Carmakers May Get Bank Bailout Cash: 5 Things to Know

After resisting the idea for some time, it looks like the Treasury Department may end up putting some of the $700 billion fund designed to stabilize the financial system into Detroit's automakers. The development comes after Congress failed to pass the $14-billion legislation intended to prop up the struggling companies.

From MarketWatch:

The Treasury Department said that it stands ready to make available funds to automakers until Congress has time to consider a long-term rescue package next year. </p>

"Because Congress failed to act, we will stand ready to prevent an imminent failure until Congress reconvenes and acts to address the long-term viability of the industry," said Treasury spokeswoman Brookly McLaughlin in a statement.

Separately, White House spokeswoman Dana Perino said funds to aid the sector might come from the government's $700 billion Troubled Asset Relief Program.

Here are five key implications of the development:

1. Flip-Flop-Filp: If TARP funds do reach the auto makers, get ready for congressional temper tantrums of epic proportions. Remember, Treasury Secretary Henry Paulson originally told Congress that the $700 billion would be used to buy up souring mortgages and other assets from banks. He has since taken sharp criticism for changing course and using the cash instead to take equity stakes in banking companies. By flip-flopping once again to allow carmakers to get in on the action, Paulson is a sitting duck for a fresh round of "flying-by-the-seat-of-your-pants" criticism.

2. New precedent: Treasury has thus far resisted the use of TARP cash for nonfinancial companies. But should the Bush administration give automakers the green light, it will set a new precedent for how such cash can be used. As a result, companies of all sorts—now being hammered by the credit crisis and recession—could end up clamoring for aid as well.

3. Second installment: Several weeks back, Paulson indicated that he would not go to Congress to request the second, $350-billion installment of TARP cash. But news reports have since surfaced suggesting that he might consider doing so. In a report released Friday, economists at Goldman Sachs suggested that using TARP cash for the automakers would increase the likelihood that Paulson would indeed return to Congress to ask for the second half.

Providing assistance to the automakers out of TARP funds could serve as a catalyst for a request to Congress for the final $350 billion installment of TARP funds. To date, TARP has dispensed $205 billion, but has earmarked $330 billion. While this would still provide Treasury room to provide the $14 billion in financing the automakers appear to need in the short term without exceeding the $350 billion in currently available TARP capacity, the cashflow needs of these companies are likely to rise if they file for bankruptcy. This could require the Treasury to commit funds that have already been earmarked for bank capital or the Temporary Asset Backed Security Liquidity Facility (TALF) or to make the request to Congress. If a request to Congress is made, the administration would need to outline its plans for the second $350 billion and Congress would then have 15 days to block the request.

4. Congressional Fire: Treasury has taken some serious heat what some consider a lack of oversight of the TARP implementation as well as flip-flopping on the program's original intent. As a result, Paulson will face a hostile group of lawmakers should he go back to Congress and request the second installment of the cash. "Most of my colleagues think they'll need police protection if they even ask for the money," House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, told the American Banker.

5. More Foreclosure Aid: One way that Paulson could win over congressional support would be by pledging to devote some TARP cash to foreclosure mitigation. Democrats on Capitol Hill have grown increasingly critical of the Bush administration's refusal to get more aggressive on this front. For example, check out this exchange from a recent congressional hearing, as reported in the American Banker:

Rep. Maxine Waters, D-Calif., advised Neel Kashkari, the Treasury assistant secretary for financial stability, against seeking the funds before agreeing to adopt Federal Deposit Insurance Corp. Chairman Sheila Bair's plan to promote loan modifications.

"Please don't come here and ask for another penny because, if you do, I'm going to work 24 hours a day with the same people that I worked with to support you to make sure that they do not support giving you another dime," she told Mr. Kashkari.