Free Markets, Free People

TARP


Did Obama save us from a second “Great Depression”?

That’s the spin from the White House and its supporters, or has been for quite some time.   The story goes, “if we hadn’t passed the stimulus bill, we’d have seen even worse economic performance than we have and we’d have worse unemployment to boot”.

Investor’s Business Daily (IBD) took a look at the claim and found it … wanting.

For instance:

White House economists forecast in January 2009 that, even without a stimulus, unemployment would top out at just 8.8% — well below the 10.8% peak during the 1981-82 recession, and nowhere near Depression-era unemployment levels.

The same month, the Congressional Budget Office predicted that, absent any stimulus, the recession would end in "the second half of 2009." The recession officially ended in June 2009, suggesting that the stimulus did not have anything to do with it.

Now we can argue the unemployment numbers and whether or not the real number of unemployed is approaching the Depression-era level (it’s not), but what can’t be argued are the forecasts from that time.  Obviously, the supporters of the stimulus knew of these forecasts and believed that with the stimulus we could come in well under those numbers.

As it turns out, unemployment shot past 8.8% and the recession ended exactly as forecasts said it would without any stimulus.  That makes it a bit difficult to argue the stimulus had a positive effect.  In fact, it can be argued that it may have had a negative effect.   But, there are also those who claim it would have been “a lot worse” without it, not to mention those who claim it was too small to begin with.

But that’s unsupportable in the face of the economic forecasts.

The argument is often made that the recession turned out to be far worse than anyone knew at the time. But various indicators show that the economy had pretty much hit bottom at the end of 2008 — a month before President Obama took office.

Monthly GDP, for example, stopped free-falling in December 2008, long before the stimulus kicked in, according to the National Bureau of Economic Research. (See nearby chart.) Monthly job losses bottomed out in early 2009 while the Index of Leading Economic Indicators started to rise in April.

So looking back we see all the indicators of an economy trying to begin a recovery.  Yet here we are still struggling and we spent a trillion dollars of borrowed money in the meantime on goodness knows what.

One other thing to keep in mind – the establishment of the most hostile climate toward business I’ve ever seen from government in my lifetime began about this time as well.

No, per IBD, it appears if there’s any credit at all for saving the country from depression, it should go to the other guy:

Also often overlooked is that a tremendous amount of stimulus already was in the economy when Obama took office, including President Bush’s $150 billion stimulus, two unemployment benefit extensions and $250 billion spent on "automatic stabilizers."

More importantly, the Bush administration pushed through the controversial $700 billion TARP program (which Obama sustained), while the Fed pursued an aggressive anti-recession campaign by, among other things, effectively lowering its target interest rate to zero.

Now agree with it or not (not – I’m still not convinced it was necessary), and buy into the “saved us from depression” or not (not – we’d have gotten over the pain much more quickly and wouldn’t be at the beginning of a “lost decade”), it appears that economic history is being revised here.   The Obama stimulus was a latecomer to the party.   Most of the action had already taken place.  What Obama and his administration did was create a hostile business climate.  The business community reacted by sitting on its hands and its money waiting for a clear signal (one they’ve yet to receive) that they’re not going to be taxed and regulated to death.

But Obama save us from a depression?  

Just for the record, It doesn’t appear to be the case.

~McQ

Twitter: @McQandO


GM to pay 400 million in bonuses without loans being paid back … where’s the left on this?

Giving the left the benefit of the doubt, maybe they didn’t know about this.  Because I’m sure, just as they blasted Wall Street for paying bonuses after receiving bailout money and TARP funds, they’d be keen to be consistent and do the same to GM.

Less than two years after entering bankruptcy, General Motors will extend millions of dollars in bonuses to most of its 48,000 hourly workers as a reward for the company’s rapid turnaround after it was rescued by the government.

The payments, disclosed Monday in company documents, are similar to bonuses announced last week for white-collar employees. The bonuses to 76,000 American workers will probably total more than $400 million — an amount that suggests executives have increasing confidence in the automaker’s comeback.

But the comeback was and is still financed by taxpayers money and borrowing.  What in the world is GM doing paying out bonuses when it still owes at least $40 billion in loans?  That $400 million would be a nice chunk toward that payback, wouldn’t it?

But the bonuses drew criticism from an opponent of the auto industry bailout in Washington who said GM should repay its entire $49.5 billion loan before offering bonuses.

