Is TARP Really a TRAP?

Posted by: Amy Barrett on November 19, 2008

The Treasury’s capital purchase program, the system for injecting capital into the nation’s banks, may look like a give away on the surface. But look a bit closer and there’s an interesting catch.

TARP (Troubled Asset Relief Program), of course, went from being an asset purchase program to a capital investment program and therefore needs a new name. Under the Treasury program, the government will invest $250 billion in the nation’s banks. A Treasury spokesperson says $158 billion has already been committed with another $92 billion to go. The hope is that new capital will get banks lending again. And many small banks, major small business lenders, are lining up now.

But here’s the rub: In section 5.3 of the agreement there is language that says if Congress wants to put new conditions or requirements on the banks, those new terms can be applied retroactively to banks who took the money. So in January if Congress wants to require banks that have received capital stop foreclosing on homes or up their lending activity, they can.

The American Association of Bank Directors sent a letter to Treasury Secretary Henry Paulson in early November asking that the government delete or modify the provision. David Baris, Executive Director of the AABD, says the Treasury has not responded to the letter.

Bank consultant Bert Ely says that is going to give some bankers second thoughts.

It is a blank check for Congress to put conditions on money that has already gone out. I think banks will go through the process, but the more they look at this they’ll decline it at the end.

Now, the program is aimed at investing capital in healthy banks. If that's the case and they don't really need the money, it's hard to understand why a bank would agree to a deal that could change over night. Guess we'll see how many banks sign on the dotted line once they read the fine print.

Reader Comments

Bob

November 20, 2008 12:45 PM

sounds like the banks credit card aggreements to me.

chance

November 20, 2008 12:46 PM

Paulson is a thug. This is the bigeest redistribution of wealth program in the history of man. The banks that do this will be subject to more social engineering under the new United Socialist States of America. USSA Watch where this goes over the next 6 months. We're all doomed. I thought slavery was abolished? Guess not!

cmholm

November 20, 2008 12:48 PM

The section 5.3 "new conditions" clause is brilliant, and should be highlighted as a feature, not a bug, in the legislation. If a bank doesn't really need the money, this is an excellent incentive to keep its snout out of the trough.

Tom Stephens

November 20, 2008 12:50 PM

This is silly: "So in January if Congress wants to require banks that have received capital stop foreclosing on homes or up their lending activity, they can." If Congress wants to require banks to stop foreclosing or up their lending activity, they can. They make the laws. That's what they are elected and authorized by the Constitution to do.

Chris

November 20, 2008 12:52 PM

Interesting, but good. I feel better knowing the money is there if needed. I'd like to see funds invested in NECESSARY infrastructure projects instead of going to a company that should work its way out of their self-inflicted mess, or go broke like normal people. AIG is a black hole and should be the first to go - either hang on to investments or sell them and write them off now - no one should insure investments (other than FDIC deposits) and anyone who thinks otherwise should stop investing.

James H

November 20, 2008 12:57 PM

The TARP legislation should never have been passed in the first place. It's just one more (large) step towards the Socialization of the USA and the shafting of the average American taxpayer.

BTW, it is also completly un-Constitutional!

Sleestak

November 20, 2008 01:01 PM

Are more loans really the answer? Does America really need more "credit"?

Americans need lower rates on the outstanding credit they do have.

FED CHEAP MONEY>BANKS

BANKS EXPENSIVE MONEY>CONSUMER

CONSUMER EXPENSIVE INTEREST REPAYMENTS>BANKS

BANKS>?????

Profits? Lower rates? More bad investments? CDS?

Land of the Unknown?

JOE AMERICAN

November 20, 2008 01:08 PM

I WILL SHOW YOU HOW TO GIVE MONEY TO THE BANKING SYSTEM, FIRST GIVE ME $200,000 AND I WILL PAY OFF MY Mortgage.
THEN THEY CAN DO WHATEVER THEY WANT WITH IT.

Prasad, Houston TX

November 20, 2008 01:08 PM

Ha Ha Ha... i Can't stop laughing.. way to go Hank.. No wonder Goldman is doing good..

lol its a trap!

November 20, 2008 01:09 PM

lol tarp

Matt Brown

November 20, 2008 01:12 PM

If the bank CAN turn down the cash, then they SHOULD turn down the cash.

I think once the taxpayers buy into a bank, it becomes partially our bank.

NO FREE LUNCH!

Philippe

November 20, 2008 01:13 PM

You make me laugh. You have no idea of what socialism is. By the way, your great capitalist system is being bailed out now by the European socialists, the Chinese communists and the Saudi monarchists.

Once again, american prove they have no brain....

Trader Vic

November 20, 2008 01:14 PM

As Bob mentioned, this reads exactly like credit card agreements. Seems like a perfectly reasonable clause to me, since the golden rule in this country is he who has the gold, rules.

Sam B

November 20, 2008 01:15 PM


I don't agree with the legislation but I don't understand how it is unconstitutional. Please explain.

