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Former chairman of the Federal Deposit Insurance Company William Isaac warns Europe to heed the lessons from TARP and catastrophic public stress tests …
Europe should learn from US mistakes
(CentralBanking.com) Oct. 13, 2011 – Some are calling for Europe to adopt a “Euro-TARP” programme and more stringent bank stress tests, arguing those programmes helped resolve the US financial crisis in 2008-2009. This assertion is wrong.
When the subprime mortgage loan crisis hit the US in 2008, a handful of large firms teetered on the brink. The government lurched from failure to failure without a coherent plan or sensitivity toward public psychology. The markets panicked, as did the government.
The Bush Administration slapped together a Troubled Asset Relief Programme (TARP) to spend $700 billion of taxpayer money to purchase toxic assets from Wall Street. The poorly conceived programme had no chance of calming the crisis. Indeed, over-heated rhetoric used by the political leaders to sell the program exacerbated the panic.
… Ben Bernanke, the chairman of the Federal Reserve, was forced to announce in late March 2009 that none of the 19 large US banks would be allowed to fail. This announcement calmed the markets by making the stress test results irrelevant. But the damage was enormous.
The Dow Jones Average stood at 10,800 when TARP was enacted in October 2008. By March 2009 it had plummeted to 6,500 and financial stocks had been crushed.
Insuring toxic assets: throwing good tax payers’ money after bad private money
(FT blog) Feb. 26, 2009 – The UK government has offered, under its asset protection scheme (APS), to guarantee (or insure) up to £600 bn worth of toxic assets held by British banks- up to £300 bn for RBS and up to £250 -£300 bn for the Lloyds Banking Group. Barclays may be waiting in the wings. The APS insures the banks (that is, their CEOs, shareholders, junior and senior unsecured creditors other than retail depositors – already covered by deposit guarantees up to £50.000 – and staff) against losses on these toxic assets over and above a certain deductible or `first loss’ for the bank.
There is ample precedent for this kind of guarantee scheme. In the US, the Fed, the FDIC and the US Treasury have guaranteed a large chunk ($300 bn) of toxic assets of CItigroup. In the Netherlands, the Dutch state insured a portfolio of $39 bn (face value) worth of securitised US Alt-A mortgages held by ING.
Like its American and Dutch counterparts, this toxic asset insurance scheme is without redeeming social value: it is inefficient, unfair and expensive to the tax payer.
Why should the government guarantee/insure or purchase the toxic assets at all?
All the toxic assets insured by the government are already existing assets. They are the result of investment decisions made in the past. One of the oldest insights in economics is that bygones are bygones. You cannot undo past mistakes. We may not know yet the magnitude of the losses that have been incurred on the underlying assets (how bad the toxic assets will turn out to be), but there is little if anything the banks or anyone else can do, other than sensible macroeconomic management (monetary, credit and fiscal policy) to affect the eventual magnitude of these losses.
By insuring losses that have already been incurred (although we may not know their magnitude as yet), the government simply redistributes these existing losses from the shareholders, creditors, management and employees of the banks to the tax payers. This is both unfair – those who break something should own it – and inefficient: it encourages future reckless lending and investment by the banks, that is, it creates serious moral hazard.
Will Geithner and Summers Succeed in Raiding the FDIC and Fed?
(Huffington Post) March 23, 2009 – Geithner and Summers have now announced their plan to raid the Federal Deposit Insurance Corporation (FDIC) and Federal Reserve (Fed) to subsidize investors to buy toxic assets from the banks at inflated prices. If carried out, the result will be a massive transfer of wealth — of perhaps hundreds of billions of dollars — to bank shareholders from the taxpayers (who will absorb losses at the FDIC and Fed). Soaring bank share prices on the morning of the announcement, and in the week of leaks and hints that preceded it, are an indication of the mass bailout at work. There are much fairer and more effective ways to accomplish the goal of cleaning the bank balance sheets.
No surprise a OccupyPlanetEarth social revolt is spreading like wildfire, see Spain, Arab Spring, Israel and Greece.
A sign posted by the Occupy Wall Street campaign demonstrators stands in Zuccotti Park: “Bail Out the People”.
"But I will not let myself be reduced to silence."