No program to bail out big banks was ever going to be popular. And, with a $700 billion price tag, TARP came with some serious sticker shock. The right hated it, the left hated it. It basically transformed Ron Paul’s Tea Partiers into a national movement. But, you know what? I supported the bill when it was proposed, and I supported Geithner’s Plan to transform it. And I’m feeling vindicated right now, because it’s looking increasingly likely that the TARP program will turn a profit for the taxpayers. Officially the administration is still being cautious and saying the worst-case scenario is that we’ll lose $60 billion. But that’s just political cover. If we sold all our AIG shares at today’s price, we’d be in the black.
The foreclosure element of TARP has totally failed, and that’s a major, major problem. But the bill probably averted 20% or higher unemployment, the loss of the auto industry (or at least its strong unions), and the collapse of our financial system. And it did it without it ultimately costing the government any money. That is a remarkable accomplishment. It’s almost astounding.
However, it’s pretty hard to get any credit for it when the landscape is still pitted with the wreckage of the crash. We still haven’t figured out a way to patch the hole that let all the air out of balloon. How does reinflating the balloon even make sense when it was all based on an illusion?
So, people aren’t impressed that the banks are profitable again. In fact, that just pisses them off more, because the people haven’t recovered. Their mortgages are underwater. They’re unemployed. They aren’t profitable.
Nevertheless, those who voted for TARP made the correct decision. Those who wanted to nationalize the banks in the early days of the Obama administration were wrong. If they had done that, we would have wound up eating most of the money used in TARP instead of recouping our investment in two short years.
Here’s a review of my writing from the Spring of 2009.
The False Choice on Nationalization
A Look at Jane Hamsher’s Argument
Another Post on the Same Subject
From the last of those, a refresher on the mind of Paul Rosenberg (a moran):
Let’s start with a simple premise. If you are being critical of the Geithner Plan and calling for nationalization in its stead, the criticisms that you have about the Geithner Plan should not be equally true of what happens when you nationalize. There should be things that turn out more favorably or that involve less risk in nationalization. Nationalization should be a better deal in some sense. If all the criticisms you have about Geithner’s Plan are basically true for what happened with IndyMac, then there’s a problem with your analysis.
Now, in the case of IndyMac, the taxpayer took an anticipated $10.7 billion haircut because, in part, they are on the hook for 80% of future defaults on shitty mortgages. Under Geithner’s Plan, the taxpayer is on the hook for 85% of the toxic assets. So, that’s a five percent difference. In the case of IndyMac, the taxpayer provided (presumably) some sweetheart financing in the form of a $9 billion loan. We hope, but are not guaranteed, of getting that money back.
We nationalized IndyMac and we have no potential upside at all. There is no scenario where the taxpayer doesn’t lose billions of dollars on the IndyMac deal. In the Geithner Plan, we make money if the investors make money. In both cases, we assume most of the risk and we provide most of the capital, and we give extremely favorable terms to the investors.
Now…you might complain about both scenarios. You might argue that IndyMac was done wrong and we can do future nationalizations in a way that doesn’t lose the taxpayers $10.7 billion dollars. But if we nationalized a bank that is fifty times bigger than IndyMac and we lost the same percentage as we did on IndyMac, that would be a $535,000,000,000,000 loss. You can double that if we nationalized two banks of that size.
I don’t want to make a false argument that we will necessarily lose that kind of money by nationalizing or that we couldn’t have done better with IndyMac, or that everything would move according to scale, but we have to think about these things more carefully. There could be perverse incentives built into the non-recourse loans that are provided in the Geithner Plan and those incentives could result in a loss of money to the taxpayer. There’s risk involved in this plan. But to suggest that there isn’t staggering risk and unfairness in any conceivable nationalization plan is just wrong and I will keep pointing that out as long as I see the same arguments coming out of Left Blogistan.
So, yeah, we’re better off because we didn’t nationalize the banks. That doesn’t make it any easier to be unemployed or have your house in foreclosure, but at least we got our money back from the banks.
What about the opportunity cost (e.g. could have used that money for bigger stimulus maybe – and getting interest back from TARP loans doesn’t address that)?
Other than question, I agree.