"Since the taxpayers helped these companies out of bankruptcy, the taxpayers should be repaid before bonuses go out," said Republican Sen. Charles Grassley of Iowa. "It sends a message that those in charge take shareholders, in this case the taxpayers, for a sucker."

Yeah, kind of hard to argue otherwise, isn’t it?  And no, for you that believed all the hype, GM hasn’t paid back its loans despite the commercials it made claiming it had.  It isn’t even close to paying them off.

That said, I’m sure, once the story gets out that the left will be just as consistent in slamming GM for paying bonuses without repaying its loans as it was with taking Wall Street (properly I might add) for precisely the same reason.  (HT: Maggie’s Notebook).

Oh, and by the way:

Ford Motor Co. announced plans last month to pay its 40,600 U.S. factory workers $5,000 each, the first such checks since 1999. The Dearborn, Mich., company, which avoided bankruptcy and did not get a government bailout, made $6.6 billion last year.

Ford also plans to pay performance bonuses to white-collar workers in lieu of raises, but it would not reveal the amounts.

Good for them and congratulations.

~McQ


TARP IG blasts program

So much for administration spin about the effectiveness of TARP. Neil Barofsky, TARP’s special inspector general, deals the administration narrative a shot to the head. In effect, he tells Americans angry about the program they have a right to be:

…[M]any Americans to continue to view TARP with anger, cynicism, and mistrust. While some of that hostility may be misplaced, much of it is based on entirely legitimate concerns about the lack of transparency, program mismanagement and flawed decision-making processes that continue to plague the program.

Some specifics:

“When Treasury refuses for more than a year to require TARP recipients to account for the use of TARP funds, or claims that Capital Purchase Program participants were “healthy, viable” institutions knowing full well that some are not, or when it provides hundreds of billions of dollars in TARP assistance to institutions, and then relies on those same institutions to self-report any violations of their obligations to TARP, it damages the public’s trust to a degree that is difficult to repair.”

Ya think? And you remember all the rhetoric about forestalling foreclosure? Uh, FAIL:

[T]he most specific of TARP’s Main Street goals, “preserving homeownership,” has so far fallen woefully short, with TARP’s portion of the Administration’s mortgage modification program yielding only approximately 207,000 (out of a total of 467,000) ongoing permanent modifications since TARP’s inception, a number that stands in stark contrast to the 5.5 million homes receiving foreclosure filings and more than 1.7 million homes that have been lost to foreclosure since January 2009.

Now, I’m not agreeing that any of that should have been done – this is about claims the administration and Democrats made for spending the money.

Question: where has the money really gone?

Oh, and you remember “spurring lending” as a key reason for TARP? Not so much.  In fact, not much at all:

“TARP has failed to ‘increase lending,’ with small businesses in particular unable to secure badly needed credit. Indeed, even now, overall lending continues to contract, despite the hundreds of billions of TARP dollars provided to banks with the express purpose to increase lending.”

Meanwhile in the "moral hazard" department – success:

“…[I]ncreased moral hazard and concentration in the financial industry continue to be a TARP legacy. The biggest banks are bigger than ever, fueled by Government support and taxpayer-assisted mergers and acquisitions. And the repeated statements that the Government would stand by these banks during the financial crisis has given a significant advantage to the larger “too big to fail” banks, as reflected in their enhanced credit ratings borne from a market perception that the Government will still not let these institutions fail, although the impact of this cost may be blunted by recently enacted regulatory reform.”

Almost a trillion dollars and they really don’t know where it has gone. Additionally, they’ve not at all achieved the goals for which they tried to tell the public this money was so damned important.

Lack of transparency?  Mismanagement?  Flawed decision-making?  Why weren’t those things included in the administration’s spin. 

And we just let them take health care from us as well.

Nice.

~McQ


GM’s claimed debt repayment

You may have seen the announcement yesterday by GM’s CEO that it was paying back a portion of the money it had been loaned by the taxpayers (who borrowed it to loan it) to keep the company from going under and providing it the room for the government to own 61%.

The White House was exultant:

No one was cheering louder than the White House about General Motors’ repayment of $6.7 billion in loans from the federal government.

 First thing this morning, Press Secretary Robert Gibbs alerted his 56,000 followers on Twitter of “BIG NEWS.”:”GM pays back US $6.7 billion used to save jobs,” Gibbs exulted. But he had more.

