That $700 billion rescue package for the banks is in danger of turning from a safety net into a slush fund. The scent of money has attracted lobbyists for every interest group in Washington. Now comes word that Treasury secretary Henry Paulson might dip into the fund to bail out struggling automakers GM and Chrysler. If car companies can qualify for a piece of that $700 billion, then there are no theoretical constraints on its use.

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The money was supposed to be used as part of a specific plan to buy distressed assets from troubled banks. Paulson testified that he needed the money urgently. Our financial ship could not right itself, he said, unless Congress gave him the power to take these troubled mortgage-backed securities off of the banks’ balance sheets. He proposed an auction by which the government would buy these assets from the banks at a fair price. He told Congress that taxpayers might even make money on the deal.

Congress passed a bailout bill — the Troubled Asset Relief Program, or TARP — giving Paulson everything for which he asked, but soon afterward he decided that an asset-purchase plan wouldn’t work quickly enough. He used part of the money instead to buy stock in the banks. This gave the banks firmer capital cushions with which to operate and calmed credit markets by signaling that the government would not let unjustified panic take down any more banks.

Unfortunately, it also signaled a certain flexibility that invited attention from other troubled sectors. First, the insurance companies pushed for inclusion, arguing that the financial system could not survive the collapse of a major insurance company. Having just put up $120 billion to save insurance giant AIG last month, Paulson could hardly say no. Then, the automakers showed up.

More specifically, GM and Chrysler showed up and asked the government to help finance a merger of the two companies. They say they need $10 billion to close the deal. Congress has already approved $25 billion in loans to the big three — Ford, GM and Chrysler — but that money is tied to the production of fuel-efficient cars and won’t be available for months.


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