If you’re making an argument that the stimulus should have been bigger, that argument is generally made on the basis that the recession etc. left a $2 trillion or thereabouts hole in the economy. On this basis it is wrong to think of TARP as separate from the stimulus in that – whatever it’s flaws – it injected $700 bn into the economy at a time when it was needed urgently. It had an immediate stabilising effect on the markets and the banks – in that falling absolutely off a cliff was averted. Do you think that if the economy had fallen off the cliff in late 2008 that any stimulus enacted in early 2009 would have had the same effect as what actually was enacted? Put it this way – and this is unscientific I concede – if there had been no TARP, the stimulus bill would have had to have been MORE than $700 bn larger than it was just to have had the same effect as it did have.
Have you watched Obama’s big speech yet? I’ve heard it got good reviews all around.
And yes, you were right. I still would like to know how the nationalization advocates would have gotten around those pesky legal problems, though. The nationalization debate is more or less what turned me against people like Simon Johnson. I didn’t mind him before. After that debate, I thought he was an abject loon. It pains me to say it, as I still read her quite often and she’s still sharp as a whip, but this whole debate turned me off of Yves Smith, too.
What you and Boo don’t want to acknowledge is that there are values (in fact pretty much all values) that economic theories/considerations don’t measure or even relate to. Yeah, it’s pragmatic and efficient that we got off cheaper by not nationalizing or otherwise destroying the bank oligopoly. But the bankers that were rescued are thieves, and are now sitting pretty, their arrogant incompetence only multiplied now that they got away with the biggest robbery in history.
That matters. It matters in terms of whether we still believe in justice or the rule of law. Whether it’s OK for crooks to prosper on the backs of taxpayers who actually do useful things to earn their paltry rewards. Whether democracy itself can survive the onslaught of enormous amounts of money playing the system exclusively for its own benefit. All the arguments about how much money was saved by not letting justice take is course are just as relevant to promoting slavery or abolishing Social Security or killing off the infirm. None of those are questions that beancounters and grifters are qualified to express opinions on.
If Geithner’s plan = Nationalization, then all things being equal I prefer nationalization every time. You can say it didn’t turn out worse, but I’m still not seeing how you think it turned out better.
I still don’t see the reason for no nationalization other than ideology. I have read your arguments and the people you were arguing with and that thread and I don’t see how you have shown they are incorrect.
And what’s worse the banks still the run the country which means we have lost our greatest chance to improve things.
How many times does it need to be said? The opponents of nationalization don’t oppose it based on ideology (“Oh noes the government!!!”).
Quoting Ryan Avent:
http://www.ryanavent.com/blog/?p=2005
“at least we got our money back from the banks”
ROFLMAO, that’s precious.
OK, time for some education:
Bailout Not Over, Taxpayers Still Owed $2 Trillion In Federal
Reserve Loans and TARP Program Funds
Madison — On October 3, 2010 the U.S. Treasury’s Troubled Asset Relief Program (TARP) will end. The expiration is likely to generate many celebratory claims from federal government officials that the bailout is over, and that taxpayers have been made whole or will be made whole in short order.
While it is true that many TARP bailout programs have ended, our research shows that money is still due to taxpayers under the TARP. More importantly, the research shows that the U.S. Treasury Department’s ten TARP programs represent less than seven percent of the $4.7 trillion disbursed by the U.S. government in an effort to aid the financial services industry. Far more money has been disbursed by the Federal Reserve to prop up the financial system than by the U.S. Treasury, and those loans are still outstanding.
Here’s something to supplement your learning on the issue:http://www.sourcewatch.org/index.php?title=Total_Wall_Street_Bailout_Cost
Let me guess, you also ran a post the other day on how combat troops are done in Iraq too?
Have to agree with Jerome. Here’s some additional estimates as to the exact total cost of the bailout:
http://www.ritholtz.com/blog/2009/06/bailout-costs-vs-big-historical-events/
http://nomiprins.squarespace.com/storage/anniversary102010.pdf
These estimate include other programs which sourcewatch keeps separate. (Including/excluding Fanny/Freddy, etc)
And you have to understand that the bailout effort is still going on with those old “toxic assets” being bought up by Fanny/Freddy (i.e US taxpayer, you).
Bill Black, one of the regulators which dealt with the S&L crisis is absolutely appalled by the manner in which Geithner has handled this combination bailout and coverup:
http://www.pbs.org/moyers/journal/04032009/watch.html
A Swedish type solution, or another RTC type solution (S&L crisis) would have been much better. As it is the TBTF banks are even larger and more out of control, and independent analysis of the FinReg law shows it does not begin to correct these problems.
It’s important to understand that bankruptcy is a very important part of having a functioning system (and is the normal way to handle failed companies). What Geithner did is very unusual. The goal would be to force failed firms into BK while assuring that the “Banking System” remains functional.