 “BIGGER NEWS,” he trumpeted. “Payment was 5 years ahead of schedule.”

Uh, not so fast.  If you were skeptical, you had a right to be.

Jamie Dupree brings us the rest of the story:

The issue came up yesterday at a hearing with the special watchdog on the Wall Street Bailout, Neil Barofsky, who was asked several times about the GM repayment by Sen. Tom Carper (D-DE), who was looking for answers on how much money the feds might make from the controversial Wall Street Bailout.

“It’s good news in that they’re reducing their debt,” Barofsky said of the accelerated GM payments, “but they’re doing it by taking other available TARP money.”

In other words, GM is taking money from the Wall Street Bailout – the TARP money – and using that to pay off their loans ahead of schedule.

“It sounds like it’s kind of like taking money out of one pocket and putting in the other,” said Carper, who got a nod of agreement from Barofsky.

“The way that payment is going to be made is by drawing down on an equity facility of other TARP money.”

Translated – they are using bailout funds from the feds to pay off their loans.

Somehow this exchange never made it to other media outlets.

With this administration, question everything.  Heck, with any administration, question everything – but it seems it is an especially important thing to do with this one.  And when it comes to politics take nothing the press says at face value – ever.

~McQ


White House Job Summit Results? Spend More Borrowed Money

How did I know that would be the inevitable outcome?

President Obama will propose using $200 billion from the Troubled Asset Relief Program (TARP) to support creating jobs, White House officials confirmed Monday.

The president, in an economic speech before the Brookings Institution on Tuesday, will argue that the money would be well spent by funding projects to build bridges and roads, weatherize homes, and provide other assistance for small businesses as well as the unemployed.

Fund projects to build bridges and roads? I thought that was the purpose of the 787 billion “stimulus”. Shovel ready projects correct? The great and wonderful stimulus, if passed, was guaranteed to keep unemployment at 8% or below, remember? How’s that worked out for us?

And, the funds will come from TARP which was borrowed to begin with. Instead of not spending (and paying back the lenders), we’re now going to create jobs weatherizing homes, oh, and giving “other assistance for small business as well as the unemployed”? It may come as a surprise to the people in Washington DC, but extending unemployment and giving the unemployed other benefits does not create jobs. Nor does some complicated bureaucratic adventure in “weatherizing”.

Initiatives which make the decision to hire and expand easy will do that, and there are none on the horizon. Instead we’ll see another 200 billion added to the 787 billion (yes, friends, a few billion shy of a trillion) on this spending boondoggle that’s worked so well in dampening unemployment.

In case you’ve forgotten (via Patterico), here’s the adjusted projected 10 year Obama budget:

revised deficit

The dark red CBO shows the actual cost, not the sanitized cost from the White House. This is our future in terms of spending. We’ve certainly seen all the excuses for spending at that level due to the financial crisis (reasons I am still not convinced are necessarily valid), but what are the excuses for the years beyond 2010? And where is that money going to come from?

It is hard to deny this isn’t planned deficit spending on a level we’ve never even contemplated before. You have to wonder how any politician of any stripe could see those budget numbers as doing anything other than worsening a bad situation. The question some are beginning to ask is whether or not this future is based on the naive assumption that government can spend its way out of financial crisis or another thing altogether.

~McQ


TARP Report – “We don’t even know where the money went”

So let’s give them health care too!

Sorry, couldn’t help myself. The quote in the title is from Democratic Representative Daniel Lipinski of IL. It’s a good preface to a Treasury Department Inspector General report issued today which was rather scathing. USA Today provides the “executive summary”:

A Treasury Department watchdog is warning that a key $700 billion bailout program has damaged the government’s credibility, won’t earn taxpayers all their money back and has done little to change a culture of recklessness on Wall Street.

Of course it also claims that the bailout is responsible for keeping the financial system from collapsing (which, of course, is still very debatable).

However:

“The American people’s belief that the funds went into a black hole, or that there was a transfer of wealth from taxpayers to Wall Street, is one of the worst outcomes of this program, and that is the reputational damage to the government,” said Neil Barofsky, special inspector general of the Troubled Asset Relief Program (TARP), in an interview.

President Obama was doing a little fundraising with Wall Streeters last night trying to get a bit of the pelf into the coffers of the Democrats. As most Americans will most likely view it, a little quid pro quo (or a little “keep that pay czar away from me”.)

