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| Tarp's legacy five years on: panel verdict | Tarp's legacy five years on: panel verdict |
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| Sheila Bair: 'We should never want to use Tarp again' | Sheila Bair: 'We should never want to use Tarp again' |
| Going into the 2008 financial crisis, we didn't have all the tools that we needed to put financial institutions into an orderly, government-run bankruptcy process. We had such a process to resolve FDIC-insured banks, but we didn't have a process to deal with the AIGs, big investment banks, or the megabanks like Citigroup. With limited tools, we had limited choices. | Going into the 2008 financial crisis, we didn't have all the tools that we needed to put financial institutions into an orderly, government-run bankruptcy process. We had such a process to resolve FDIC-insured banks, but we didn't have a process to deal with the AIGs, big investment banks, or the megabanks like Citigroup. With limited tools, we had limited choices. |
| That said, we could have been more muscular about Tarp's requirements, or about cracking down on weaker firms. By 2009, we had stabilized the system – and that's when we could have started enforcing accountability. We should have forced the banks to clean up their balance sheets, take their losses, and get out there to lend, which is what the economy needed to restart. That was the original idea behind Tarp, and we didn't do that. | That said, we could have been more muscular about Tarp's requirements, or about cracking down on weaker firms. By 2009, we had stabilized the system – and that's when we could have started enforcing accountability. We should have forced the banks to clean up their balance sheets, take their losses, and get out there to lend, which is what the economy needed to restart. That was the original idea behind Tarp, and we didn't do that. |
| We never forced them to clean up their assets, probably because the losses would have been massive. The government was too focused on making the banks profitable again, so we didn't make them eat their losses. The rationale went that restored profitability would return confidence to the system. Instead, it brought public resentment and anger – and didn't help the economy. | We never forced them to clean up their assets, probably because the losses would have been massive. The government was too focused on making the banks profitable again, so we didn't make them eat their losses. The rationale went that restored profitability would return confidence to the system. Instead, it brought public resentment and anger – and didn't help the economy. |
| Banks with a lot of troubled assets on their books nurse those assets. They play it safe and don't go out and lend. We should never want to use Tarp again; institutions should stand on their own two feet. If they fail, they fail. | Banks with a lot of troubled assets on their books nurse those assets. They play it safe and don't go out and lend. We should never want to use Tarp again; institutions should stand on their own two feet. If they fail, they fail. |
| Now, under Dodd-Frank's Title II, (which gives the government orderly liquidation authority), government capital investments are banned and bailouts are banned. | Now, under Dodd-Frank's Title II, (which gives the government orderly liquidation authority), government capital investments are banned and bailouts are banned. |
| Shareholders and unsecured creditors take the losses if a bank fails, as they should. The government has the power to restructure a failed institution; to force it to deal with troubled assets; to break it up and downsize it; and to make it healthy enough to contribute to the real economy. | Shareholders and unsecured creditors take the losses if a bank fails, as they should. The government has the power to restructure a failed institution; to force it to deal with troubled assets; to break it up and downsize it; and to make it healthy enough to contribute to the real economy. |
| There were other forms of support, too. The FDIC was asked by the Federal Reserve and the Treasury to guarantee unsecured debt – debt without collateral – for these large financial institutions. We launched the Temporary Liquidity Guarantee Program which helped keep the system liquid. Large financial institutions borrowed heavily in the short-term credit markets, and they were having trouble renewing expired debt. We helped them access enough funding to remain operational. It was a risk, but it worked. | There were other forms of support, too. The FDIC was asked by the Federal Reserve and the Treasury to guarantee unsecured debt – debt without collateral – for these large financial institutions. We launched the Temporary Liquidity Guarantee Program which helped keep the system liquid. Large financial institutions borrowed heavily in the short-term credit markets, and they were having trouble renewing expired debt. We helped them access enough funding to remain operational. It was a risk, but it worked. |
| Combined with Tarp and the Fed's trillions in lending programs, the government collectively threw a lot of money at the big financial institutions. But Tarp investments used taxpayer money, whereas the FDIC – though backed by the government – obtains its finances by charging banks for deposit insurance. Therefore our program, at least, was met with less controversy. | Combined with Tarp and the Fed's trillions in lending programs, the government collectively threw a lot of money at the big financial institutions. But Tarp investments used taxpayer money, whereas the FDIC – though backed by the government – obtains its finances by charging banks for deposit insurance. Therefore our program, at least, was met with less controversy. |
