Wall Street bailout: a win for Main Street?

The TARP covers financial institutions, but average Americans are still waiting for help.

Turmoil in the US stock market, born initially from the subprime mortgage lending crisis, has battered financial markets around the world, eroding investor confidence. Seeking to stabilize the situation, Congress approved a hefty $700 billion bailout package Oct. 3. The plan includes an initial $250 billion allocation, strong congressional oversight, and restrictions on executive compensation.

Also known as the "troubled asset relief program" (TARP), the bailout plan was initially intended by the US Treasury to buy toxic, mortgage-related assets from banks through a complicated auction system. But it quickly evolved into a direct bank-investment plan, paralleling a $3 trillion bank recapitalization plan put in place by European countries.

Using their new TARP authority, the US Treasury purchased preferred non-voting equity shares in nine major US banks with the expectation of collecting an initial 5 percent dividend and 9 percent at the end of five years. In future weeks, the Treasury will purchase shares in hundreds of smaller regional banks.

Both measures, a capital infusion into banks and the later purchase of troubled mortgages, aim to increase liquidity in financial markets. TARP also temporarily raised the limit of deposits insured by the FDIC and the National Credit Union Administration from $100,000 to $250,000 per account.

While TARP has mainly focused on supporting financial institutions, it has also changed the financial environment for individual investors. With the demise of investment banks, the elevation of five banks to dominant first-tier status, and greater federal guarantees on money-market and CD investments, Americans might consider certain financial moves:

•Revisit your banking relationship. With consolidations creating larger banks, look for changes in the level of services, fees, and credit availability.

•Those with hefty savings can consolidate CD holdings to benefit from the new $250,000 deposit guarantee ceiling.

•Reconsider the role of money-market funds in your portfolio. Recent moves by the Fed have made them secure, but year-end capital gains distributions, despite steep market declines, may be a tax risk if the investments are held in a taxable account rather than a tax-deferred retirement account, such as a 401(k).

•Maintain high cash reserves, given the volatile stock market and uncertain employment picture.

So far, the TARP and a series of aggressive monetary actions by the Fed has failed to alleviate problems on Main Street. Many Americans feel that their problems have only intensified. Job losses have exceeded 900,000 since January. An estimated 16 percent of homeowners have negative equity in their houses and hundreds of thousands of Americans are on the verge of foreclosure.

Despite billions of dollars of assistance for financial institutions, credit availability remains scarce and volatile markets are ravaging even prudent investment portfolios. Major public pension funds have faced 20 percent declines in their investments. Baby boomers, who have been forced to delay retirement due to depleted retirement accounts, have received no relief from the TARP.

In an October Associated Press poll of probable voters, more than half of those surveyed expressed approval of the $700 billion bailout for banks, but a greater majority questioned why more has not been done for Main Street. Only 15 percent of those polled expressed belief that the country is moving in the right direction, with one-third worried about losing their jobs, nearly half reporting that they are unable to keep up with mortgage and credit-card payments, and 70 percent distressed by the losses in their retirement and investment portfolios.

Fed Chairman Ben Bernanke agrees that not enough has been done for Main Street. In comments before the House Budget Committee last week, he signaled support for another stimulus package to address the weakening economy. "Consideration of a fiscal package by Congress at this juncture seems appropriate. It should consider including measures to help improve access to credit by consumers, home buyers, businesses, and other borrowers," he said.

After the November elections, lawmakers will weigh options for a second stimulus plan that could include mortgage assistance for homeowners at risk for default, increased infrastructure spending, direct assistance to back state and local government debt, a boost to unemployment benefits, and possible tax breaks for businesses.

At that point, Main Street may finally be winners.

• Dr. Kathleen Connell is a professor at Haas Graduate Business School, University of California, Berkeley.