The report criticized Treasury’s implementation of the program and its lack of transparency, making 41 recommendations, 18 of which were implemented. Barofsky says it’s “extremely unlikely” that taxpayers will recover the $77 billion committed to the ailing auto industry or the $60 billion in TARP assistance to American International Group as part of a pledge of up to $180 billion in aid. An additional $50 billion to modify unaffordable home mortgages “will yield no direct return.”

But, but, but we were promised it would all be repaid – with interest.

Of course those of us who knew better lobbied against it in the first place. Unfortunately, this is one of those times you wish you had been wrong:

Financial experts say it’s no surprise that the government won’t be able to recoup all of its investment in TARP. “Anybody who said this was all secured lending that would surely be repaid was kidding himself,” says Lawrence White, economics professor at New York University’s Stern School of Business.

To be sure, 47 financial companies have repaid $72.9 billion to the government. And Treasury has received interest and dividend payments or sold warrants for an additional $12.4 billion.

Of course the come back is, “you can’t put a price on financial stability”, to which I say, “Yes. You can. And we paid about $700 billion more than it is worth”.

~McQ


Compounding The Problem?

The “too big to fail” intervention in the financial realm may have put us in an even worse position:

Joseph Stiglitz, the Nobel Prize- winning economist, said the U.S. has failed to fix the underlying problems of its banking system after the credit crunch and the collapse of Lehman Brothers Holdings Inc.

“In the U.S. and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz said in an interview today in Paris. “The problems are worse than they were in 2007 before the crisis.”

A comforting thought.

Stiglitz said the U.S. government is wary of challenging the financial industry because it is politically difficult, and that he hopes the Group of 20 leaders will cajole the U.S. into tougher action.

“We aren’t doing anything significant so far, and the banks are pushing back,” he said. “The leaders of the G-20 will make some small steps forward, given the power of the banks” and “any step forward is a move in the right direction.”

Key phrase – “politically difficult”. I.e. it may cost the Democrats and Obama some political capital. Wouldn’t want them to have to make difficult political decisions, would we – so the hope is they can “outsource” it. Make the decision out to be one that a group of leaders came up with and thus a broad consensus that gives the administration some political cover.

“It’s an outrage,” especially “in the U.S. where we poured so much money into the banks,” Stiglitz said. “The administration seems very reluctant to do what is necessary. Yes they’ll do something, the question is: Will they do as much as required?”

That depends on what that political cost is calculated to be.

“We’re going into an extended period of weak economy, of economic malaise,” Stiglitz said. The U.S. will “grow but not enough to offset the increase in the population,” he said, adding that “if workers do not have income, it’s very hard to see how the U.S. will generate the demand that the world economy needs.”

The Federal Reserve faces a “quandary” in ending its monetary stimulus programs because doing so may drive up the cost of borrowing for the U.S. government, he said.

“The question then is who is going to finance the U.S. government,” Stiglitz said.

Indeed – and here we are set to spend even more money on a pet domestic issue.

Why?

~McQ


Socialism? Why Not Call A Spade A Spade?

One of the things we talked about on the podcast this week is how, in the broadest sense, socialism is a growing phenomenon in our country. As I mentioned, while government may not actually own the means of production, if its regulations are such that they dictate how a company must operate, then government exercises de facto ownership.

What is happening in the financial sector right now serves as a perfect example.

The Obama administration plans to require banks and corporations that have received two rounds of federal bailouts to submit any major executive pay changes for approval by a new federal official who will monitor pay, according to two government officials.

[...]

Others, which are being described as broad principles, would set standards that the government would like the entire financial industry to observe as they compensate their highest-paid executives, though it is not clear how regulators will enforce them.

So regulators will have the final say on compensation. That, of course, is an ownership function. The de facto owner then is who?

Moving on:

In a sign of how eager corporations are to escape government diktats on pay, nine of the nation’s biggest banks are likely to repay bailout money as quickly as by the end of this month. The administration is expected to grant its approval this week.

Goldman Sachs, JPMorgan Chase and a handful of others have worked to rid themselves of their ties to government in order to shed restrictions on pay that they say put them at a competitive disadvantage.

But under the administration’s new plans, even companies that repay the taxpayer money will not escape some form of oversight on their compensation structure.

