As readers may recall, we have been skeptical of the TARP from the get-go. As the program ricocheted from one high concept to another, one had to wonder: were Paulson and the Treasury truly that incompetent, or was the seeming cluelessness, as some have suggested, a cover for a program to transfer funds to the financial sector, sort of a Hailiburton in Iraq version 2.0?
The damning Congressional Oversight Panel report on the TARP’s activities to date, and the lame Treasury response, are instructive. And we have plenty of troubling incidents along the way: the Treasury strong-arming nine banks to take a total of $125 billion among them when some were obviously in greater need than others (by all accounts, JP Morgan’s Jamie Dimon was furious over the move).
Now one can legitimately argue that having banks maintain or expand their bubble-era level of lending is a mistake. Putting that aside, the TARP was created with the notion that supporting the banks would lead to more lending, so one must measure its success against that goal.
Tonight’s New York Times article, “Bailout Is a Windfall to Banks, if Not to Borrowers,” not only indicates that banks are using the government largess for pretty much anything but lending, but even worse, the fund has provided money to banks in no need of government assistance.
From the New York Times:
Individually, banks that received some of the first $350 billion from the Treasury’s Troubled Asset Relief Program, or TARP, have offered few public details about how they plan to spend the money, and they are not required to disclose what they do with it….
A review of investor presentations and conference calls by executives of some two dozen banks around the country found that few cited lending as a priority. An overwhelming majority saw the bailout program as a no-strings-attached windfall that could be used to pay down debt, acquire other businesses or invest for the future.
Speaking at the FBR Capital Markets conference in New York in December, Walter M. Pressey, president of Boston Private Wealth Management, a healthy bank with a mostly affluent clientele, said there were no immediate plans to do much with the $154 million it received from the Treasury.
“With that capital in hand, not only do we feel comfortable that we can ride out the recession,” he said, “but we also feel that we’ll be in a position to take advantage of opportunities that present themselves once this recession is sorted out.”…
For City National Bank in Los Angeles, the Treasury money “really doesn’t change our perspective about doing things,” said Christopher J. Carey, the bank’s chief financial officer, addressing the BancAnalysts Association of Boston Conference in November. He said that his bank would like to use it for lending and acquisitions but that the decision would depend on the economy.
“Adding $400 million in capital gives us a chance to really have a totally fortressed balance sheet in case things get a lot worse than we think,” Mr. Carey said. “And if they don’t, we may end up just paying it back a little bit earlier.”
One issue the article raises is the use of TARP funds to support acquisitions. Since the financial services industry is badly in need of rationalization and consolidation, this activity is helpful to the extent that the purchased banks are troubled (note that Citigroup recently tried to buy Chevy Chase Bank, a healthy institution, so readers should not assume that any deal announced in this environment necessarily involves a floundering seller).
57 comments
Comments are closed.
I can’t help it:
http://www.youtube.com/watch?v=bWPIICWOyy4
There is, of course, more:
http://www.youtube.com/watch?v=h4kbC4SKoKQ
http://www.youtube.com/watch?v=EohFpw81cag
http://www.youtube.com/watch?v=0v8AqAyDQfo
A very Angry Man indeed.
In what sense is the $350B "wasted"? I mean, it's still sitting there on the balance sheets, right? All those institutions that "didn't really need it", will continue to pay the dividend. When that dividend goes way up (which it is scheduled to in a few years), those healthy banks will be motivated to retire the government's preferred stock.
So we borrow from the Treasury market at zero to 2 percent and invest at five. In what sense is this wasting money?
If the economy goes much further south, all those "fortressed balance sheets" could forestall another run. In which case the money will have been prudently distributed after all.
I'm open to the idea of the liquidationists (e.g. Chris Whalen), that hey, we should let all the bad banks go to the wall… but when you have the fire sale for one bank's assets, and everyone marks to market, doesn't the failure simply cascade through the system? Doesn't the precipitous liquidation of MBS type assets just further exacerbate the problem?
Can the FDIC take all the big banks through receivership over a weekend? How many divisions does the FDIC have, anyway?
And what would this do to confidence?
I have a sinking feeling that a Japanese style "lost decade" is not a bug, it's a feature, and perhaps the best we can aspire to. The alternative might be widespread runs, massive FDIC liability on deposits, complete ownership of the financial system by the government, the S&P at about 300, and a full on deflationary economic collapse.
I think the avoidance of this worst case is the "notion" the TARP was sold on and all other metrics are mere rhetoric. Of course we may end up at that worst case anyway, and it's reasonable to assert the actions taken to date have made that worst case more likely, not less. I just don't see how, so tell me.
