Richard's Real Estate Thoughts: GMAC to receive TARP funds - announcement made last night

The Treasury announced last night details of the plan to use TARP funds to bolster GMAC.  The plan calls for $5 billion in preferred stock, with an 8% dividend. The plan also provides for an additional preferred stock purchase later.

This move was expected, but it just further confirms the direction away from the initial purpose of the TARP funds.  In order to qualify for the funds GMAC is reorganizing as a bank holding company. To help with this reorganization, the Treasury is lending General Motors an additional $1 billion, over and above the auto manufacturer bailout bucks.

As stated in some previous posts, this use of Treasury TARP funds seems opposed to the stated purpose for which Congress authorized them.

This use of TARP funds leaves the foreclosure problems unaddressed.

The Treasury announcement of this move supporting GMAC and GM ends with a statement that "Treasury will work with Congress and the President-elect's transition team on the appropriate timing for release of the remainder of the TARP's funds to support financial market stability."

This is a smooth bit of rhetoric to persuade our thoughts that TARP was originally designed to be used to prop up struggling companies however deemed necessary at the unrestricted discretion of the Treasury Secretary.

I do not see much evidence that these moves are supported by Congress. Most comments seem to call the moves, if not the motives, in question.

As for the intended use of the TARP funds, the language in the law provides the Treasury Secretary authority  "to establish the Troubled Asset Relief Program (or ‘‘TARP'') to purchase, and to make and fund commitments to purchase, troubled assets from any financial institution, on such terms and conditions as are determined by the Secretary, and in accordance with this Act and the policies and procedures developed and published by the Secretary." 

Here is the full text of the law - all 169 pages. 

It may very well be that the Treasury's action are necessary, but they seem to me to be directly contrary to the congressional authorization.  If the actions are necessary, they should have no difficulty receiving Congressional approval for additional funds. TARP funds were authorized to purchase troubled assets.

 Congress voted not to bail out the automakers. I am not stating whether that was right or wrong, but it seems very wrong for the Treasury to misuse congressionally granted authority in the TARP program in ways that are counter to the stated will of Congress. So much for working with Congress for the appropriate release of TARP funds. 

In using the funds in this way, the Treasury seems to have failed to address the goal of the TARP authority - to purchase and to rehabilitate  non-performing loans so that they could be sold again to the market place. Congress was persuaded to provide TARP funds based on the prospect of restoring financial market stability by removing "illiquid assets are clogging up our financial system" and by assisting homeowners to avoid foreclosure and stay in their homes.

These actions by the Treasury have left the non performing assets to "clog our financial system," have left families and neighborhoods without assistance to face the loss of their homes, and have made an irreversible move towards nationalization of our financial markets and institutions. 

Whether these moves are the right ones or not may be known at some future time. These moves however have at least stretched the mandated TARP purpose, if not completely overstepped that mandate. These moves have pushed forward a program of wide spread nationalization at the discretion of one person.

In the meantime, many families are left with unaffordable homes, unable to refinance the mortgages, unable to sell the home. Many strong potential buyers are not able to purchase with current guidelines. These problems are not remedied by historically low interest rates.

I would really love for someone to help me understand the rationale and justification for these moves by the Treasury Department. None of the points I have heard made so far provide me much assurance that we are moving in the right direction and that we are using our $700 billion in ways that are best for our overall economy.

Richard Smith
American Acceptance Mortgage, Inc
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