Can Hank Paulson Use TARP Funds To Bail Out Auto-Makers?


So just in case you’ve been living in a cave this week, Congress is struggling to figure out how to bailout the big three automakers. The House passed a bill which died in the Senate late Thursday night. The reports of the bill’s demise reached the White House where it was rumored the Treasury Secretary would be ordered to fund the bailout with monies under the TARP program.

TARP Money For Detroit

The initial TARP allocation was $350 Billion and Neil Kashkari was told this week by Barney Frank he wasn’t getting the second disbursement until Treasury forced mortgage servicers to modify defaulted loans en mass.

So this mean Hank and Neil are going to have to tally up how much they’ve spent and see if any is left.

If there is a few billion left, is it legal for Hank to use TARP funds to bail out non-banking institutions?

Well, first the bailout bill was written with such wide-reaching powers for the Secretary, he can do virtually anything he wants.

However, what most folks don’t know is all three automakers have significant financial service companies. For example, Ford has Ford Motor Credit. GM owns GMAC Financial, a huge financing company that operates lending divisions including the cable TV advertiser, Ditech Mortgage.

Just a few years back, GM made $1 Billion in a single year from just their mortgage lending, both commercial and residential, which just so happened to match the revenue that same year as their auto sales divisions.

Who would have ever guessed that GM could generate the same amount of revenues from mortgage lending as they did from building and selling cars?

GM is still in bed with Cerberus Capital Management as the major shareholder in GMAC and owns Chrysler. Cerberus is pushing for TARP funds as they started floating their option of putting GMAC in bankruptcy if they don’t get bondholders to agree to an exchange to raise the capital needed to qualify as a bank holding company.

(Supposedly Cerberus believes Hank can’t use TARP to bailout non-bank companies or “unqualified” bank holding companies….or they are just using this crisis as leverage to skin their bondholders…you be the judge.)

Either way, it was clear that the smart money for an automaker bailout would be on the Bush Administration and their man, Hank to solve the problem…not Congress.

And Maybe He Should

Originally I was siding with the Senate Republican’s who have simply had enough of poorly run car companies and championed their efforts to kill the bailout.

However, the more I looked into the “banking” tentacles the automakers have, the rationale for the original banking bailout holds true for the automakers…since the modern automaker is not so much automaker as auto, dealership, and real estate financier. reported it this way,

“Whatever happens at GMAC will ripple through the auto industry. The financing company provides loans to consumers for cars and to dealers for their inventories. General Motors, which retains a large stake in the financing company, said in its latest turnaround plan to Congress that it was counting on GMAC’s viability. Otherwise, G.M.’s financial problems, and its need for government assistance, could grow.

For G.M., any additional problems at the financing company would bring more pain for its dealers, who have long depended on GMAC to provide consumer financing and to carry its inventory. The automaker set up the unit in 1919 to help customers buy its cars.”

Dealers all over the country need GMAC to fund all those cars on the lots and they need access to those funds to help customers buy a new car too. Killing the bailout kills the financial arm of the automakers and subsequently, the dealerships. The bailout is to keep credit flowing and to keep the dealers in business. If we don’t keep the credit flowing, car buyers would be forced into the hands of the scared local banks.

That won’t work…

So, Hank go ahead and get out your check book…cut them a check for the $34 Billion Congress choked on.

You’ll be able find that small amount the cushions of the Treasury Department sofa, eh?

About Author

Rob K. Blake, a 15 year veteran of the mortgage industry, is a renowned public speaker, author, and former radio talk show host. His blog,, is dedicated to educating mortgage consumers, mortgage providers, and investors about both mortgage and housing markets.


  1. John Q. Public on

    Well, first the bailout bill was written with such wide-reaching powers for the Secretary, he can do virtually anything he wants.

    You apparently ave not read the TARP statute.

