Crony capitalism in U.S. banking bailout should end

There is no way to look past the way that the U.S. TARP (Troubled Asset Relief Program) has been administered and not understand we are seeing crony capitalism at work.  One only need look at the way the British are doing things to see a true banking bailout which limits moral hazard and regulates against poor behavior.

President-elect Barack Obama has signaled he intends to bring the same methods to the United States.  These are issues I have mentioned in prior posts regarding using historical precedents as a guide to administering America’s TARP program and setting up a framework for a comprehensive banking crisis solution.  The following steps are what are still needed in the U.S.:

  1. Comprehensive overview of all US Financial Institutions to determine solvency of each individual company
  2. Separation of good assets from bad assets in order to fully restore inter-bank lending confidence.
  3. A limit in executive compensation and expenditure oversight at financial services companies which are nationalized.
  4. Partial replacement of executive management at nationalized firms.
  5. Elective choice given to banks as to whether to receive TARP funds at all.
  6. An elimination of all dividends and stock buybacks at companies receiving government assistance.
  7. A prohibition on acquisitions of solvent banks by firms receiving TARP funds (The acquisition of NCC by PNC Bank and of Chevy Chase Bank by Capital One Financial after the acquirers received TARP funds are two acquisitions that should never have happened.)

Ben Bernanke addressed some of points 1 and 2 in his speech at the LSE (London School of Economics) today.  Barack Obama’s team has now addressed many of the remaining points.

Barack Obama will order the Treasury Department to limit executive compensation and dividend payments by financial institutions that get “exceptional assistance” from the financial rescue fund, Larry Summers, a top economic adviser to the president-elect, told Congress.

Summers sent a letter to congressional leaders yesterday outlining the conditions that Obama supports in tapping the second half of the $700 billion Troubled Asset Relief Program.

“Those receiving exceptional assistance will be subject to tough but sensible conditions that limit executive compensation until taxpayer money is paid back, ban dividend payments beyond de minimis amounts, and put limits on stock buybacks and the acquisition of already financially strong companies,” he wrote.

Obama wants more of the money funneled to community banks and small businesses, as well as steps to loosen credit for individuals and help for homeowners facing foreclosure, said Summers, picked by Obama to head the White House National Economic Council. He also wants greater oversight of the aid program and a public accounting of how the money is spent.

Are we witnessing the end of crony capitalism in how The TARP funds are distributed? Time will tell.

Sources Obama to Limit Dividends From Banks Getting ‘Exceptional’ Aid –

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Originally published at Credit Writedowns and reproduced here with the author’s permission.