| But the important point remains the same: it's appropriate in times of system-wide stress for government to intervene and make support available. Capital investments – like Tarp – are not a good idea. Government shouldn't take on ownership stakes in banks; it's not consistent with a market-based system. | But the important point remains the same: it's appropriate in times of system-wide stress for government to intervene and make support available. Capital investments – like Tarp – are not a good idea. Government shouldn't take on ownership stakes in banks; it's not consistent with a market-based system. |
| I don't want anyone who's big to have a giant "put" on taxpayers. It's problematic for big financial firms think that they can profit by taking a lot of risks, and if they lose money they can put it on taxpayers. There's no more damaging and destabilizing message the government can send than this idea that if you're big, the government will get you out of trouble. | I don't want anyone who's big to have a giant "put" on taxpayers. It's problematic for big financial firms think that they can profit by taking a lot of risks, and if they lose money they can put it on taxpayers. There's no more damaging and destabilizing message the government can send than this idea that if you're big, the government will get you out of trouble. |
| Is the financial system safe? I think it's safer than it was, but not as safe as it should be. | Is the financial system safe? I think it's safer than it was, but not as safe as it should be. |
| Sheila Bair is the former chair of the FDIC and the author of Bull by the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself. She is currently the chair of the Systemic Risk Council, co-founded by the Pew Charitable Trusts and the CFA Institute. This has been reproduced as told to Heidi Moore. | Sheila Bair is the former chair of the FDIC and the author of Bull by the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself. She is currently the chair of the Systemic Risk Council, co-founded by the Pew Charitable Trusts and the CFA Institute. This has been reproduced as told to Heidi Moore. |
| Christy Romero: 'These bankers lied, pure and simple' | Christy Romero: 'These bankers lied, pure and simple' |
| Yes, the financial system has stabilized, in part due to the Tarp bailout, but are we rid of the toxic corporate culture that led to the financial crisis? Not sufficiently. | Yes, the financial system has stabilized, in part due to the Tarp bailout, but are we rid of the toxic corporate culture that led to the financial crisis? Not sufficiently. |
| Excessive executive pay is still far too routine, in spite of corporate scandals and continued losses. The root cause of the financial crisis was a pervasive culture of rampant risk-taking and greed, combined with unchecked power. | Excessive executive pay is still far too routine, in spite of corporate scandals and continued losses. The root cause of the financial crisis was a pervasive culture of rampant risk-taking and greed, combined with unchecked power. |
| This destructive culture existed not only in the largest financial companies on Wall Street, but also in banks outside of Wall Street. | This destructive culture existed not only in the largest financial companies on Wall Street, but also in banks outside of Wall Street. |
| At SIGTARP, we have arrested and continue to arrest bankers who cultivated a culture of reckless arrogance, believing they were untouchable even as they broke the law. | At SIGTARP, we have arrested and continue to arrest bankers who cultivated a culture of reckless arrogance, believing they were untouchable even as they broke the law. |
| When their risky gambling went south these bankers lied, plain and simple. They hid bad loans and bad balance sheets through illegal accounting trickery. Some sought taxpayer dollars to fill in the holes on the fraud-riddled books. Some criminally concealed that the bank itself was funding their luxury lifestyles, believing they were entitled to the best even while they foreclosed on homeowners. | When their risky gambling went south these bankers lied, plain and simple. They hid bad loans and bad balance sheets through illegal accounting trickery. Some sought taxpayer dollars to fill in the holes on the fraud-riddled books. Some criminally concealed that the bank itself was funding their luxury lifestyles, believing they were entitled to the best even while they foreclosed on homeowners. |
| Regulators can change the rules of the road, but there will be those who specialize in loopholes, workarounds and criminal deception. At SIGTARP, we will continue to change corrupt culture the way we do it best, by putting as many rotten apples in jail as we can. | Regulators can change the rules of the road, but there will be those who specialize in loopholes, workarounds and criminal deception. At SIGTARP, we will continue to change corrupt culture the way we do it best, by putting as many rotten apples in jail as we can. |
| Tarp was not meant to finance criminal activity, but our jurisdiction is narrow, and law enforcement is but one effective method. Companies must change from within. Adopting strong board and management oversight, for instance, will help curb risk and greed to the point where a company can absorb its own losses without coming to taxpayers, hat in hand, again. | Tarp was not meant to finance criminal activity, but our jurisdiction is narrow, and law enforcement is but one effective method. Companies must change from within. Adopting strong board and management oversight, for instance, will help curb risk and greed to the point where a company can absorb its own losses without coming to taxpayers, hat in hand, again. |