The set of broad pay principles being drafted by the Treasury Department would authorize regulators to tell a bank to alter its compensation arrangements if they are found to encourage too much risk-taking. It is not clear how the government will define too much risk.

Part two – no matter whether you pay the money back in full with whatever interest is owed, the government retains the right to dictate your compensation structure based in some arbitrary metric of “too much risk”, to be determined only by them.

They will apply to a broad swath of financial companies, even the United States operations of foreign banks, as well as private companies like hedge funds and private equity firms.

“This is the government trying to tell the TARP banks not to worry, because everyone else’s compensation will be monitored too,” said Gustavo Dolfino, president of the WhiteRock Group, a financial recruiter, of the industrywide principles. “We’re in a world of TARP and non-TARP.”

Clear enough? For those that like to quibble about the meaning of socialism and parse words, I’m eager to hear your spin on this. But, in light of the plan above you’d better be damned good at deploying the rhetorical smoke and mirrors if you plan to call this anything but a manifestation of the “s” word.

~McQ


TARP: The Tragedy Deepens

Michael’s post immediately below deserves to be addressed in some more detail.  Not only is the TARP program pernicious to the banking and financial sector, but it’s implications go much deeper than that, and corrupt the rest of the economy as well.  And most importantly, this is only the beginning.

The corruption expresses itself in a number of ways.  Take a look at the GM/Chrysler situation.  In both cases, the UAW emerge as the clear winners in the bankruptcy proceedings.  In the case of GM, bondholders with $27 billion in bonds are supposed to accept 10% of the company’s equity, while the UAW’s retirement fund, which holds $10 billion in bonds, is supposed to receive 40%, with the Government taking the remainder of the equity. In what possible way is this supportable?

Likewise, in the Chrysler bailout, the UAW will receive 55% of the equity, while Chrysler’s bondholders receive 30 cents on the dollar for their $7 billion investment.

OF course, Chryslers bondholders are balking at this, throwing the compnay into banklruptcy court.  Not that that will save them.  Why?  TARP.  As Thomas Cooley explains:

Chrysler’s dissident lenders have on their side the “absolute priority” bankruptcy rule, which holds that value must be distributed according to the legal priorities of the stakeholders.

Unfortunately, the bankruptcy code also holds that the absolute priority rule can be modified if a two-thirds majority can convince the court that it makes legal or business sense. Two-thirds of the lenders can force the holdouts to go along with them in a procedure called a cram-down.

That is exactly what is likely to happen. Citi, JP Morgan Chase, Goldman Sachs and Morgan Stanley, all major recipients of TARP Funds, all deep in the pocket of the Treasury, agreed to the administration’s plan.

So, the government, holding TARP over the heads of the banks, can now abrogate the generally used bankruptcy rules, and force through a sweetheart deal for a favored political client, the UAW.  But, in so doing, they enlarge the damage to the country’s economy by sounding a warning that government funds are dangerous because the government’s first priority is to re-write the rules to reward their special friends.  The uncertaintly that creates keeps investors on the sidelines.

Many investors are sitting on the sidelines, as is much money. Why? Because it is impossible to know what the rules of the game are. And that’s because the administration and the Congress keep changing the rules in capricious ways in pursuit of larger political objectives.

Megan McArdle make some of the same points, highlighting the danger inherent in such an approach by the government.

Countries that use their banking systems this way don’t get good results.  If you’re a fairly uncorrupt developed country, you get slower growth and bloated “critical” sectors that are usually more critical in providing campaign support, lavishly remunerated make-work jobs, and photo ops, than any products the public actually wants.  Then, if something like Japan happens, you have a twenty-year “lost decade” while everyone pretends as hard as hard can be that everything is all right, in the sincere but misguided believe [sic] that wishing hard enough will make it so.

One wonders if Ms. McArdle now thinks back on her support of Mr. Obama during the last election as “sincere but misguided”.  But I digress.

IN any event, the government has moved full steam ahead with the approach Ms. McArdle decries.  And it will continue to do so. How do we know this?  because of the way the Chrysler bankruptcy is being handled.

