Many years ago, when I was in business school, one of the courses was taught by George Cabot Lodge. He said he could remember distinctly the day in 1968 that it occurred to him that the US could not simultaneously end poverty, send a man to the moon, and fight a ground war in Asia, that there were limits to what the US could do.
Similar doubts are allegedly crossing the minds of the bailout overlords, or perhaps this is an excuse to draw the line with non-financial supplicants (but having allowed American Express, clearly NOT a systemically important player, to form two bank holding companies so as to get access to cheap funding, I don’t see how Detroit can be told “no”). We have said before that the Fed cannot shore up the entire financial system, or keep it from deleveraging. The Fed and Treasury have consistently endeavored to save the current institutional architecture, when that is clearly rotten, rather than try to salvage (in some fashion) the critical activities that those firms perform. Note that many of the same firms would still recapitalized, but the posture towards them would be very different. The authorities would have a clearer vision of who and what they were saving and why.
One problem appears to be that by being unduly generous with the TARP. The terms on offer were far better than those from investors like Warren Buffet, when the time-honored Bagehot principle is to lend generously, but at a penalty rate. Suddenly a host of the needy has shown up wanting similar terms, and the authorities oddly feel compelled to be fair (the whole point of having power is that you get to be capricious).
The Wall Street Journal says today that the government plans to start saying no, allegedly out of necessity (but the necessity of scarce resources should have been apparent from the outset and led to more measured responses):
The U.S. government’s financial-system rescue plans are coming under pressure as a growing array of distressed companies signal the need for assistance.
On Monday, mortgage giant Fannie Mae said it is losing money so rapidly it may need a cash infusion from the Treasury Department by year’s end. The funds would come from a special $100 billion pool Treasury set aside back in September to aid the company. Fannie Mae had a loss of $29 billion for the third quarter…
General Motors Corp., which has been lobbying heavily for government aid, said Monday it might violate the terms of some of its debt by the end of the year…
The Treasury has committed all but $60 billion of the first $350 billion in funds granted by Congress under the TARP plan.That sum remains after accounting for Treasury’s planned investments in the banking sector and Monday’s additional $40 billion investment in troubled insurer American International Group Inc.
Yves here, This is no surprise. The whole point was to spend the dough before regime change, and with the possibility of an Obama victory, that meant dispensing as much as possible before the election.
The rescue efforts are “evolving in ways that I don’t think anyone anticipated,” said Camden Fine, president and CEO of the Independent Community Bankers of America, a trade group. “Things are just hitting them from every single direction, every day, and I don’t think they know whether to spit or go blind.”
Yves here. This is disingenuous. Recall that some of the nine banks that received equity infusions did not want it, others did not need it, but they were all force fed allegedly so as not to taint the ones who really needed it. Similarly, American Express, as we indicated in an earlier post, is simply not an essential financial player (and they are not at risk of going under, either)
Back to the Journal:
The additional life jacket for AIG — plus the thrashing from Detroit — makes it increasingly likely that Treasury Secretary Henry Paulson will turn to Congress for the second half of its promised $700 billion….
The Treasury secretary is likely to face a hostile reception from lawmakers angry over Treasury’s reluctance to aid the auto industry as well as its decision not to force banks receiving government assistance to lend out those funds to consumers and small businesses…
All the woes could undermine prospects for one possible Obama cabinet appointment: Federal Reserve Bank of New York President Timothy Geithner. Mr. Geithner, a former Clinton administration official widely viewed by top Democrats as a pick for Treasury secretary, has been a main player in the government’s financial bailouts this year…
Sen. Charles Schumer of New York said lawmakers want Treasury to put in place new requirements to encourage lending and to focus the program on struggling, not healthy, institutions. Mr. Schumer also wants Treasury to widen the scope of the program to include a greater variety of financial firms.
“My concern is that in its desire to be inclusive that Treasury didn’t set up enough criteria and made it too easy for healthy financial institutions to come to the window, get capital, and hoard it or use it for mergers,” Mr. Schumer said.
The Senate Banking Committee wants to see Treasury provide more help to struggling homeowners. It also wants to induce banks receiving federal funds to lend money to consumers and business, and it seeks new restrictions on bonuses for financial firms that receive the capital injections, according to a congressional aide.