| Christy Romero is the special inspector general for the Troubled Asset Relief Program. Before joining President Obama's Tarp team in 2009 as chief of staff, she was counsel to SEC chairs Mary Schapiro and Christopher Cox. | Christy Romero is the special inspector general for the Troubled Asset Relief Program. Before joining President Obama's Tarp team in 2009 as chief of staff, she was counsel to SEC chairs Mary Schapiro and Christopher Cox. |
| Neil Barofsky: "Capitalism without failure is like religion without sin" | Neil Barofsky: "Capitalism without failure is like religion without sin" |
| I believed at the time – and I continue to believe now – that action on the scale and scope of Tarp was absolutely necessary. Unfortunately, that notion gets conflated with the idea that we did everything in the appropriate manner – we didn't. Even in the heat of the moment, steps could have been taken to pursue the policy goals set by Congress. Those promises set the theme that Tarp wasn't just saving Wall Street; this was the start of a robust financial recovery. | I believed at the time – and I continue to believe now – that action on the scale and scope of Tarp was absolutely necessary. Unfortunately, that notion gets conflated with the idea that we did everything in the appropriate manner – we didn't. Even in the heat of the moment, steps could have been taken to pursue the policy goals set by Congress. Those promises set the theme that Tarp wasn't just saving Wall Street; this was the start of a robust financial recovery. |
| Ultimately, the Treasury lost sight of and ignored some of those policy promises. | Ultimately, the Treasury lost sight of and ignored some of those policy promises. |
| One was housing. There could be no Tarp without the Treasury's promise to Congress to do something about foreclosure crisis. Congress thought the Treasury would buy mortgages, and the Treasury all but ignored that direction. Dropping the ball on an effective mortgage modification program was one Tarp's major failures. | |
| Second, the idea of putting equity into banks was to restore lending in the economy. But there were no incentives to accomplish that goal or penalties for failure, so the Treasury largely ignored it. | Second, the idea of putting equity into banks was to restore lending in the economy. But there were no incentives to accomplish that goal or penalties for failure, so the Treasury largely ignored it. |
| The third problem was a "moral hazard be damned" attitude when shoveling money out to the banks, which provided for the explicit promise that they could be bailed out. Here we find ourselves, five years later, with banks like giant Frankenstein monsters, roaming the earth and wreaking havoc. Ultimately these giants might be Tarp's biggest legacy. | The third problem was a "moral hazard be damned" attitude when shoveling money out to the banks, which provided for the explicit promise that they could be bailed out. Here we find ourselves, five years later, with banks like giant Frankenstein monsters, roaming the earth and wreaking havoc. Ultimately these giants might be Tarp's biggest legacy. |
| Are we being safer, or are we really safe? I think we are safer, but not safe. Rather than deal with the fundamental problem of "too big to fail" institutions, Dodd-Frank nibbles around the edges of the status quo, which preserves the status of the megabanks. | |
| But these jumbo financial institutions are too large and too interconnected not to threaten the economy, and we should be worried about the lack of political will to break up their influence. Risk will mount higher and higher because of the proven "heads I win, tails you bail me out" construct, until sooner or later something must be done. We have to overcome the incredible, vise-like grasp of these institutions – not just on members of Congress, but on the executive branch as well. | But these jumbo financial institutions are too large and too interconnected not to threaten the economy, and we should be worried about the lack of political will to break up their influence. Risk will mount higher and higher because of the proven "heads I win, tails you bail me out" construct, until sooner or later something must be done. We have to overcome the incredible, vise-like grasp of these institutions – not just on members of Congress, but on the executive branch as well. |
| It's a myth that before Tarp, our system reflected free market capitalism; the presumption of a bailout is a major distortion of that system. In these three and a half years of Dodd-Frank, it's clear that the law is not sufficient. | It's a myth that before Tarp, our system reflected free market capitalism; the presumption of a bailout is a major distortion of that system. In these three and a half years of Dodd-Frank, it's clear that the law is not sufficient. |
| If you like free markets, you should want to break up these banks, and you won't want to give them this government subsidy, which Bloomberg puts at a value of $83bn a year. That's not free market capitalism, that's corporate socialism. Everyone's inner capitalist should be cheering to break up these institutions. | If you like free markets, you should want to break up these banks, and you won't want to give them this government subsidy, which Bloomberg puts at a value of $83bn a year. That's not free market capitalism, that's corporate socialism. Everyone's inner capitalist should be cheering to break up these institutions. |
