New TARP Direction Puts Taxpayers at Risk
The Treasury recently announced that it may not need any more money to bail out banks aside from the $700 billion TARP money that it received already. There is about $134 billion left of the original amount. Instead of asking for more money, Treasury may convert the loans that it’s made to large banks into common stock. Common stock provide equity, which could help shore up bank balance sheets, but there are some problems.
Common stock ownership is riskier than loaning to the companies. If the stock price falls after the Treasury buys, then taxpayers could lose money when Treasury sells. The added risk to taxpayers could result in losses of hundreds of billions. On top of that, government will likely never allow the companies to bankrupt, no matter how poorly they perform, if they own large portions of stock. They might get the money back from a loan, but it is unlikely they’d recover taxpayer dollars from common stock in the event of bankruptcy.
At current prices, if the Treasury converted its preferred shares in Citigroup to common stock, it would own about 36 percent of the company. Converting to common shares will increase taxpayer risk and will likely result in more government control in the financial sector, which could mean even less chance at profitability down the road.
Congress should have never voted to unconstitutionally bail out failing banks. Without government backing the failing businesses, prices would have fallen sooner and faster rather than dragging out the recession.