November 17, 2008
November 17, 2008
TARP is, of course, the Treasury plan to provide capital to banks. There are terms of the deal described in the press and in official documents from the Treasury. However, the deal is subject to any modification that Congress wants to make. Section 5.3 says that Treasury may unilaterally change the terms of the deal to conform with laws passed by Congress. This is a huge danger.
Back in the savings and loan crisis, Congress changed the terms of deals made between the government and banks. The Supreme Court said that whenever Congress does that, the government may owe damages to the banks for violating the contracts. (I was an expert witness in two of the damages lawsuits.) This time round, it won’t be a violation of contract for the terms to be changed, because the contract says the terms are whatever Congress wants them to be.
The biggest fear is that the many people in Congress who want to do good deeds with someone else’s money will legislate that banks in TARP must make lots of loans to people who are not credit-worthy (again), that banks have to forgive bad mortgages, or that they not adjust adjustable rate mortgages, etc. Banks that have not yet decided whether to participate in TARP should be very wary. Other citizens should be concerned about this kind of behavior.
Bill Conerly is principal of Conerly Consulting LLC, chief economist of abcInvesting.com, and was previously Senior Vice President at First Interstate Bank. Bill Conerly writes up-to-date comments on the economy on his blog called “Businomics” and produces a monthly audio magazine available on CD. Conerly is author of “Businomics™: From the Headlines to Your Bottom Line: How to Profit in Any Economic Cycle”, which connects the dots between the economic news and business decisions.
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