Putting a TARP Over Our Economy

Bellagio Casino, Las Vegas
Image by rajeshvj via Flickr

In Nicholas Pileggi’s brilliant book “Casino,” a budding casino developer considers taking an investment from powerful union interests. But before he pulls the trigger, the developer’s mentor takes him aside with a warning.

“Don’t do this,” the developer is told. “Don’t get into bed with these people. They will wind up taking your business and using you as a front. You will never get out. You might even wind up dead.”

The bank executives who took TARP money won’t be killed for their troubles, but no doubt many are still now regretting that decision. What’s worse, many didn’t even have a choice about taking TARP funds – they were ordered to do so by the government.

They Didn’t Have a Choice

This is probably one of the least-known aspects of the TARP program. All major banks were required to take the money, because the government didn’t want the public to know which banks were in the most trouble. Bizarre as it sounds, this makes sense. Things move so fast today that a false rumor, even if it’s debunked within a day, can kill a company. If we (and institutional investors) get a sense that a bank is vulnerable, that bank will have a “run” that ensures its failure – everybody with assets in the bank will hurry to pull them out.

They Don’t Have a Choice Now

The thing is, we’re past the panic stage of this downturn. We’ve reached a point where some banks would like to give the TARP money back. However, they aren’t being allowed to. Treasury Secretary Tim Geithner has said an individual bank’s ability to repay the funds is not as important to him as the overall needs of the economy (which, in his mind, he can track much more effectively than the other 300 million of us).

Why Do They Want to Give the Money Back?

So why don’t they want to keep the money? Hey, it’s free money from the government! Get your share! What the banks have found, however, is that the TARP money comes with strings they’d rather not touch. It starts with executive compensation limits. There are also new lending requirements, and restrictions on other practices.
Finally, the government has indicated a desire to convert some of its TARP money into common stock – thus greatly increasing its influence over the way these banks are run.

I’ve described four aspects of the TARP program. Individually, none seem bad and some make a lot of sense. Taken together, they are outrageous. Consider a bank that never needed the TARP money. It was forced to take it – forced to keep it – forced to change its internal business practices – and forced to accept the federal government as a meddling, all-powerful business partner.

Now consider how you would feel if Congress and the President swept down upon you like this.

This Isn’t Over

Now you see the extent of new government influence in our banking system at this time. What are the chances that they’ll reduce their influence eventually? I’d say those chances are nil. One thing we know about politicians is that they love to accumulate power. This is in part because they honestly believe they know how to do, well, just about anything better than their constituents. Just listen to any Senator hectoring a car company executive about making better cars and you’ll see what I mean.

Of course, power also begets power (and wealth). Imagine that you are the CEO of Bank of America. Your number one priority is pleasing the federal government, because if you don’t, they can destroy you. Beyond that, it’s really important to make the party in power happy. That means:

  • If they want campaign donations, you’ll pony up
  • If they want you to be quiet about certain matters, you’ll shut up
  • If they want you at their fundraisers, you’ll show up

These actions, of course, beget more power. And don’t forget the wealth. Politicians have many ways to transfer public money to themselves – many $165,000 per year Senators and Reps retire as multimillionaires.

What can we do to stop this?

Believe it or not, we the people are the only ones who can stop this ravenous accumulation of power. My idea for doing it may seem radical, and will take a lot of effort and luck to work, but I think it can. The solution is simply this: we will boycott any institution that takes TARP money. We will pull our money and transfer our loans.

The reason we’re doing this is to reduce the influence of the TARP-receiving banks, and increase the influence of the non-TARP-receiving banks. The government wields its strongest authority over the TARP-receiving banks. When those banks are reduced, government power will be as well.

At some point, Washington has a choice. It can either accept that the American people simply don’t want it running our banking system, or engage in a truly naked power grab by forcing money on the non-TARP banks. I believe such an action would be viewed very differently now than it was during the panicky months of last fall.

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  1. GREAT summary. I agree with it 100%. Problem is… people are too complacent and won’t even consider it.

    If this gets some publicity and momentum… I’m behind it.

    Thanks again!

  2. Los Angeles Law guy on

    Whats wrong with caps on executive pay and new lending rules? I would hope that if I gave such an amount of money that it would be going to whatever cause I was lending it for (in this case, to get folks purchasing housing an qualifying for loans) I would not want to lend money to a ocmpany to help its survival to then have it given to someones bonus.

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