Bush auto bailout plan pulls money from under the TARP

The USD13.7 milliard is the sum that US President Bush says the Federal Government will lend to the US automotive industry to stave off certain collapse. But it comes with strings - one of which is that it must be repaid in three months if the companies - and the unions - have not come up with a plan that will restructure the companies so as to make them competitive with incoming manufacturers.

The details of the plan are not what's important here, however. It's where the money is coming from - and why.

When the Senate agreed, under protest, to make up to USD700 milliard available to the US financial services industry, it was not intended to support the banks' continued profligacy but to provide funds to keep them afloat, and to enable them to fix bad lending decisions - and to support industry. USD350 milliard of that money was held back for payment on application in a bizarre re-enactment of the Bush administration's handling of money in Iraq: send loads over, flood the place with dollars and then when it's stabilised do the paperwork and then make money available on merit.

Well, the throwing money at the problem phase is over in the USA and many are more than angered that the recipients do not appear to have been either contrite over their role in the mess they are in - nor obviously willing to pull in their horns. AIG's parties whilst taking government lending have already become the stuff of legend - except that most of the stories are true not legendary.

And AIG is not the only company that is seen as wasting taxpayers' money at a time when taxpayers need it themselves.

The tide is turning against the banks - not just in homes across the company but in government. With eyes across the pond, Bush has seen the reports that say that his little friend Gordon Brown, who famously claimed to have saved the world, has thrown double the amount of money at the banking sector that Bush did - but the result has been a tightening of lending criteria by banks. In short, the money has not reached the parts other money could not reach.

Bush, who as of Friday had just one month remaining in the Oval Office made a bold decision: bypass the banks, use some of the remaining USD350 milliard and tell the banks one simple message - if you don't use the money for the good of the economy, we will wrest control of it from you.

Whatever good, or bad, reasons may have been behind his decision and timing that one message is probably the most important - and the most overlooked.

The Federal lending to the motor manufacturers is, at its most basic, a way of circumventing the blockage that many economists think is at the heart of the current financial crisis - a shortage of lending.

And whilst others, including Treasury secretary Paulson think that a hand-out is a bad idea, Bush has at least managed to put pressure onto the banks with the message that the government is prepared to put taxpayers' money at risk where the banks are unwilling to do so.