Bailout Plan Growing Beyond Original Constraints

The $700 billion “financial rescue package” – read: bank bailout – approved by Congress in late September started as a simple three-page document authored by the Treasury Department. By the time it passed Congress, it had swelled to the typical several-hundred page bill lawmakers are accustomed to passing.

But the intent of the package was still relatively singular: invest the massive amount of approved taxpayer money on buying toxic assets from large banks. The thinking was that with the bad assets off the books, banks would start lending again; to themselves, to businesses and to consumers.

By most accounts, the federal government has not been buying up the bad assets – comprised primarily of subprime mortgage-backed securities – under the umbrella program created to do so: the Troubled Asset Relief Program (TARP), even though close to half of the approved $700 billion has been spoken for already.

Treasury Secretary Henry Paulson is giving an update to lawmakers Wednesday on the program. In early remarks, he noted that Treasury has shelved the idea of buying the mortgage assets in favor of shoring-up “the market for credit card receivables, auto loans and student loans.”

A large chunk of the money — $250 billion — to major banks went in the form of a capital infusion program. Days after the package passed Congress, Paulson and President Bush announced that rather than buy up bad assets, money in the program would be given directly to major banks in exchange for a public equity position in the businesses (“Banks Line Up for Government Money,” Oct. 28).

And still more are requesting money. Premium credit card giant American Express is rumored to have asked for $3.5 billion in the program, even though it did not meet all the requirements outlined in proposals. Coincidentally or not, American Express announced this week that it had been approved for bank holding company status by the Federal Reserve, which would qualify it for the capital purchase program.

Officially, more than $40 billion has also gone to keep insurer American International Group (AIG) afloat. But with new announcements concerning AIG’s total tab coming nearly every week, that actual total is likely to be much higher.

The auto industry is now angling for a cut of the $700 billion. Democratic Congressional leaders are pushing for help for carmakers, an industry that collectively employs more than 2 million Americans. There have been signals that any auto industry financial help would come from the bailout funds.

The accounts receivable management industry seemed poised for a major role in TARP. A lot of the modern ARM businesses grew from the government’s Resolution Trust Corporation, launched in 1989 to deal with the savings and loan crisis. Like TARP, the RTC bought bad assets from failing banks and attempted to liquidate them.

Many RTC executives found themselves opening similar companies in the mid 1990s after the crisis had passed. It is commonly thought that these companies laid the groundwork for the modern debt purchasing industry.

ARM professionals with RTC experience were anticipating a role for their firms in TARP. In fact, some formally banded together to create USA Recovery Group which positioned itself to act as “Special Servicer” under TARP (“Former Resolution Trust Corporation Experts Prepare for U.S. Financial Restructuring Effort,” Oct. 16).

ACA International, the association of credit and collection professionals, also offered their expertise to the government (“ARM Industry Players Pushing for Role in $700 billion Bailout,” Oct. 23).

With asset acquisition off the table for now under TARP, the ARM industry will have to wait and see if its role in the bailout will materialize.