Wednesday, April 14, 2010

A Permanent Bailout State

Heritage asks the question of how to create a permanent bailout culture, and then answers it with current legislation from the Democrats:

Treasury Secretary Timothy Geithner stumps for Sen. Chris Dodd’s (D-CT) finance reform bill in today’s Washington Post:

As the Senate bill moves to the floor, we must all fight loopholes that would weaken it and push to make sure the government has real authority to help end the problem of “too big to fail.”

Crucially, if a major firm does mismanage itself into failure, the Senate bill gives the government the authority to wind down the firm with no exposure to the taxpayer. No more bailouts.

Excuse us if we don’t take the Secretary of Wall Street Bailouts’ word on this. To the contrary, what the Dodd bill actually does is create a new $50 billion fund to be used in “emergencies” for restructuring firms deemed too close to bankruptcy. And who gets to decide when there is an emergency and which firms are too close to bankruptcy? You guessed it: Treasury Secretary Timothy Geithner. The Dodd bill is thus nothing less a permanent extension of Secretary Geithner’s TARP powers.

But don’t take our word for it. Time reports:

That’s why the government decided to bail out most of the nation’s largest banks at the height of the financial crisis. And here’s where the problem potentially gets worse. Once bankers understand that the government will bail out their firms when their loans or other financial bets go bad, they are likely to take riskier and riskier bets. That, of course, leads to more potential bank failures and more taxpayer funded bailouts.

The Dodd bill was supposed to end all of this, and Senator Dodd says it does. Nonetheless, policy makers and economists say it’s far from clear that the proposed legislation solves the issue. Even members of the Federal Reserve, which gets a lot more power to regulate banks and financial products in the Dodd bill, are wary of the proposal’s ability to end too big to fail. Richmond Federal Reserve president Jeffrey Lacker recently said on CNBC that he believes the bill does little to stop future financial bailouts.

And that's the problem. Bankruptcy is a perfectly workable and legitimate solution to address failing businesses. I suspect the one thing Heritage's article leaves out is the fact that, if a company's survival is up to the government, one must ask the question of what happens when that company isn't run by people who are politically in favor with the administration? Could we see reasonably healthy firms get taken apart based purely on political reasons? Nah, surely not. That wouldn't happen in America, would it?

***cough cough***

Regardless, bankruptcy has been working for years, and it's a far better solution than a permanent bailout state. Speaking of which...

A recent GAO report warns that GM and Chrysler may need even more taxpayer money. This comes after GM and Chrysler received the overwhelming bulk of an $81 billion auto bailout under TARP.

The report finds GM and Chrysler may have unfunded liabilities for their pension programs. These obligations could have been terminated if these companies had filed for a typical bankruptcy. They were maintained, however, after the government assumed sponsorship during the most recent crisis. Should these companies be unprofitable, these unfunded liabilities will be unmet by GM and Chrysler as soon as 2013.

The report explains why:

Officials at the Department of the Treasury, which oversees TARP, expect both GM and Chrysler to return to profitability. If this is the case, then the companies will likely be able to make the required payments and prevent their pension plans from being terminated. However, if GM and Chrysler were not able to return to profitability and their pension plans were terminated, PBGC would be hit hard both financially and administratively.”

Should these companies continue to face losses, GAO estimates that for years 2013 and 2014 pension liabilities could cost GM over $12 billion, and Chrysler over $2 billion, to combine for “about $14.5 billion” picked up by PBGC. And that’s only by year 2014. It’s likely taxpayer money will be needed for future years.

Further, the GAO explains:

…until Treasury either sells or liquidates the equity it acquired in each of the companies in exchange for the TARP assistance, its role as shareholder creates potential tensions with its role as pension regulator and overseer of PBGC in its role as pension insurer. In particular, tensions could arise if decisions must be made between allocating funds to company assets (thereby protecting shareholders, including taxpayers) or to pension fund assets (thereby protecting plan participants).

In other words, another bailout is all but inevitable, the only question is whether taxpayers will take the hit through TARP or through the PBGC. Considering the Obama administration’s big labor ties, expect the PBGC to take the hit.

I suspect Barack Obama and the Dems in Congress will soon introduce a bill to fund everything done by every business and government on the planet. And yes, it'll be deficit neutral, too.

There's my two cents.

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