Posted by Joseph Y. Calhoun, III

Barney Frank is proposing placing limits on the use of the second $350 billion tranche of TARP money (via WSJ Real Time Economics blog):

1) Substantial efforts to reduce foreclosures, including a version of a proposal pushed by Federal Deposit Insurance Corp. Chairman Sheila Bair to give incentives to lenders to make loans more affordable.

2) Require banks to tell Congress how money received from the government is being used.

3) Strict requirements that any money given to banks would have to be used to “promote systemic stability and increased lending,” including limits on executive bonuses. Also, there would be limits on how the money is used for acquisitions.

4) Use funds to offer mortgages at low and affordable rates.

5) Assist cities and other tax-exempt issuers who are having a hard time finding investors for their general obligation bonds.

6) Explicit authority to make sure funding is available for automobiles.

Okay, let’s cover these one by one:

1. Reducing foreclosures will just extend the time it takes for the housing market to reach a bottom. Over 50% of loans that were modified in the first quarter of last year were back in default within six months. Foreclosure mitigation is a waste of time.
2. The banks can tell Congress anything they want. Money is fungible. There is no way to seperate out what the bank uses TARP money for versus anything else they use capital for.
3. Using the money to make more loans? Isn’t that what got us in this mess to begin with? Limits on acquisitions will just delay the consolidation that is so badly needed in the industry.
4. How low a rate does Frank want? The 30 year mortgage rate is now 5% (or less in some cases). Does Frank want the banks to provide loans at rates that are unprofitable? To whom? Members of Congress?
5. Cities are having trouble finding investors for their bonds because their absurd pension promises ensure they are bankrupt in the long run. If the banks buy their bonds, who will bail out the banks when the cities default?
6. Haven’t we given enough money to Detroit? GMAC is offering 0% loans already. How could the banks possibly beat that?

The second tranche of TARP funds should not be authorized. The first tranche shouldn’t have been authorized. The TARP should just be ended and failure admitted. The sooner the better.