Roger

November 20, 2008 01:16 PM

Bob,

Ooohh I love it. Let's issue them little cards, even offer to put their picture on it. AND, we can put them on a 17 day billing cycle and periodically send them info about tranferring their other debts to this account.

And, we should call them every three nights, between 7 and 9 pm if they are late on a payment.

tonyt

November 20, 2008 01:17 PM

BINGO Bob. They sure like to change the terms whenever they want when they are doing the lending, but listen to them cry now.

John Steele

November 20, 2008 01:28 PM

This is great. Now the banks can give loans to good business models or else?
Be prosecuted for fraud? This whole TARP thing was meant to throw more gasoline on a out of control list of crisis for Obama to resolve. Try and burn the house down before he even takes office. Roast labor
too. Some knew how thoroughly corrupted Bush and Paulson are.

Johnny

November 20, 2008 01:33 PM

I read socialism and "redistribution of wealth" here. Please excuse my ignorance and naivete but I submit this definition of socialism: "social and economic doctrine that calls for public rather than private ownership or control of property and natural resources." The money supply was sold to private ownership many years ago. Paulson works for the FED owned by the IMF owned by the banking cartels. Where is the public ownership from a non-government entity?
Redistribution of wealth is exactly what this country needs. Take it from the Hamiltonian-Federalist-Whig kleptocrats that call themselves Republicans in a feeble attempt to hide their true roots and return to the American people (employees who actually do the work) who have been exploited since Hamilton established the Central Banking System. American Gold Eagles did n't lose nearly as much as most folks 401Ks. Hmmmm....

Marcus

November 20, 2008 01:36 PM

Intersting. You have to wonder what the end desired result is here, because I can't believe that this is reactionary. Is this a controlled power play to grab the purse strings or is it a knee jerk reaction to legitammate problems? Is this a furtherence of the amazing wealth grab of the last eight years by the rich? Are we in the hands of a benificeint dictatorship that is actively trying to correct an "spoiled American" economy gone amok, or just the outcome of eight years of monetary incompitance by Republican greed?

vjb

November 20, 2008 01:53 PM

paulson is nothing more then a con artist that pulled the wool over the eyes of congress, they(congress)have no more knowledge about what is really at stake with our economy then a banker that gives a loan to someone who has no job, but tells the banker that he has all intentions of paying off the note if he finds work. in other words kiss the money goodby, (sucker)

chuck

November 20, 2008 02:02 PM

We should be suprised because financial institutions are seeking to void regulatory language that might be used to require them to act responsibly ?? Have we learned NOTHING ???

J Wingert

November 20, 2008 02:49 PM

Wow! Where did Tom Stephens come up with "If Congress wants to require banks to stop foreclosing or up their lending activity, they can. They make the laws. That's what they are elected and authorized by the Constitution to do?" There's no power remotely resembling that in the Constitution. It's comments lke that that confirm both the Constitutional and economic illteracy of the population. Where is any of this Constitutional, moral or otherwise anything but insane?

Daniel

November 20, 2008 03:04 PM

I find it interesting that mismanaged banks (now looking for a taxpayer funded bailout) are complaining about a contract that allows new terms to be applied retroactively after they take the funds.

After all isn't that the same deal most bank's credit cards have in their contract terms? That they can change the terms after you take the money.

No wounder the socialists are gaining ground politically.

Paul

November 21, 2008 01:20 AM

Support Senate bill S3683 introduced this morning (11/20/08) to stop this misappropriation of funds.

Chris Brown

November 21, 2008 04:45 PM

J. Wingert, perhaps you have never heard of something called the Commerce Clause in the Constitution? Congress has explicity authority to regulate interstate commerce, and the banking industry falls squarely in that area. Congress certainly has the authority to temporarily halt foreclosures. Also, Congress can similarly require banks to increase their lending activity, especially if they have accepted government bailout funds. Now, you may disagree with this as a policy matter, but I can assure you it is most certainly Constitutional for Congress to do so if the elected officials decide to pass such legislation.

JH student

November 22, 2008 12:44 PM

I think this could backfire. If the government is trying to help banks by giving them money but then put in this clause, what if they tell the banks to do something that does not work. That will be a waste of all the money right?? I mean it's good to have some sort of control on them but is this really going to do more good than harm?

anonymous

November 23, 2008 12:42 PM

I posted a blog yesterday, it didn't get posted, why is that?

Dave Swanson

November 24, 2008 07:27 AM

TARP = Terrorism and Racketeering Payments

Wall Street and fininical firms leveraged close to a trillion dollars at about 33:1. We’re about 33 trillion dollars in the hole. A few hundred billion or a few thousand billion in bailout money is not even a scratch at the tens of trillions that American capitalism has scammed? Should we expect other countries to happily pay 10% of their GNP for a decade to compensate for American greed?

Dante

November 24, 2008 10:31 AM

The banks are all relying on political pressure later on to make sure this little retro clause doesn't kick in. Besides, banks are already being forced to lend to people who can't pay back - it's called CRA.

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