A lot of people have been looking at the changes to compensation limits included in the stimulus bill and wondered: “Hey can they do that?” Can the government really unilaterally change the terms of the deal with banks that have already taken TARP funds? Isn’t that a bit unfair?
As my father used to say, life is unfair. And so is the TARP. Included in each of the contracts the banks signed with the government to get TARP funds is a short section that makes it clear that they are now completely at the mercy of the government.
TARP’s “Securities Purchase Agreements” each contain a Trojan Horse clause, Section 5.3, stating that Treasury may “unilaterally amend” the agreement to comply with changes in federal statutes. In short, Congress has the power to retroactively amend the terms of the bailout…
Keep in mind that this has a plus side. It allows the government to quickly react to any shenanigans from banks to abuse the TARP program. The government is at a huge disadvantage when negotiating deals with investment bankers, folks who do this kind of thing for a living. Allowing the government to revisit the deals once they have begun to operate is a great advantage.
Unfortunately, our government doesn’t operate as cleanly as all that. Rather than clamping down on banking shenanigans, the ‘blank check’ clause allows special interests to step in and demand concessions from banks. We’ve already seen the begining of political lending when Illinois Governor Rod Blagojevich used TARP to pressure Bank of America into paying over a million dollars to a union at a window-maker’s shop.
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.