| There's an apt saying: capitalism without failure is like religion without sin. | There's an apt saying: capitalism without failure is like religion without sin. |
| Neil Barofsky was the first special general inspector of Tarp and the author of the book "Bailout. He is an adjunct professor of law at New York University and a partner of the law firm Jenner & Block. This has been reproduced as told to Heidi Moore. | Neil Barofsky was the first special general inspector of Tarp and the author of the book "Bailout. He is an adjunct professor of law at New York University and a partner of the law firm Jenner & Block. This has been reproduced as told to Heidi Moore. |
| Guy LeBas: "Tarp provided a much needed shot of confidence" | Guy LeBas: "Tarp provided a much needed shot of confidence" |
| This week marks five years since Congress passed (on the second vote) and then-President Bush signed into law the Troubled Asset Relief Program, more affectionately known as Tarp. | This week marks five years since Congress passed (on the second vote) and then-President Bush signed into law the Troubled Asset Relief Program, more affectionately known as Tarp. |
| Originally envisioned as a fund that would purchase so-called toxic waste from bank balance sheets, the program quickly morphed into a mandatory capital injection for the nation's largest banks, an optional source of capital for other healthy depositories, and a bailout vehicle for automakers. | Originally envisioned as a fund that would purchase so-called toxic waste from bank balance sheets, the program quickly morphed into a mandatory capital injection for the nation's largest banks, an optional source of capital for other healthy depositories, and a bailout vehicle for automakers. |
| Tarp has evoked a range of responses, but the initial round of capital injections clearly provided a much-needed shot of confidence to a financial system at legitimate risk of collapse. | Tarp has evoked a range of responses, but the initial round of capital injections clearly provided a much-needed shot of confidence to a financial system at legitimate risk of collapse. |
| It's hard to overestimate the importance of confidence in the contemporary financial system. It underlies nearly every transaction, contract, or exchange of funds. In a financial society that crosses borders, our traditional form of confidence – personally knowing those to whom you're transferring cash –simply can't exist. | It's hard to overestimate the importance of confidence in the contemporary financial system. It underlies nearly every transaction, contract, or exchange of funds. In a financial society that crosses borders, our traditional form of confidence – personally knowing those to whom you're transferring cash –simply can't exist. |
| Financial technology essentially forced the development of a new form of trust: institutional confidence. The failure and sale of Bear Stearns, the failure of Lehman, and the hint of similar risks elsewhere threatened that system of institutional confidence which the global markets required to function. Tarp was the first step in restoring that institutional confidence. | Financial technology essentially forced the development of a new form of trust: institutional confidence. The failure and sale of Bear Stearns, the failure of Lehman, and the hint of similar risks elsewhere threatened that system of institutional confidence which the global markets required to function. Tarp was the first step in restoring that institutional confidence. |
| The need for Tarp in 2008 was quite clear, but the program's legacy is essentially non-existent. From a market perspective, Tarp staunched the bleeding of institutional confidence and played a clear role in re-laying the foundations for a 54% rebound in the S&P 500 in the last five years. From a cost perspective, Tarp as an investment has returned about $39bln in net profits, with $54bln still outstanding, according to ProPublica. | The need for Tarp in 2008 was quite clear, but the program's legacy is essentially non-existent. From a market perspective, Tarp staunched the bleeding of institutional confidence and played a clear role in re-laying the foundations for a 54% rebound in the S&P 500 in the last five years. From a cost perspective, Tarp as an investment has returned about $39bln in net profits, with $54bln still outstanding, according to ProPublica. |
| Both of these measures are now five years ex post facto, and don't do justice to the environment under which it was conceived. Moreover, the Dodd-Frank Act ostensibly banned all future Tarp-like bailouts, though it stands to reason that, in extreme circumstances, Congress could simply eliminate that provision. | Both of these measures are now five years ex post facto, and don't do justice to the environment under which it was conceived. Moreover, the Dodd-Frank Act ostensibly banned all future Tarp-like bailouts, though it stands to reason that, in extreme circumstances, Congress could simply eliminate that provision. |
| In assessing the ultimate need and value of Tarp, Treasury Secretary Hank Paulson summed up the situation in a way that captured the financial zeitgeist of 2008: | In assessing the ultimate need and value of Tarp, Treasury Secretary Hank Paulson summed up the situation in a way that captured the financial zeitgeist of 2008: |
| "Government owning a stake in any private US company is objectionable … yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable." | "Government owning a stake in any private US company is objectionable … yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable." |
