THE BLOG
01/17/2009 05:12 am ET | Updated May 25, 2011

Parsing TARP: Sweetening the Deal

Governor Mark Sanford of South Carolina hates bailouts and Twinkies. Concerned that the federal government might authorize funds for his state last month, the Governor wrote to Congress pleading with the House and Senate to keep their money:

We've in essence unloaded truckloads of sugar in a vain attempt to sweeten a lake. Tossing in a Twinkie now will not make the difference, especially when that $100 billion Twinkie represents less than one-fifth of one percent of a global economy that continues to sour.

Sweet metaphor. Then this week Sanford sent a terse letter to President Bush (along with seven GOP senators) requesting that the Treasury not use TARP funds to bail out the domestic auto industry.

I believe this would be a very great mistake. It would open the floodgates to federal monies for every distressed industry across this country.
...
The American public was sold on the original TARP proposal based on the explanation that the banking industry held a unique and universal role in our nation's economy in providing credit to every business and family. If we now abandon that nexus to credit, every struggling industry would see itself potentially eligible for these funds.

Sanford, an opponent of congressional auto industry bailout legislation as well as the TARP bailout plan, clearly hates federal spending of any sort more than he does violations of legislative intent. But his argument that the auto industry should be denied TARP funds because the American public was sold on EESA based on the universality of the banking industry is disingenuous (and probably gives too much credit to the bill's loose language).

First, the American public was sold on TARP - the Troubled Assets Relief Program - based on the idea that the funds would be used to buy up, well, troubled assets. In the end, however, Treasury changed course and used most of the first $350 billion in funds to recapitalize banks.

Second, I'm well aware that the purpose of EESA is "to immediately provide authority and facilities that the Secretary of the Treasury can use to restore liquidity and stability to the financial system of the United States..." But EESA also must use this authority to promote "jobs and economic growth". It doesn't require too much of a stretch to consider TARP loans to auto companies part of an effort to restore liquidity and stability to the financial system. After all, if the auto companies could get sufficient loans through normal financial channels they would be in less trouble and Chapter 11 bankruptcy might be an option. It is, however, a stretch to see how TARP loans have thus far promoted jobs and economic growth (let alone preserved homeownership). Which purpose of TARP is really being undermined?

Finally, the $15 billion in remaining TARP funds might not be enough to prop up the auto companies. If more is needed, using the money to bail out the automakers begins to make even more sense. EESA only allows for release of the second $350 billion tranche of funds if the President provides a report to Congress that details "the plan of the Secretary" to spend the money. Congress must act negatively - that is, Congress must deny the President's request via a joint resolution - but the body still has the capacity to shape the second authorization of money. Indeed, several congressmembers warned Paulson that they would reject any request for the second tranche without additional conditions on how the money would be spent. A request for funds that included an auto bailout plan with conditions would make such rejection nearly impossible. Though most consider the requirement for the joint resolution to be a check on runaway use of TARP funds, it can also be viewed as a tool for Congress to shape how the additional funds will be used.

Of course, carefully considered congressional legislation to bail out the auto industry - not unlike the House bill passed last week - would have been preferable to using the TARP funds. But tapping into TARP is not only expedient - South Carolina's unemployment rate, for instance, would increase by almost 1% if GM failed - but is within the purview of the original legislation. All sorts of additional conditions can and should be attached to the use of TARP funds and still there would be decent arguments against using them: indeed, we opposed EESA and the initial authorization of funds. But dismissing loans to the automakers because of legislative intent is simply not one of these arguments.