Citizen G'kar: Musings on Earth

September 25, 2008

The $700 Billion Bailout Plan's Fine Print

NEW YORK - DECEMBER 21:  People walk past a pa...

Image by Getty Images via Daylife
Goldman Sachs
CEO Lloyd Blankfein
received a bonus of
$53.4 million in 2006.

Mother Jones
Treasury Sec. Hank Paulson's $700 billion bailout plan now has a name: the Troubled Asset Relief Program, or TARP. But even as Capitol Hill debates TARP, few seem to have noticed the proposal item that puts taxpayers on the hook for future bailouts. It's in Section 6, and the key phrase is this: "The Secretary's authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time."
What does "at any one time" actually mean to economists? It means that if everything we American taxpayers buy re-evaluates down to zero, we get to buy more. That's hardly taxpayer "protection." With several hundred billion dollars of write-downs already announced this year by the part of the industry compelled to post their losses, it's a safe bet that $700 billion worth of the junkiest assets in existence will be heading to zero the second they are purchased.
But that's not all the bad news. With Sunday's announcement that Goldman Sachs and Morgan Stanley have decided to become bank holding companies, the last pretense of respect for the Glass-Steagall was dropped.
GoldmanSachsTower NJ

Image via Wikipedia


The Bank Holding Company Act of 1956 prevented bank holding companies from engaging in non-consumer oriented banking activities, like investment banking. It also prohibited such entities headquartered in one state from acquiring banks in another state. The interstate restrictions were gutted in 1994, and the 1999 Gramm-Leach-Bliley Act took care of the rest.
At first this meant that commercial banks could buy investment banks and insurance companies, hence Citigroup (which is a combination of Citibank, Travelers Insurance and Salomon Brothers investment bank), and the latest incarnation waiting to post lots of losses, Bank of America-Merrill Lynch. But even with a new name, Goldman Sachs is still an investment bank, in the same way that a horse by another color is still a horse. Changing its status to bank holding company will mean access to the bailout fund, and give it the ability to buy any commercial bank out there. Which it likely will.
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