How Banks Used The Bailout

There's a report out today from Neil Barofsky, the special inspector general overseeing the $700 billion bank bailout (aka "TARP"). He's unhappy with how the banks have been spending the money and calls for better oversight in how the money is spent. According to his report, however, the money seems well spent to me, and I'm not sure what greater oversight would do.

First, how was that money spent? Barofsky thinks on the wrong stuff. Here's where the money went, via the Wall Street Journal:

The report provides a broad glimpse at how TARP recipients used federal capital. It shows 43% of the banks used the money to meet capital or reserve requirements set by regulators. Four percent used it to complete acquisitions, often in transactions facilitated by the Federal Deposit Insurance Corp. About a quarter reported investing in mortgage-backed securities affiliated with federal housing agencies, and 14% reported using the money to pay down other debt obligations.

Unless my calculator is broken, that only adds up to 86%. So maybe the other 14% was legit according to Barofsky. Yet these other reasons seem legitimate to me.

My understanding when banks were originally bailed out wasn't that the money would go towards new lending -- it was to fix their balance sheets so that they could survive. All of these uses for the funds contributed to fewer banks failing. I think anyone who really believed that the bailout would result in money going straight into the hands of consumers through lending was deluded. Banks needed this money to merely go on, not so they could ramp up lending.

The idea that greater oversight should be sought seems good on the surface. But only until you remember that money is fungible. For example, a bank can simply claim that every dollar of bailout money is used for lending, paying down debt, enhancing capital requirements, etc. Those big salaries? That's coming from other money -- not the bailout. In reality, money is money. To determine where each dollar goes, one dollar would have to be different another, and they aren't. Any attempt at creating greater oversight, while noble, will probably be useless, since money is fungible.