What has happened to the US bailout package? Ask top Senate Democrat majority leader Harry Reid who said on Tuesday the Senate was likely to approve the $US350 billion package this week as President-elect Barack Obama asked outgoing President George W. Bush to request lawmakers to unlock the second half of the bailout package approved last October. But many are echoing their concern about where the money is going “What we really need is something with more details so that we can truly make those decisions about how the money is gonna be spent," said Democratic senator Ben Nelson who echoed general concern.
But you may recall I agreed with what was originally planned under U.S. Treasury Secretary Henry Paulson’s troubled Asset Relief Program, or TARP.eg that the $700 billion rescue package would be used to repurchase the toxic debt securities held by institutions which were causing the underlying credit crunch and resulting in stalled lending. The amount of toxic debt removed would have been 4/5 times the original value, since the securities to be disposed of through the reverse auction system would have been at a fraction of their original value. In the longer term there was good chance the funds would be fully recovered when the securities were finally liquidated or sold and hence the cost to the taxpayer could be zero. But instead of proceeding on that basis funds were channeled into direct type bulk payments to recapitalize banks and rescue companies including American International Group Inc and Citigroup.
Yet the continued barrier to private investment in financial institutions remains the very large quantity of these toxic assets which remain in the Balance Sheets of the major institutions despite write offs amounting to nearly a trillion dollars. Until this cancer is finally removed the patient will continue to be in a dire position. I think there is real risk the new stimulus package to be approved by incoming president –elect Barrack Obama will be far less effective unless the financial system is itself cleared of the mess with accompanying adequate regulatory control that ensures less reckless risk taking in the future.