Yeah, I remember Black doing that interview. He even went as far to say that Obama is breaking the law. He claimed on multiple occasions that the Obama administration was violating the letter of the PCA law. Either he’s a horrible lawyer, disingenuous, or both.
Regarding Sweden, Sweden never put its banks in receivership. It nationalized the banks by becoming the majority owner of each bank. The government bought well over 50% of the banks’ equity.
This is why when people say “nationalize” they need to define what they mean by nationalization.
Don’t forget Barry Ritholtz from the other day(long story but I’ll have to find and post the link later). Long story short, we’ll never fully recover the money from AIG. Second, does anyone really think the banks are solvent, even now?
You link a source that provides larger outstanding debt on some items than the total maximum risk. In other words, it’s a useless source.
But, in any case, this piece is about TARP and the nationalization of banks, and not about $100 billion donation to the IMF or the bailout of Fannie Mae and Freddie Mac.
Obviously, we haven’t recouped all our losses, but the TARP program is probably going to be profitable, which would absolutely not be the case if we had followed the advice of the those who called for immediate liquidation and nationalization.
That’s my point. There’s a bigger argument to be had, but I didn’t make a bigger argument.
You need to take the total maximum estimate up with the Special Inspector General of the TARP. His estimate as to potential total exposure was $23.7 trillion:
http://www.geldpress.com/2010/02/bailout-237-trillion-sigtarp/
I have looked at many estimates as to the bailout cost. There is a wide degree of divergence. Auditing the Fed would help.
But saying the TARP is making money, or bailing out AIG is making money? Please! Just keep arguing about necessity if you must argue.
Booman,
I am so incensed that all the naysayers (in the Left in particular)have never ONCE admitted that they got this one wrong. Very wrong. I’m in the financial business and was disgusted with the “All Knowing” on Daily Kos and other blogs who railed against this daily – most of them having no business background at all in finance. 90% of the Left was railing about it with no other good idea for a solution or coming up with some crazy and scary ideas including nationalizing and I forget what else. (Didn’t Kos himself suggest just giving every citizen a $1,000 or something?). Anyway, as much as I tried to discuss it logically back then it was a losing battle. Bonddad gave up on the Kossacks too after ignorance won out.
I am sure the Administration didn’t think it would end up this good this fast but it only made sense that at some time it would prove to be the best and only choice. Thank God we had Obama in charge, putting up with the BS about Geithner from the Left and the Right and sticking with him rather than let the mobs rule on this issue. Tim Geithner might have known a little bit more than a Matt Taibbi about how the markets work.
And you think Barry Ritholtz knows nothing?
What the professional left whiners will never acknowledge is the huge impact of saving the US auto industry. They will never acknowledge how bad the economy and unemployment would have been without extraordinary measures.
They also will never see the big picture for these midterms and acknowledge the dangers and opportunities this country faces, right now.
Who, on the Professional left, advocated letting the auto industry die? Please name names. Other than dickheads like Lanny Davis.
I’d like an answer to this too. The folks I recall advocating for giving the US auto companies the shiv were mostly Republicans. I certainly don’t recall anyone from the “professional left” screaming about it, except to point out that the auto workers had to make concessions on pay and other things to get a bailout of their industry while the bankers basically got a free pass.
“Who, on the Professional left, advocated letting the auto industry die?”
Hi Calvin,
You’re reading something into my words that isn’t there. I’m going to try to tame this down because I get a little hot about this sometimes.
My point is that “some folks” seem resistant for some reason to celebrate what happened in the case of the auto industry “bailout”. I think the stakes and outcome were much more important and successful than is commonly discussed in the progressive blogoshere.
GM did “die”. It went through BK and came out the other side. A very normal thing to do. I suspect, when everything is said and done, GM will make back the loans. (They may do this by moving jobs to China, but that is another argument.)
My question is – why didn’t we do the same thing with the banks? GM is a multi-national corporation, same as the reason given that the banks could not be BK. I strongly suspect the reason was to keep auditors out of the banks books. Look what they found when the finally went through Lehman’s books:
http://www.independent.co.uk/news/business/news/fraud-charges-loom-for-lehman-bros-1920944.html
Massive fraud.
As it is, the TBTF banks got a massive bailout, and NO REFORM. In fact, in the opinion of one Senator, they own the place:
http://www.ritholtz.com/blog/2009/10/qotd-the-banks-run-the-place/
So, why didn’t we run the TBTF banks through BK? I think Bill Black is right – we would have found the fraud and the crooks.
