Deficits, Dollar, Federal Reserve, Individual v. Collective, Live and Learn, Treasury, Trust

Former Fannie Mae CEO to Run TARP

Akin to Fannie Mae: We make home possible, until the first notice of default

Akin to Fannie Mae: We make home possible...until the first notice of default. Catchy slogan.

Former Fannie Mae CEO, Herb Allison, will run the $700 billion Troubled Assets Relief Program (TARP). At first glance, the headline sounds a tad alarming, given Fannie Mae and Freddie Mac’s role in the financial crisis. Fortunately, Allison only took over Fannie in September, after a respected career as chairman at investment company TIAA-CREF, as well as an executive at Merrill Lynch & Co. As readers of this site know, Fannie Mae is responsible for a gross misallocation of resources, which funneled dollars into home loans for borrowers who were incapable of making their payments over the long haul. The pushing of an “ownership” society, as well as the greed of banks, investors and credit rating agencies to make millions, is a big reason the economy is in a tailspin.

Ten banks are poised to repay TARP bailout funds next week, pending approval by the Treasury. At the top of this list is JP Morgan Chase & Co., who received $25 billion of TARP funds last year (on a side note, I’m getting nostalgic for WaMu signage; all of the WaMu banks in my city have officially swapped out for Chase signs). This is great news for the taxpayer who stepped in at a point of crisis, and shouldered great risk to backstop the country’s largest financial institutions; albeit not at our choosing. As any capitalist knows, returns on capital are necessary and the greater the risk exposure, the greater the return. So the $64,000 question is (because that’s what our money should be worth, in real terms, by the time we retrieve it): when do U.S. taxpayers get back the principal and earn our returns?

The way former Treasury Secretary Henry Paulson set up the system, returned TARP funds and interest paid on TARP funds go back into a TARP account, which is now managed by Herb Allison. As the government sells their equity stakes in banks, how will the money ever find its way back to the taxpayer? A reasonable query. A skeptic might think the government will use those funds to backstop more companies in the future, a la General Motors. A cynic would propose the government might use it to fund another stimulus package or government spending program. It doesn’t seem like the Fed’s style to send taxpayers a check funded by equity or profits. And it seems unlikely the Feds will issue private stock to taxpayers for all of the companies they’ve become majority owners in.

Either a check or individual stock ownership must occur for taxpayers to actually own these private concerns. Until then, don’t count on ever seeing the money, or any upside to these investments if any of the companies turn a profit one day. If there’s no need for oversight, or even a hearing, on a government takeover of General Motors; or a respect for contracts and debt repayments in bankruptcy law, I doubt a little savior capital will ever need to be returned safely.


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