One point about acquisitions. They should at least require that acquisitions are done in stock. That way the capital is not flowing directly into the hands of shareholders of the acquired. In additions, they should be stopping all bank dividends. Why recapitalize the banks while their capital is flowing out the door to shareholders.
Since the financial services industry is badly in need of rationalization and consolidation…
Was this tongue-in-cheek, Yves? We have multiple banks(WFC, BAC, and JPM, but fortunately — heh — most of C’s deposits are overseas) already breaching the 10% statutory limit on depositor share, and this entire crisis was touched off to a non-trivial degree by the too-big-to-fail doctrine.
It’s just another one of those “laws” that the executive and judicial branches have graciously chosen to ignore.
One wonders at the foolishness of our forefathers, what with Glass-Steagall and all. Thank goodness we’ve demonstrated our superior understanding and the fruits it brings.
In what sense is the $350B “wasted”?
TARP was passed, in part, on the (overt?) threat that the Dow and S&P would go into the crapper if it wasn't done.
If you listen carefully, you can still hear the giant flushing noise coming from yonder Wall Street.
TARP was also supposed to be for "troubled assets" … and we now have the spectacle of banks doing just about everything else with the stuff.
Example: if I gave you $1000 to spend on Good Deeds, but you instead went to a casino, well, I would say "wasted money" … and begin to wonder about laws against "breach of trust".
It can also be argued that the very act of handing out $1000 on such a vague thing as "Good Deeds" is almost begging that the money be wasted.
If you listen carefully, you can still hear the giant flushing noise coming from yonder Wall Street.
You ignore the counterfactual – what if nothing had been done?
The financial system, and the economy in general, had absolute cardiac arrest in October. Whatever anyone may say, that distress has been relieved, at least somewhat. Libor drifted back down. The bond market has seen some new issues. Etc.
What is the evidence that these problems would have simply cleared themselves up?
What is it that wasn’t done, and should have been, which is so bogglingly obvious? I still don’t get it.
Further: the whole “too big to fail” and “save strong banks, not weak banks” discussion misses a key point: when there is no genetic diversity in the population, diversification is impossible.
OK, so Wells and JPM were stronger than Citi. Could either one have survived a fire sale (and the resultant marks) of Citi’s assets?
If we had ten institutions, each one tenth the size of BoA, each with 1% deposit share, but more or less identical looking balance sheets, aren’t we back to square one? Either one big thud, or a dozen dominoes… either way, they all go down.
The long boom / great moderation / leverage scam (whatever suits you) bred out the genetic diversity in large institutions, and probably a lot of smaller ones. Anyone with any real sense of risk was replaced. Misalignment of interests.
So we are where we are, and the conundrum we keep coming back to is the pricing of illiquid, complex and opaque assets in a falling market. Anyone willing to admit that this is actually a tough problem and all the solutions have downsides, and forswear the smug moralizing and snarky posturing for the duration?
Goldman Sachs alumni at Treasury aren’t that incompetent. The hidden agenda with anyone working at high levels of finance is always compensation. Funneling TARP money to banks that were intent on paying bonuses and dividends come hell or high water is an ingenious way to ensure that members of ruling elite stay on top even though their deferred comp plans are evsicerated by falling share prices.
ndk,
The US has far more banks than any country in the world, over 7000. Canada, 1/10 our size, has five big banks and the healthiest banking system in the world. I am NOT saying we should have 50 big banks, merely pointing out that the US has a ton of banks.
And since we have a lot of sick banks, the preferred route has been to the extent possible to merge them into other institutions rather than liquidate them.
Consolidation is not tantamount to “let’s merge everyone into JP Morgan.” In fact. consolidation will also take the form of shrinking balance sheets. That in turn will force banks whose operations pre-supposed a larger asset base to shrink operations, which in some cases will make a sale a logical outcome.
Meredith Whitney has argued that the Feds should focus less on salvaging national players and more on regional/local ones, since they have better borrower/market knowledge. But some of those players will not make it (I have been told that 29% of the banks in the US, mainly the smaller type, have more than their net worths in construction loans).
lewy14,
First, the US is already constrained fiscally. Willem Buiter has advocated a lesser stimulus than most Serious Economists deem ideal because the US is already running overly large fiscal deficits. Thus it IS important to target the money well so as to get the best possible results from limited funds. It appears you did not bother to read the Congressional Oversight Panel, which makes clear what a botch Treasury has made of the TARP.