| Guy LeBas is the chief fixed income strategist for Janney Montgomery Scott. | Guy LeBas is the chief fixed income strategist for Janney Montgomery Scott. |
| Anat Admati: "Tarp's legacy is disturbing" | Anat Admati: "Tarp's legacy is disturbing" |
| Authorized through Tarp, the US Treasury invested hundreds of billions of funds in financial institutions. Meanwhile, only $8.6bn were directed at the "troubled assets" of distressed homeowners, and some funds were abused. | Authorized through Tarp, the US Treasury invested hundreds of billions of funds in financial institutions. Meanwhile, only $8.6bn were directed at the "troubled assets" of distressed homeowners, and some funds were abused. |
| Combined with many loans and guarantees programs administered by the Federal Reserve, the FDIC and the Federal Reserve Bank of New York, Tarp helped calm the panic that followed Lehman's bankruptcy. The direct cost of Tarp will likely be relatively small, but so were its benefits; it was not the best use of taxpayer money. | Combined with many loans and guarantees programs administered by the Federal Reserve, the FDIC and the Federal Reserve Bank of New York, Tarp helped calm the panic that followed Lehman's bankruptcy. The direct cost of Tarp will likely be relatively small, but so were its benefits; it was not the best use of taxpayer money. |
| For example, Tarp invested about $160bn in the largest 19 US banking institutions, just a bit more than the $131bn payouts that these institutions had made to their shareholders just in 2006-2008 alone. Remarkably, more than $70bn were paid out to shareholders between summer 2007, when problems in mortgage markets were evident, and early 2009, through the worst of the crisis. Had the banks invested this money instead of paying it out, they would have been able to better handle losses, and the credit crunch that motivated Tarp would have been less severe. | For example, Tarp invested about $160bn in the largest 19 US banking institutions, just a bit more than the $131bn payouts that these institutions had made to their shareholders just in 2006-2008 alone. Remarkably, more than $70bn were paid out to shareholders between summer 2007, when problems in mortgage markets were evident, and early 2009, through the worst of the crisis. Had the banks invested this money instead of paying it out, they would have been able to better handle losses, and the credit crunch that motivated Tarp would have been less severe. |
| Overhanging debt can prevent banks from lending again, in the same way it can cause a distressed homeowner to avoid investing in maintenance. Tarp did little to improve lending because it actually placed more debt burdens on its recipients. Most banks rushed to repay Tarp to avoid the restrictions on executive and shareholder payouts that accompanied it. Remaining highly indebted, banks likely continued denying worthy loans, choosing riskier investments with more "upside" instead. | Overhanging debt can prevent banks from lending again, in the same way it can cause a distressed homeowner to avoid investing in maintenance. Tarp did little to improve lending because it actually placed more debt burdens on its recipients. Most banks rushed to repay Tarp to avoid the restrictions on executive and shareholder payouts that accompanied it. Remaining highly indebted, banks likely continued denying worthy loans, choosing riskier investments with more "upside" instead. |
| The Federal Reserve is repeating past mistakes. It's failing to clean up unrecognized losses and ensure that the banking system can better – and more consistently – support the economy, without needing support or causing harm. The banks are not as strong as they, or "stress tests", suggest, and the system is not in good enough shape to deal with crises such as those in Europe, failed municipalities or rising interest rates. | The Federal Reserve is repeating past mistakes. It's failing to clean up unrecognized losses and ensure that the banking system can better – and more consistently – support the economy, without needing support or causing harm. The banks are not as strong as they, or "stress tests", suggest, and the system is not in good enough shape to deal with crises such as those in Europe, failed municipalities or rising interest rates. |
| Tarp's legacy is disturbing. Most of those who got into financial trouble because of "troubled assets" suffered severe consequences, and many innocent people are still suffering the collateral damage. Those who aren't are the bankers who took excessive risks and the policymakers who did not control the system effectively. They would prefer us to think that everything is fine now, when in fact much too little has changed. | Tarp's legacy is disturbing. Most of those who got into financial trouble because of "troubled assets" suffered severe consequences, and many innocent people are still suffering the collateral damage. Those who aren't are the bankers who took excessive risks and the policymakers who did not control the system effectively. They would prefer us to think that everything is fine now, when in fact much too little has changed. |
| Anat Admati is the George GC Parker Professor of Finance and Economics at Stanford University's Graduate School of Business. She is, along with Martin Hellwig, the author of the book The Bankers' New Clothes. | Anat Admati is the George GC Parker Professor of Finance and Economics at Stanford University's Graduate School of Business. She is, along with Martin Hellwig, the author of the book The Bankers' New Clothes. |
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