Friday, the Internal Revenue Service suspended the present law Section 382 denial of loss deductions in the event of a "takeover" of a financial institution by Treasury via its investment of TARP funds. This will allow Citigroup to keep $38 b. of loss deductions.  A Treasury spokesman said Section 382 was never intended to take away losses when the takeover was by the government. True enough. Section 382 was intended to stop corporate raiders from taking over unprofitable firms just for their tax deductions of in the 1980’s. Nonetheless, this is a back door way for Treasury to capitalize financial institutions. It just goes to show, that when circumstances change dramatically, the law changes with them.  This morning’s Washington Post article lays it all out.

Elizabeth Warren -- I feel your pain.

It was just about a month ago that Bruce noted that the health care bill then being considered by the Senate was close to 2000 pages long and that those who insisted members of Congress read every page didn't understand how bill drafting worked (I'm being kind here but just work with me).

Those of you who were critical of that bill because of its length seem to forget that you similarly criticized TARP for being too short.  The original version of TARP drafted by Bush Treasury Secretary Hank Paulson that was sent to Capital Hill was slightly less than 3 pages using what I think was 14 point type and at least double spacing. 

And it was projected to cost about $233 billion per page, that is, $700 billion and  said the little more than "Give us the money get out of our face."

As enacted, TARP was more than 10 times longer than what Paulson requested, largely because it added a number of oversight procedures and triggers.  The total cost was the same but the cost-per-page fell to around $17 billion.

I have it on good authority from Hill sources that Treasury Secretary Tim Geithner will send Congress the letter tomorrow morning that will extend the Troubled Asset Relief Program through October 3, 2010.  There's no surprise here, except the precise timing and that some deficit hawks and bailout opponents had raised hopes that more deficit reduction was on the way.  The timing is necessitated by the need for the House to find $10 b. to pay for the financial reform bill, H.R.4173.  When the House Rules Committee finishes its work tomorrow, that bill will reduce the $700 b. TARP authority to $680 b., which at a 50% rate under the credit reform scoring rules will yield the requisite $10 b.  When the House jobs bill is tacked onto the defense appropriation conference report next week, TARP will be reduced just enough to pay for that too. 

The New York Times, Wall Street Journal, and Bloomberg all had the same story this morning and obviously received the same briefing/leak from the White House over the weekend.  The bottom line is that the administration is saying that the cost of TARP is now projected to be about $200 billion less than was estimated earlier this year.

I can't tell from the reports whether this means that total TARP spending or the budget impact will be that much less.  They're not the same.  TARP is scored on a credit reform basis so only the net present value of the expected total cost shows up in the budget.  This is why the $750 billion in additional funds included by the administration in its 2010 budget just in case the financial sector needed more support only increased the deficit by $250 billion.

Don't read this from today's Washington Post if you have a weak stomach or blood pressure problems.  In a remarkable story, Neel Kashkari, the many who conceived of and ran TARP for Bush Treasury Secretary Hank Paulson, admits that the $700 billion figure came "out of the air."  Here's the money quote:

"Seven hundred billion was a number out of the air," Kashkari recalls.... "It was a political calculus. I said, 'We don't know how much is enough. We need as much as we can get [from Congress]. What about a trillion?' 'No way,' Hank shook his head. I said, 'Okay, what about 700 billion?'"

It started with a Wall Street Journal story from yesterday that said the White House either is considering not spending all of the TARP money that remains unspent or doesn't think it's going to need to spend the funds because the situation is improving faster than expected.  As a result, it may be able to lower the projected 2010 deficit and the amount the government will have to borrow.  Here's the money quote:

Agreeing not to spend a certain amount of TARP money will enable the White House, in its budget projections, to assume less money out the door and, therefore, less debt issued. The move would also reduce the deficit by an unknown amount since a certain level of spending and borrowing is already factored into estimated future deficits. (Italics are mine).