And no executives had to go to jail for fraud. Bonuses for everyone!
The TARP is but a wee bit of the total commitments made by the government to bail out the banks and the economy at large. Total commitments total $9.9 trillion (i.e., about two thirds of a full year’s GNP).
Adding Up the Government’s Total Bailout Tab
I did a brief diary about 18 months ago to try to illustrate what amount of money we are talking about, including a very telling graphic:
A Trillion Here, A Trillion There…
The tax payer is on the hook for a long time to come…
Typo above, the total commitments amount to $9.0 trillion (not $9.9 trillion).
total commitments are reported as $1.5 trillion in non-TARP funds according to today’s Washington Post.
I’m at work and cannot study/compare the articles right now. There may be a discrepancy because actual disbursements may not amount to several trillions, however, guarantees in addition to what was disbursed may increase the total to $9 trillion ++. Possible future defaults will then increase totals beyond the $1.5 trillion WP mentions.
Also, the wording of WP:
The Treasury and the Federal Reserve alone have committed more than $1.5 trillion to prop up the faltering mortgage and housing markets. (my bold)
This refers to only mortgage and housing.
Mortgage and housing markets are where the greatest risk is because banks are more interested in foreclosure and sale than in negotiating down principal or interest.
And the crooks have invaded the foreclosure market which will delay bank recovery of the value of foreclosed mortgages while courts sort out which foreclosure actions are valid and which aren’t.
Other than that where do the folks advising WaPo think that possible $9 trillion in defaults is coming from? That is around half of US GDP. It sounds to me that the $100 trillion number that was being bandied about at the beginning of 2009 has now become $9 trillion.
The sad part of the non-TARP discussion only starts with that fact that none of us really have good a handle on the non-TARP commitments as of right now. The commitments may have been reduced since the 8 month old link from which ask’s original diary drew data.
But it gets much trickier of course. How much of the commitments have actually been dispersed? And what assets are the Fed and the Treasury holding in exchange?
That last question was the key for me with regard to the TARP “bailouts” and is also for the non-TARP ones. When the government “bailed” out the auto industry it became a stockholder in GM. I for one thought that the risk vs. reward potential was pretty good. It turns out I had no idea how good. If in that one case the government realizes a profit and still managed to keep the US auto industry alive then we made out big time. Michigan should change its name to Obamagan (OK that was fun and snarky, but makes my point).
So I’m not yet troubled by a large amount of commitments because it is hard to find the underlying data that really counts.
We need to be just as analytical about the benefit as the cost. If we’re only harping on the cost, then we just thinking the same way as the Tea Partiers.
So what is the benefit, if any, of the non-TARP funds? Is there credit freed up so that the housing market doesn’t slow down even more? Did it help 100,000 home buyers get access to credit? Did it help keep 100,000 employed in the real estate industry? We may never know, but we’re not looking at this wisely if we don’t also analyze what the “bailouts” are doing to improve the economy.
What could the true cost be? Pure speculation:
If there are commitments of 1.5 trillion, maybe there are 800 billion of dispersed funds. Maybe the assets held by the government in exchange for those funds is worth 500 billion right now. Maybe taxpayers are then on the hook for 300 billion?
I think the TARP bailout was a well executed technocratic approach to preserving the status quo. It was a shining example of what effective government looks like and by that measure, it was a success. But its not either/or when it comes to what we did with TARP vs nationalizing ala Sweden in the 90’s. My view is that we should have taken a much more aggressive restructuring with the banks, similar to how Obama’s car czar took a tough negotiating position with management and creditors of the car companies. Bank creditors should have taken a haircut and management should have been shown the door.
And in January 2009, prior to the stress test, Geitner should have circulated a Term Sheet outlining financial regulatory reforms and advised the survivors to sign on and agree to the broader principles.
Here is the issue. It is not just TARP although that has become the symbol of the financial industry bailout. The entire rescue package involved taking the worst companies — AIG, GM, Chrysler… — into receivership and putting them through a resolution and restructuring process. That involved putting billions of federal dollars at risk of loss.
In addition, the Fed made trillions of dollars available for borrowing at discount window rates (near zero) to shore up bank assets so that the default terms of credit default swaps would not kick in. One estimate in late 2008 was that there was $100 trillion in credit default swap obligations total floating in the global financial market. (The financial industry was creating money at an astounding rate and that money was being thrown into every sort of investment vehicle in sight — a subtle, possible unconscious, Ponzi scheme that collapsed. Had all of those default instruments been invoked through a chain reaction of defaults, the global financial system would have collapsed as everyone lost more money than their net worth. The global monetary system and not just bank loans would have ground to a halt. The gold bugs would have been Pyrrhic victors; gold would have no value except for what it could buy in the necessities of life. That was the worse case situation as reported in late 2008, and of course the lefty blogosphere took the worst case scenario as what was going to happen. And some in the lefty blogosphere thought that this was the promised collapse of capitalism.