Second, writing checks to healthy institutions is a waste of money. I am amazed that you defend that idea. We have no mechanism for clawing it back should the subsidy prove unnecessary.
Third, the article gives strong evidence that little of the money has been used to increase lending, its nominal purpose. So the TARP has failed to meet its own goals.
lewy14 doth protest way way too much. Must be with the Treasury or in one of the big banks that got a big check.
If we had ten institutions, each one tenth the size of BoA, each with 1% deposit share, but more or less identical looking balance sheets, aren’t we back to square one? Either one big thud, or a dozen dominoes… either way, they all go down.
I find that claim preposterous, lewy14. It totally neglects how much dramatically better smaller, regional banks fared as compared to their behemoth brethren even in this meltdown.
The US has far more banks than any country in the world, over 7000. Canada, 1/10 our size, has five big banks and the healthiest banking system in the world. I am NOT saying we should have 50 big banks, merely pointing out that the US has a ton of banks.
We do, but this isn’t 1989. I’m not comfortable ascribing the relative health of Canada’s banks to their number alone, when there are so many other data points to consider. Spain’s banks fared better than most, too, despite that country’s huge property bubble, but only because they failed to invest in the US substantially.
The article itself even quotes a few regional manager who haven’t the foggiest what to do with these extra funds.
You ignore the counterfactual – what if nothing had been done?
There is no evidence of something that was prevented from occurring, of course, but this is a relatively easily forecast situation as compared to the morass we’re currently wading through.
There would have been massive liquidation of debts and credits; the FDIC would probably have saved smaller depositors, at least to some extent; and the top 1%, who have accumulated extraordinarily outsized claims against the rest of the populace largely through outsized money growth and gross abuse of the system would have seen those claims erased in the inferno.
At least taxes are progressive rather than regressive, so the rich will have to pay a disproportionate share of the bailout, right? Especially carried interest.
I really apologize for my frustration here, but I find this maddening.
Another view:
“By throwing cheap money with little conditionality at the banks, the Fed and the US Treasury may get bank lending going again. By subsidizing new capital injections, they reward bad porfolio choices by the existing shareholders. By letting the executive leadership and the board stay on, they further increase moral hazard, by rewarding failed managers and boards that have failed in their fiduciary duties. All this strengthens the incentives for future excessive risk taking.”
Harry
ndk,
I should have stated my point more clearly: the health of a banking system does not appear to be a function of the number of its banks. So as long as we make sure we do not have institutions “too big to fail” (or if we do, we make sure their risk-taking is severely curtailed), we could still have a smaller number of banks.
And as I stated, the merging parts or the whole of failed banks into sounder banks is the preferred route for resolution.
To clarify, I’m not at all adverse to consolidation on the small and regional level, if that’s what those banks would like to do. But they don’t really need a TARP to do that with, and I’m not sure how much of a beneficial macro effect it would exert.
More to the point, to the extent that we create, subsidize, and prop up these C/BAC/JPM/GS monstrosities, it dramatically reduces the opportunities available to those small and regional banks who were somewhat more wise in the investment of their funds. That ticks me off almost as much as the theft from the taxpayer.
And as I stated, the merging parts or the whole of failed banks into sounder banks is the preferred route for resolution.
I think we’re in violent agreement, Yves, though with the possible caveat that I’d amend this statement to exclude those banks that are so egregiously large that they are better off dismembered and sold to the fertilizer factory so that the fit ones can thrive.
Yves,
First, while Buiter may be right about the constraint, it hasn’t been shown yet that the $350B has been wasted – not within the constraints imposed by the real world and it’s attendant political system. As for Congress, the TARP is massively unpopular (was before they spent a dime), and Congress is massively unpopular, and so, a program undertaken in exigent and distressed circumstances, is going to have what kind of Congressional review, exactly? The fact that they panned it tells me nothing, except that the issue is political, which I knew already.
Second, provision of capital in return for preferred stock is not “writing checks”. The banks are incented to retire that stock because the dividend will become punitive in future years, so there’s your clawback. (If there’s a full recovery, I’m not sure what prevents the government from selling that high div pref stock in the open market; maybe something). Further, I keep hearing respected analysts (Whalen again) talking about providing capital to the stronger banks, not the weaker ones. If anything, it was a mistake to give the capital to the weak ones, nay?
Third, you wrote: Now one can legitimately argue that having banks maintain or expand their bubble-era level of lending is a mistake.. I invoke that argument. The increase in lending is a bogus goal. You too ignore the counterfactual possibility: what of the total collapse in lending which would have occurred had nothing been done? Your only point in measuring against an unsustainable base lending rate is rhetorical. You want the point, take it, but this is not debate team.
