$700 Billion Bailout Turns in Congressional Slush Fund

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If the Democratic-controlled Congress is looking for a New Year’s resolution, here is a suggestion: No more bailouts.

The past year and a half was dominated by a string of taxpayer funded bailouts – from Fannie Mae and Freddie Mac, to AIG, to the big Wall Street TARP bailout, to the multiple bailouts of the auto industry. The bailouts started under a Republican administration, but were ratcheted up under the new Democratic administration. At every interval, taxpayers were told that these were vital, short-term fixes necessary to keep the economy afloat. To this day, President Obama’s chief economic adviser, Larry Summers, insists that the bailouts "were designed to be, and have proved to be, temporary."

But these short-term fixes have quickly turned into long-term programs with no end in sight. The bailouts have not ended with the closing of 2009’s door. In fact, just the opposite has happened.

Last week, while Americans were busy enjoying their holiday break, three bailouts received new leases on life.

First, the Treasury Department announced on Christmas Eve that it was lifting the $400 billion cap on government aid for Fannie Mae and Freddie Mae, paving the path for an unlimited government bailout of the mortgage companies.

For years, Congress refused to heed the warnings about Fannie and Freddie’s undercapitalization and structural problems. Led by House Financial Services Chairman Barney Frank, D-Mass., and Senate Banking Chairman Chris Dodd, D-Conn., many in Congress insisted that the mortgage giants were structurally sound and that any new regulations to rein in the companies were unnecessary.

Even when the federal government bailed out Fannie and Freddie in the summer of 2008, Congress refused to take advantage of the opportunity to impose critical reforms on the mortgage behemoth. Without fundamental reforms, Fannie and Freddie continue to hemorrhage money. Now Congress and the Obama administration are making the same fatal mistake again.

Second, last week, GMAC Inc., the auto and home lender, received its third bailout from the federal government in the span of a year. Taxpayers have already poured a total of $13.5 billion on two separate occasions into the auto company, but the additional infusion of $3.79 billion brings the total to $17.3 billion. This new infusion makes the U.S. government – and taxpayers by default – the majority stakeholder in GMAC, upping its share from 35 percent to 56 percent.

Third, Treasury Secretary Tim Geithner decided to extend the ultimate bailout program – the $700 billion TARP program – through October 2010, despite bipartisan opposition. When Congress passed the Wall Street bailout in October 2008, it gave the treasury secretary full discretion to extend the program after one year. A bipartisan group of Democrats and Republicans sent two letters to the secretary asking him to let the program expire at the end of the year. Instead, the administration is throwing the Wall Street bailout a lifeline.

From the very beginning, the $700 billion bailout has lacked the appropriate oversight, has been plagued by secrecy, and will probably be returned to taxpayers, according to Special Inspector General Neil Barofsky. Most importantly, the program has failed to do the very thing it was supposed to do from the get go – buy up toxic assets to provide financial stability. Now, the Obama administration wants to use the remaining TARP funds for other spending programs, completely unrelated to the country’s banking system.

The $700 billion Wall Street bailout is quickly turning into Congress’ very own personal slush fund.

These new bailouts are a bad idea for the same reason they were a bad idea when they were first initiated. They are fundamentally unfair to the taxpayers who are being forced to foot the bill for other people’s mistakes. They establish a dangerous precedent where large companies know they can engage in risky behavior because taxpayers will swoop in and save them when they fail. And they are unaffordable. With the 2009 deficit at $1.4 trillion and the deficit for 2010 scheduled to follow suit, there is no way the country can sustain the current bailout/spending trajectory.

Traditionally, the new year is supposed to be an opportunity for people to learn from their mistakes and turn over a new leaf. In the spirit of the new year and for the sake of taxpayers everywhere, now would be a good time for Congress to urge the Obama administration to end the bailouts once and for all.

Paid for by Toomey for Senate

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