Sherman described Geithner’s proposal as “TARP on steroids”. He noted that Section 1204 of the proposal allows the executive branch to use taxpayer money to make loans to, or invest in, the largest financial institutions to avoid a systemic risk to the economy.
Sherman compared Geithner’s proposal to the Troubled Asset Relief Program (TARP), the $700 billion Wall Street bailout adopted last year. Sherman noted that TARP was limited to two years, and to a maximum of $700 billion. Section 1204 is unlimited in dollar amount and is a permanent grant of power to the executive branch. TARP contained some limits on executive compensation and an array of special oversight authorities. Section 1204 contains absolutely no limits on executive compensation and no special oversight.
Sherman asked Secretary Geithner whether he would accept a $1 trillion limit on the new bailout authority; if the executive branch wanted to spend more, it would have to come back to Congress. Geithner rejected a $1 Trillion limit, insisting that the executive branch be able to respond without coming back to Congress.
Finally, Sherman noted that both TARP and the Treasury proposal have vague provisions under which taxpayers might possibly recover any money lost through a special tax on the financial services industry. Sherman noted that under the Treasury proposal, only the very largest institutions could benefit from a bailout, but the special tax, if ever collected, would fall chiefly on medium-sized institutions.
Thus, the medium-sized institutions will be at a competitive disadvantage for two reasons. First, the largest institutions will be able to borrow money more cheaply because their creditors will believe that if the institution is unable to pay, the taxpayers will. Second, if there ever is a bailout benefitting a very large financial institution, the tax will be imposed on the medium-sized institutions.
