Captain Morgan Gives TARP Legislators A Massive Hangover

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As the TARP legislation was being thrown together and rubber stamped last September, Captain Morgan had a lot more to smile about. Buried in the midst of the tax breaks that were extended last fall was a seemingly innocuous one relating to a federal excise tax on rum. In 2008, Diageo Plc (which owns Captain Morgan) agreed to billions in tax breaks from the governor of the USVI in exchange for moving its rum production from Puerto Rico to St. Croix. Now, through that agreement and the TARP extension of a rebate on part of the excise tax, Diageo stands to gain about $2.7 billion in benefits over the next 30 years. No doubt somewhere on the desk of Max Baucus (who recommended the tax breaks) there's a cocktail napkin that reads 'The Captain was here'.
Bailout of U.S. Banks Gives British Rum a $2.7 Billion Benefit [Bloomberg]

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The Federal Reserve has this new paper out about TARP that does a bit of highly suggestive eyebrow raising about some banks that shall remain nameless. They start from the awkward fact that TARP wanted everything in one bag but didn't want the bag to be heavy, or as they put it: The conflicted nature of the TARP objectives reflects the tension between different approaches to the financial crisis. While recapitalization was directed at returning banks to a position of financial stability, these banks were also expected to provide macro-stabilization by converting their new cash into risky loans. TARP was a use of public tax-payer funds and some public opinion argued that the funds should be used to make loans, so that the benefit of the funds would be passed through directly to consumers and businesses. So you might reasonably ask: were TARP funds locked in the vault to return the recipient banks to financial health, or blown on loans to risky ventures, or other? Well, here is Figure 1 (aggregate commercial and industrial loans from commercial banks in the U.S.): So ... not loaned then. But that's not important! The authors are actually looking not primarily at aggregate amounts of loans but at riskiness of loans and here's what they get:

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