I heard repeatedly from progressives, in the run-up to the bankruptcy case, that the holdouts were unreasonably holding out for a trivial improvement–about 500 million dollars.  But if it was so trivial, why didn’t the government just put the extra money in, rather than jeopardizing confidence in the bankruptcy system–and the creditworthiness of a large swathe of unionized firms?  $500 million is about the price of one cup of coffee per American, a trivial sum relative to the overall budget.  This move has shown potential partners that government funds are dangerous, and potential lenders that union firms are risky bets; both have probably cost American citizens more than they saved.  So why did the government risk so much for so little gain?

You know the answer, don’t you?  Because they’re planning to do it again.

And to the extent they keep doing so, and keeping the financial sector in line via the TARP funds, investors will increasingly keep their money out of the game.  Why should they do otherwise?  Any investment in any entity with any relationship to TARP, either directly, or via creditors, is a target for the government to re-write the rules of investment and bondh0lding to ensure their special friends get a nice cut of the action.

True, it’s hard to have much sympathy for either GM or Chrysler.  But the issue now goes far beyond them.  Cooley, again:

There is at least some poetic justice in this outcome. The unions, whose years of work rules, and pension and health care deals helped sink the company, will have to eat their own cooking from now on. But their future success needs not only labor but capital.

Why would private capital get involved when the rules of the game are so capricious? No one would take that gamble when it is clear that, in dealing with the government, private capital will always take a back seat to politically powerful entities.

And that is the larger worry that current policy has neglected. Firms and markets can function quite well within a framework of rules. Indeed, rules are good for the orderly conduct of business. But when rules get imposed or dispensed with willy-nilly in the interests of politics, it is very dangerous. We have should have learned this lesson long ago.

But, apparently, we didn’t.  Don’t worry, though.  I’m fairly certain we’ll re-learn it in due course.

What really offends me the most in all this is not that the government is acting in the interest of favored clients, although that’s extraordinarily offensive.  That’s what governments do.

I think the thing that offends me the most is the sheer stupidity of the thing.


TARP as Shakespearean Tragedy

Does it strike anyone else as funny that TARP is a poor anagram for “trap”? If Shakespeare had written this play the name would have been much more clever, of course, but I think he would delight in the barely concealed irony of the federal government drawing banks into its lair with the pretense of saving their hides, only to use the money intended to do so as the means of yoking the industry. I’ll bet the banks who took TARP funds don’t find it so humorous.

Since last October when Hank Paulsen forced nine of the largest banks to take an initial injection of $125 billion in TARP funds (among other bullying), the federal government has committed about $12.2 trillion dollars to bailouts and spent about $2.5 trillion on such efforts (er, among other, other bullying). Aside from an increasing assertion of control over the financial and automotive sectors of our economy (among other, other, other bullying), there is very little to show for all this money. Which leaves the rather stark impression that government control was the goal all along — i.e. the method within the madness.

I must be naive. I really thought the administration would welcome the return of bank bailout money. Some $340 million in TARP cash flowed back this week from four small banks in Louisiana, New York, Indiana and California. This isn’t much when we routinely talk in trillions, but clearly that money has not been wasted or otherwise sunk down Wall Street’s black hole. So why no cheering as the cash comes back?

My answer: The government wants to control the banks, just as it now controls GM and Chrysler, and will surely control the health industry in the not-too-distant future. Keeping them TARP-stuffed is the key to control. And for this intensely political president, mere influence is not enough. The White House wants to tell ‘em what to do. Control. Direct. Command.

[...]

Here’s a true story first reported by my Fox News colleague Andrew Napolitano (with the names and some details obscured to prevent retaliation). Under the Bush team a prominent and profitable bank, under threat of a damaging public audit, was forced to accept less than $1 billion of TARP money. The government insisted on buying a new class of preferred stock which gave it a tiny, minority position. The money flowed to the bank. Arguably, back then, the Bush administration was acting for purely economic reasons [ed.: That's a highly charitable argument]. It wanted to recapitalize the banks to halt a financial panic.

Fast forward to today, and that same bank is begging to give the money back. The chairman offers to write a check, now, with interest. He’s been sitting on the cash for months and has felt the dead hand of government threatening to run his business and dictate pay scales. He sees the writing on the wall and he wants out. But the Obama team says no, since unlike the smaller banks that gave their TARP money back, this bank is far more prominent. The bank has also been threatened with “adverse” consequences if its chairman persists. That’s politics talking, not economics.

