The Failout, Pt. II

Well, President-elect Obama persuaded President Bush to ask Congress for the second $350 billion of TARP money, and despite some jawboning by the handful of fiscal conservatives left in Congress, it breezed through the House and Senate. So after Mr. Obama has wrapped up all his $158 million worth of inaugural balls, the money will be sitting there waiting for him and his tax-dodging Treasury Secretary, Tim Geithner, to spend.

It will fail.

It will not do anything but buy time, prolong the inevitable, and raise your and my tax bills for a long time to come.

Am I just being my curmudgeonly self? No. This is not rocket science, my friends.

For one thing, every special interest group out there has their hand out for a piece of the pie, and the populist President-elect and the free-giving (as long as it's taxpayer money) Congress thus far appear all to willing to invite everyone to the table. The automakers will undoubtedly ask for more, commercial real estate developers want in, credit unions are making a pitch, the automakers' captive finance arms and other consumer lenders are on bended knee, homebuilders are pleading their case, the big bond insurers are in the queue, and so on, ad nauseum.

Inclusiveness is a great thing, but let's face it: if $350 billion didn't help the banks enough to save them, divvying up the next tranche won't provide enough assistance to any one of the myriad groups that are playing a domestic version of beggar-thy-neighbor. Put another way, it's noble to invite all the hungry in your community to your house for Thanksgiving dinner. But if you don't up-size the menu, everybody walks away still hungry.

Don't get me wrong - I am NOT for one minute advocating increasing the size of the TARP (though that is eventually going to happen - I'll say it's about a calendar quarter away, given that tranche one was authorized in late September and spent by year-end, and tranche 2 is authorized now and ready to go). Faithful readers of this blog know that I have been adamantly opposed to this miserable failure of a wretchedly bad idea from the get-go.

But how do I know it won't work? What if they didn't divvy up the money?

Remember how Hank Paulson sat a handful of big banks down and made them take the first disbursements of TARP funds? They all looked down their patrician noses and said, "We don't need a bailout - we're healthy."

One of them was Citigroup. Citi's stock traded in the $40-50 range from 2004 through early 2007. Then the subprime birds came home to roost. Citi's share price fell below $30 by year-end 2007. By March of last year, when the crisis hit full bloom, it was under $20.

In October, after the TARP passed, Citi's stock jumped from a low of less than $15 a share before the TARP negotiations got under way, to $23. But then it plunged to about $13, until Citi got its first infusion of TARP money, upon which it rebounded to more than $17 a share.

Guess what? Even after getting taxpayer assistance, Citi's stock fell to $3.77 in late November, and closed last Friday at $3.50. Citi lost $8.3 billion last quarter - its fifth quarterly loss in a row, and not much improved from the year-ago quarterly loss of $8.9 billion. So the government Friday announced plans to give Citi more assistance, in the form of backstopping 90% of all but the first $39.5 billion of Citi's estimated $301 billion losses. (In case you don't want to do the math, that puts us taxpayers on the hook for more than $235 billion of Citi's bad bets.)

Another bank that harumphed it didn't need aid was BofA, the nation's largest bank by assets. Remember the week that AIG, Merrill and Lehman all went kaput in one form or another? Merrill, seeing Lehman be allowed to fail without government rescue, went to one of its largest creditors and asked that they extend a line of credit necessary to keep Merrill from failing.

That creditor was BofA, and they put their foot on Merrill's throat, saying no to the credit line extension but offering to buy Merrill - on the cheap, it appeared. Merrill's board had no alternative but to accept the offer.

So BofA - which earlier bought failed subprime lending giant Countrywide - now owned the nation's best-known brokerage. Then, the deal began looking ever less cheap. They announced 15,000 job cuts. Then 30,000. Then 35,000. Then, last week, BofA announced its first quarterly loss in 17 years, losing $1.8 billion. Worse, that didn't include the $15.3 billion in losses at Merrill, as the books didn't close on the deal until after year-end.

Along with the loss announcement, BofA announced it would need government assistance to complete the Merrill acquisition - an acquisition that it made of its own accord, not at the government's behest. BofA set the price, so if it wasn't enough to cover Merrill's losses, shame on them for not knowing how to value a business. But no, they're getting another $20 billion of taxpayer money, plus they're getting a backstop of $118 billion of bad assets. All tolled, the cost to the taxpayer for the aid to BofA and Citi alone could top $350 billion.

That, my friends, is a TARP tranche in itself, and that points to why this will fail: it was intended to shore up the financial sector, and since it passed, Citi and BofA alone have seen their share prices fall by more than 80%. If the first $350 billion was burned through in a quarter, and did nothing to improve the financials' lot, what good will the second tranche do - especially if it's divided up among everybody and his brother?

Another ominous thing about Friday's rescues is that the backstop promises were outside the scope of the TARP - in other words, the Fed (with the help of Mr. Geithner) decided unilaterally to put the taxpayer on the hook for roughly the same amount of money that the President had to formally request under the TARP and Congress had to approve. As I've lamented before, where are the checks and balances? (I'm seeing lots of checks, actually - unfortunately, I don't think the balances are there.)

In a partisan swipe that Mr. Obama took at the outgoing administration, in justifying his request for the second half of the TARP funds, he said, "I know this wasn't an easy vote because of the frustration so many of us share about how the first half of this plan was implemented."

No, Mr. President-elect, we the people were overwhelmingly opposed to the TARP to begin with. Some of us were astute enough to predict it would not work, and would result in a trillion-plus dollar deficit for 2009. And the vast majority of Americans were opposed to the moral hazard of spending taxpayer dollars to bail out banks that were failing due to their own bad decisions, when most of America has managed its own financial affairs responsibly. It had nothing to do with how the TARP was implemented, for it was doomed to fail regardless.

As is part two. So please spare us the warm and fuzzies about how this time it'll work better - especially with a key co-architect of the first go-around at the helm of Treasury (assuming he's not too busy revising the tax code to remove "nanny-gate" risk and the way IMF employees have to pay withholding taxes). Just spend the money, hand us taxpayers the bill, and try to fix something else - global warming maybe. I'm tired of shoveling it off my sidewalks.