    Letter sent to President Bush and Congress:

    I cannot adequately express the grief and disappointment I feel in my government. I see my America crumbling under the weight of corruption and government intrusion into the private sector. My grievance is not with any one party, but rather with the government as a whole. I lost my job on March 10, 2008. I watched the government throw $700B at the financial markets in a rushed manner, served on a platter of fear, and poorly planned. And now I see the program has failed as banks and other financial institutions are hoarding that taxpayer money. The TARP did not help me or others like me at all. No, the government helped the elite.

    I have watched my government try to pass legislation to bail out a completely dysfunctional auto industry with yet more taxpayer money. I hear much discussion about protecting autoworker’s jobs, but I have heard nothing about the rest of us. I am not greatly bothered by this as I am a proud and principled American who will face whatever destiny awaits me.

    The Legislative Branch of our government has a specific job to perform defined by, and within the limits of, our constitution. When we do not like what comes out of both houses of congress, we do not presume to believe that the Executive Branch is unconditionally granted the freedom of running ram shod over the Legislative Branch no matter what the interest of the Executive Branch may be. We let the legislative branch do its job and we stand by the result of their efforts whether we like it or not – unless it is unconstitutional.

    Now I read that the President is planning on taking unilateral action to draw funds from TARP to bailout the automakers without the consent of my congressional representatives; Senator A, Senator B, and my Representaives in the House. Oh, they may not have a problem with your proposal, but that does not in any way make it right or just. It is wrong in principle, and it violates my right to equal protection as stated in the 14th Amendment of our constitution. In addition, I am of the opinion that such a proposal annunciated by your administration tramples trias politica. Indeed this model of a democracy is clearly documented in the United States Constitution, Article I, Section 8: which places all the power of the government in the Congress to make all the laws.

    Yet the sum of all guidance divined from our constitution is being set aside for what might be considered for the good of the many. However, is setting aside our constitution, for even the most noble of causes in fact and in truth serve the greater good? I should think the founders of our country and the framers of our constitution would answer in the negative.

    The TARP was funded for the purpose of assisting Financial Institutions. I direct your attention to the following interpretation of “Financial Institution” as documented in the TARP bill (Emergency Economic Stabilization Act of 2008, Public Law 110-343):

    Financial Institution – The term “financial institution” means any institution, including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company, established and regulated under the laws of the United States or any State, territory, or possession of the United States, the District of Columbia, Commonwealth of Puerto Rico, Commonwealth of Northern Mariana Islands, Guam, American Samoa, or the United States Virgin Islands, and having significant operations in the United States, but excluding any central bank of, or institution owned by, a foreign government.

    This definition contained in the statute does not leave much room for interpretation.

    Automakers are not Financial Institutions and thus, to draw funds from TARP for any other purpose than to assist Financial Institutions without the protection of representation afforded me by the Constitution and through my Senators and Representative is wrong by any measure. And should my Senators and Representative not act to prevent such action is to abrogate their constitutional duties and responsibilities and render them unfit for presiding over the matters of, and brought forth by the people of the United States of America.

    Should you proceed, you will release my America into a deep and unexplored abyss of historic proportions. I advise good measure and profound thought before you make any decision in regard to drawing taxpayer dollars from TARP to be given over to any public or private business.

    I am for the Constitution.


  2. In the quote below…the loophole is bolded…
    plus I clearly indicated in the post all the automakers own financial institutions…institutions that will qualify for TARP funds under even a strict interpretation of the las.

    …but clearly Hank will have to pull them from the monies already disbursed.

    “Financial Institution – The term “financial institution” means any institution, including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company, established and regulated under the laws of the United States…”

  3. John Q. Public on

    Hi Rob,

    I understand how you see this as a “loophole” when the paragraph stands alone in support of my contention in the post above. However, it is very difficult to distill a 169 page law document into any brief, meaningful, and coherent statement.

    If you are interested in the TARP bill, just google the following: Emergency Economic Stabilization Act of 2008, Public Law 110-343

    Thank you for your reply.

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