Think about it: If Rick Wagoner can be fired and compact cars can be mandated, why can’t a bank with a vault full of TARP money be told where to lend? And since politics drives this administration, why can’t special loans and terms be offered to favored constituents, favored industries, or even favored regions? Our prosperity has never been based on the political allocation of credit — until now.

Despite the government’s bullying, it is difficult to feel much pity for the institutions who accepted TARP funds. Surely they must have at least suspected an iron hand inside that velvet glove attempting to feed them. However, if they truly don’t need the money, and have the means to pay it back, then onerous seems too slight a word to express how gripping the government’s control has become:

Financial firms eager to return infusions from the $700 billion Troubled Asset Relief Program will have to demonstrate that they can operate without debt guarantees provided by the Federal Deposit Insurance Corp., a senior government official said Tuesday. The FDIC program allows financial institutions to borrow money at lower costs.

The new requirement will make it harder for some institutions to get out from under government rules attached to the bailouts, another shift in a changing landscape for banks. It also illustrates the government’s desire not to have banks abandon the bailout program if they are not financially prepared to do so.

The government’s desire? I don’t recall exactly where that is accounted for in the Constitution. Is it buried somewhere in the penumbras and emanations of the commerce clause? Clearly the “government’s desire” must have some force of law that it can unilaterally decide to allow banks to sink or swim on their own. Otherwise, such desire is wholly irrelevant.

Nonetheless, banks did take the money, and so the government gets to call the tune. Institutions who would have collapsed absent the bailout have little to grouse about in such circumstances. But other firms, who didn’t need the money in the first place, rightfully bristled at the demands being placed upon them and the opprobrium casually tossed their way by the government.

Kim Price’s Gastonia bank accepted $20 million from the Troubled Asset Relief Program to help keep credit flowing as the economy faltered.

Now the Citizens South Banking Corp. chief executive and other community bankers feel that Congress is treating them like villains.

Proposed new TARP rules that could limit bankers’ pay have upset many bank executives here. And the congressional effort has prompted some banks in other states to give the money back.

Paying back the government (although coming at a pretty price) not only seems like a right the banks should have, it just makes good business sense for the healthy ones:

TCF Financial Corp, a Minnesota lender, said it repaid a $361.2 million capital infusion that it took from the U.S. government’s bank bailout program, becoming the largest recipient to repay its funds.

[...]

Regulators, banks and investors once viewed participation in the program as a positive, figuring that it would help healthy banks lend more and perhaps buy struggling rivals.

But participation is now often viewed as an albatross, subjecting recipients to restrictions on such things as executive pay and dividends.

Investors now consider some banks that hold onto their aid as being too weak to return it. Large banks such as Goldman Sachs Group Inc ( GS – news – people ) and JPMorgan Chase ( JPM – news – people ) & Co have said they want to repay their aid soon.

TCF Chief Executive William Cooper this week said holding TARP money put the bank at a “competitive disadvantage.”

He said repaying the aid and eliminating the associated dividend payments will boost earnings by more than 14 cents per share annually.

By inducing banks to take TARP money, whether through tactics or intimidation, the government has neatly cornered the capital flow of the country. Much like Hamlet surreptitiously forced his uncle to publicly face scorn for his act of regicide (by having performed the “Murder of Gonzago,” aka the “Mouse-Trap”), the government has successfully lured failing banks into the public square for ridicule. Whereas Hamlet sought to elicit a sign of guilt in order to justify his vengeance, however, the government seems intent on effusing guilt throughout the banking industry so as to justify its controlling moves. By tainting the public view of the financial sector, the government seeks to undermine public confidence and build a chorus calling for its heavy-handed involvement. As mentioned above, protestations by the beggars for such action protest too much, methinks, but those who truly have no need of the interference have much cause to cry foul.

Hamlet ends with nearly every character dead, and the country being turned over to its greatest enemy. Unfortunately, the financial sector seems destined for a similar result as the government has made clear it will not allow certain institutions to fail, and is callously indifferent to fate of the unchosen. No matter how well those banks who managed to avoid TARP altogether do, the government is now the major mover in game, and the only one with the power to force its will on all the other players. It can, and will, pass laws that favor the winners its chosen, thus leaving the non-assisted banks out in the cold. In the end, firms who conform to market forces (i.e. respond to the desires of its customers), will be supplanted by those which conform to will of the government’s agenda. The trap was set, the mice did enter, and thus their fates were sealed.

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