Others in the lefty blogosphere saw the TARP rescue package as a good thing but wanted the decision-makers who got us into this mess be punished through loss of their jobs, incomes, and wealth. What turned them and the general public on TARP was the translation of federal bailout dollars into multiple billions of dollars in bonuses instead of securing the balance sheets of the firms.
The clear fact is that in spring of 2009 no one knew how the financial rescue would turn out or if additional federal funds would be required to prop up the institutions that created the crisis and were too big to fail. Differences in opinion, most based either on optimism, fear, or anger instead of any clear analysis should be cut some slack during this period. Even the financial industry experts had differences of opinion.
As the economy recovered and so did a lot of the companies that had been bailed out, there was pressure on the government to sell out prematurely its shares of the companies it had taken stock in under the argument that the government was going to lose more money. Fortunately, the Obama administration resisted those calls from financial interests who wanted to buy cheap and ride up the firm’s recovery profitability. The federal government has made money on GM and Chrysler and is likely to make more money post-IPO as long as those companies don’t return to their complacency. The government is likely to hold AIG to the point at which it makes a profit on that loan.
So the major financial crises are over but the deficit of consumer and business demand is keeping money on the table, essentially federal bailout money on the table. This is not a recession that responds to supply side remedies (i.e. loans to businesses to expand production and hire workers) because it is demand, not supply that is out of whack. And the political gridlock in DC will keep it out of whack for a decade or a generation.
Less of the accumulated debt from deficits is coming from TARP. And those assets that have generated a profit contribute to lowering the deficit and debt. So supply of funds and trust in the financial markets is less a problem, and with the financial reform act become even less a problem for a generation (idiots will return). But the flow of funds is not restored because although production is up and employment is up slightly, there still is not enough demand to bring unemployment up to “normal” levels (which in the 1960s was 3% and today is 6%). And because of all the money sitting out there on the table, there is still the fear in the financial industry that if growth in employment takes off rapidly, it will cause inflation. So the financial industry has been pushing for slow increases in employment, essentially by setting public expectations of a 10-year recovery and opposing significant government infrastructure investment. They can make and capture profits off of trading paper and protect their wealth by stashing it in government T-bills. Why risk investing in real growth.
You also have to remember that by September 2008, the trust level on the left for the Bush administration was below zero. So, to have Paulson go out there and ask for hundreds of billions without significant oversight…well, people were inclined to call bullshit regardless of the objective facts. It looked like a last minute looting operation.
But the catastrophe was real. It took me a couple of days to investigate what was going on and satisfy myself that the intervention was truly necessary. I concluded that we’d all be out of work in short order without a bailout. And we didn’t have the luxury of waiting or negotiating a better bill. It was Yes or No, and Yes was the correct answer.
Then the next crisis was how to manage the program once Obama took over. It seemed like Krugman and every leftist in the county was clamoring for nationalization of the banks, but once I looked into it I realized that nationalization was extraordinary risky and guaranteed to give us catastrophic losses. Even worse, it didn’t mitigate any of the concerns people had with Geithner’s Plan.
My point in this piece is that are better off for not having followed Krugman/the left’s advice, not that we got all our money back from all the various programs that were started.
Me too. The idea of nationalization pushed by folks like Krugman was based on the successful Swedish nationalization. They didn’t understand the scale problem in a nation of 330 million with huge branch banking systems.
The only way to eliminate too big to fail is to eliminate “too big”. In the old days, this was called trust-busting. It still could work. Correspondent banking is just as efficient and cost-effective as huge financial institutions with multiple layers of management, each taking their cut. And less risky. It is easier to carry out a resolution of a small failing bank than a large one; FDIC does it all the time.
I think the other side of the argument is that this crisis may have been the only opportunity for some trust busting, given the corporate/financial control of the media and the political process. Whatever the benefits of the rescue, and I won’t disagree that they may be financially huge, they also cemented the TBTFs’ stranglehold on our country.
Which sheds little light on whether TARP, etc, was a good thing or a bad one. But it does remind us that short-term success does not necessarily produce long-term benefits, or even survival of what’s most valuable.