Friday, January 16, 2009

Cutting The TARP Free

The Senate vote to release the second half of the TARP fund went along party lines, with Democrats securing a 52-42 vote in favor of supplying Obama with $350 billion.
Obama praised lawmakers for their quick response to the crisis and thanked senators for helping him score an important victory in the first test of his administration's ability to forge consensus. The Senate voted 52 to 42 to defeat a resolution that would have blocked the second installment of the $700 billion financial rescue program, guaranteeing that the money will flow to the Treasury soon after Obama takes office Tuesday.

The House may vote on a similar measure next week, but its defeat in the Senate makes that effort largely symbolic.

Obama acknowledged that it "wasn't an easy vote" for many senators "because of the frustration so many of us share" over how the Bush administration managed the first half of the rescue fund, known as the Troubled Asset Relief Program, or TARP.

"Restoring the economy requires that we maintain the flow of credit to families and businesses," Obama said in a statement. "So I'm gratified that a majority of the U.S. Senate, both Democrats and Republicans, voted today to give me the authority to implement the rest of the financial rescue plan in a new and responsible way."

With news of a $825 billion financial stimulus package in the House ready to go, Obama may be able to sign a number of bills and executive orders into law within the first few weeks of his term and hit the ground running.

But will it be enough? I have strong doubts. The best Obama will be able to do is soften the blow for some Americans over the next 18-24 months. He may indeed choose to start with the effective nationalization of Citigroup and Bank of America and other large financials. With the TARP money freed up now, Treasury can move on this option and can move quickly. The fact is Citigroup is on its last legs, and is planning to split the company into a good bank and a bad holding company: a prime target for nationalization. BoA has snapped up another $20 billion from TARP 2 already. More banks will follow.

And six weeks from now when the TARP funds are gone and banks are still in trouble...then what?

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