could be used to pay down debt, acquire other businesses or invest for the future,” according to Mike McIntire, in his article “Bailout Is a Windfall to Banks, if Not to Borrowers,” which quoted several bank chairmen who said in his article that they had no intention of changing their lending practices to “accommodate the needs of the public sector” and that they viewed the money as available for strategic acquisitions in the future. Moreover, while TARP funds have been provided to bank holding companies, those holding companies have only used a fraction of such funds to recapitalize their bank subsidiaries.

Many analysts have speculated that TARP funds could be used by stronger banks to buy weaker ones. If there was any doubt that banks had an alternative motive, look to Oct. 24, 2008, when PNC Financial Services received $7.7 billion in TARP funds and then hours later agreed to buy National City Corporation for $5.58 billion – perhaps a bargain price. But then again that type of purchase has not occurred since 2008.

Our elected members of Congress created a Congressional Oversight Panel which was meant to oversee TARP and has concluded that during 2008, the federal government paid $254 billion for assets that were worth only $176 billion, that during 2008, the companies that received bailout money had spent $114 million on lobbying and campaign contributions. These companies received $295 billion in bailout money. So even in the worst of times, the companies that lobbied for the money got one heck of a return on their investment.

On the other hand we can look at the four goals. Many would say that clearly they have not been met. Congress and the Administration could probably be graded with a C- or a D+. To begin with, little has been done to help main street business, millions of families or install long term confidence in the market. Market reform, or perhaps the lack of it, is especially disconcerting.

What happened in 2008 can happen again. Nothing is being done in Congress as lobbyists have made sure that both parties won’t enact anything that regulates the market including the CDOs. Sadly, we expect to be protected from financial predators (in this case the risk takers in the financial markets) but we will perhaps be waiting for a long time or for another crash or crisis before we see results.

We should be demanding that Congress do something to help small businesses and families and start regulating, which is what they should have been focusing on for the past 14 months.

I am always reminded that wisdom is quite different from intelligence. What we need now is the intelligence to understand the big picture and the wisdom to know that the recovery is going to take a lot more than $700 billion, a lot more than 12 months and a lot more patience than most of us have available.

Paul Groshart is a current member of the Sidney City Council.