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May 22, 2009, 09:46 AM ET
A Tale of 2 Bailouts (Cont.)
We have two kinds of bailouts going on: one for banks, one for the auto industry. I wrote last week about bank executives skittering to leave the TARP program — to escape control and executive pay limits — even if it hurts the bank’s health and the shareholders. Now the banks want even a better deal. Yesterday Bank of America, one of the nations most troubled banks, announced it is selling its most valuable assets and new shares to raise cash and break off with the federal government.
The U.S. government signals this is OK since the Treasury is allowing banks to buy back valuable assets — warrants — for cheap.
This is how it works. In exchange for TARP funds banks gave the government the option (warrants) to buy bank stock at certain prices. When the prices go up, this option will be worth a lot. That was supposed to be the upside for the taxpayer when the Treasury gave the banks the bailout loans in the first place. So letting the banks buy back the warrants at cheap prices helps banks and hurts the taxpayer.
The question is if BofA pays back the TARP shouldn’t the U.S. taxpayers have a right to a return for making the company’s survival possible. Bailout money should have a cost. After all the Treasury is extracting a cost on the Midwest and auto workers by encouraging GM — another taxpayer debtor — to get profitable even if it means importing cars made in China! This not only hurts workers, but entire Midwest cities.
As former IMF economist and professor Simon Johnson says, when there is a struggle between finance, taxpayers, and workers, finance comes out on top.
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