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Can the bailouts be stopped?

A billion dollars used to be a lot of money. But one year ago Congress, under pressure from Treasury Secretary Henry Paulson and the Bush administration, irrevocably altered the meaning of a billion dollars. Paulson convinced the Democrat-controlled Con

The “toxic asset plan” that became
a slush fund of historic proportions

By U.S. Representative Virginia Foxx

A billion dollars used to be a lot of money.  But one year ago Congress, under pressure from Treasury Secretary Henry Paulson and the Bush administration, irrevocably altered the meaning of a billion dollars.  Paulson convinced the Democrat-controlled Congress to approve a $700 billion package of bailouts known as TARP for the biggest banks in America.

Twice I voted against this outrage and urged a very different, free market approach that would have reversed the negative situation in the housing market.  But TARP became law on October 3, 2008.  TARP funds were to buy up the so-called “toxic assets” that were poisoning the megabanks’ balance sheets.  Turns out they’d made lots of terrible loans and the bill was coming due.  Taxpayers would have to pick up the tab.

Within days the plan was changed.  On October 14, 2008 the Treasury announced that toxic assets were out and direct cash infusions were in.  One reckless plan swapped for another.  So instead of getting the bad loans off the banks’ books, taxpayer money went to purchasing shares of bank stock.  This is also known as nationalization. 

Now the U.S. government owns sizable chunks of some of the largest names in American finance—Citigroup, Bank of America and AIG come to mind.  Together these three sucked up more than $160 billion in bailouts and yet we have the highest unemployment rate in 26 years. 

Last December the bailout slush fund morphed into a bailout for failing automakers, costing $80 billion so far.  It was quickly becoming apparent that one of the cardinal rules of our free enterprise system no longer applied.  Bad decisions, unhealthy risk-taking or poor management no longer mean failure.  If you are big enough, “systemically significant” in Treasury Department parlance, you get bailed out with taxpayers’ money. 

That’s why mortgage giants Freddie Mac and Fannie Mae got bailed out.  AIG was so important that it got its own bailout program, the aforementioned “Systemically Significant Failing Institutions Program”. 

In January I introduced legislation to stop the bailouts.  It passed the House by an overwhelming bipartisan majority but not the Senate, meaning that the bailouts continued.  Since then we’ve pumped billions more into banks and automakers. 

Maybe we should cut to the chase and rechristen last fall’s bailout the “TBTF Program”.   AIG is Too Big To Fail. Now the government owns an 80 percent stake.  GM is Too Big To Fail.  Now the government owns a 60 percent stake.  Citibank is Too Big To Fail.  Now the government owns a 36 percent stake. 

But some people are still defending the program, saying that taxpayers are going to make a profit.  Hogwash.

Let’s temporarily set aside the debate over whether the government has any business bailing out companies.  Several banks have paid back their bailout funds, netting the Treasury a relatively small profit.  But most have not repaid the bailout money.  Not to mention that it is doubtful taxpayers will ever recover anything close to the full amount invested in outfits like GM and AIG.   In fact, the independent Congressional Research Service estimated that taxpayers would lose about $40 billion of the initial $55 billion investment in the auto industry.  That’s a 72 percent loss. 

To recap: it has been a year since the bailout became law.  The program is almost unrecognizable from what was pitched to Congress.  It has swung between toxic assets and a government takeover of GM.  The Treasury Department can continue to use the bailout funds as it sees fit for up to an additional year—even “reinvesting” funds that have been repaid.  That means the Treasury Department controls a $700 billion revolving fund.

Now that the bailout damage is done, what recourse does Congress have?  Despite a year’s worth of bailout mania, Congress still holds the purse strings.  So this summer I cosponsored a common sense bill (H.R. 3020) with North Carolina Democratic Congressman Larry Kissell that designates any bailout proceeds for debt repayment—not new adventures in high finance or politicians’ pet projects.

It’s no cure-all.  We’ve still got hundred’s of billions of taxpayer money propping up banks and automakers.  Like most Americans I am very concerned about our unsustainable accumulation of debt.  But this bill does ensure that bailout money that is returned to the government is actually used to pay down the debt it helped create.  That would put us back on track to reducing our record deficits and restoring responsibility to both government and reckless financial institutions. 

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