Again: Whalen says give money to the strong banks, let the weak ones fail. When you say (to ndk) And as I stated, the merging parts or the whole of failed banks into sounder banks is the preferred route for resolution. This is probably the best contrary opinion I’ve heard, except it doesn’t address confidence, of resources, or the lack of genetic diversity in the institutions. Stiglitz said, at the time anyway, don’t buy distressed assets, inject capital! OK, we did that. Roubini says… OMG, Roubini says government action has made systemic meltdown less likely!
And now it’s dawning on the British, and Bernanke, and Obama’s team, etc, that we might need a “bad bank”, to aggregate the bad assets, and then we have the whole price discovery problem there, which torpedoed the first incarnation of TARP. Pricing the assets without a healthy market is a two sided constraint: too rich and the taxpayers subsidize the banks, to stingy and the resultant marks cascade through the system and bankrupt everybody. No easy answer, no snark, no fun.
UK Inflation 1790-2005
http://www.bankofengland.co.uk/education/inflation/timeline/chart.htm
The Inflation Map
http://www.bankofengland.co.uk/education/inflation/map/map.htm
ndk, you misunderstood my point about size: let me be clearer. I agree that the regional banks have done better; this has been widely reported. My hypothetical had to do with many small banks with no genetic diversity in their balance sheets: banks that have substantially the same balance sheets will all go down together in a crisis.
The problem with the large institutions is not so much that they’re large (although that causes problems), it’s that they’re so much alike… yes, Citi is inrementally worse off, but how far behind are the rest? And Barc is better than RBS, CS better than UBS, but how much? And how did Deutche Bank get to looking so shabby? Does anyone else find it remarkable that all the big banks seem to have been managed more or less the same way, rhetoric nothwithstanding?
So my point, ndk, was that this lack of diversity (a similar, crazy level of risk and leverage) is what the problem is, and if this same problem existed among many smaller banks, it would be no saving grace. The marks against their assets when one was liquidated would take them all down like dominoes.
lewy14,
Thank you for catching my drafting error, which I am correcting IMMEDIATELY, It is a mistake to maintain or expand bubble level credit. Steve Waldman has a post up which I am writing about now that suggests other options than propping up banks. He makes an extreme but interesting argument.
Elizabeth Warren, head of the oversight panel, is a highly respected scholar and NOT a political operative. You clearly have not bothered to read the report, which has been widely praised. By contrast, as I also pointed out, Treasury has not given a remotely adequate response.
The banking industry has grown to constitute over 40% of S&P 500 earnings at the peak. That is unusutainable. The financial sector needs to shrink. The TARP is fatally flawed, It fails to have a view (and therefore not anything even remotely approaching a plan) as to how to shrink the financial sector. Propping it up in place is throwing good money after bad.
As to preferred dividends, it has been widely discussed elsewhere how the terms are far too favorable to the industry. Bagehot said that central banks should lend freely against good collateral at penalty rates. We are breaking the core rules of sound banking practice to prop up a diseased industry.
We need to have price discovery, to take over banks that are insolvent (based on realistic asset pricing) and rationalize the industry. That was what the Swedes did, the most successful example of how to address a financial crisis. An IMF study
of banking crises (124 in total) found that the TARP course is not a successful one:
Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.
Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions’ liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery.
So my point, ndk, was that this lack of diversity (a similar, crazy level of risk and leverage) is what the problem is, and if this same problem existed among many smaller banks, it would be no saving grace.
I’ve still got to disagree with your fundamental point here, lewy14, though I agree with several others you made in response to Yves earlier. In addition to just balance sheet composition, there’s overall leverage and the quality of the assets on those sheets.
In short, I don’t believe banks originate as many stupid loans without the imputed moral hazard from knowing the gentle hands of the Feds are there to carry you home. Moral hazard is, even today, posed as a potential problem, despite it being a demonstrable key ingredient for this whole fiasco.
Until we stop couching that issue in hypothetical terms, we’ve accomplished very little in resolution of some severe misalignments of interest.
lewy14,
Upon re-reading, I stand by my original formulation. However, the TARP was not even aimed at where the collapse in credit (not lending) took place, namely, the securitization market and the shadow banking system.
If you look at credit since 1980, the share of banks in total credit intermediation has been in a steep decline. Banks account for only 15% of non-farm, non-financial lending.
Maybe there are many people like me who view public money through a kind of window that filters out emotion.
I find it hard to get upset about money wasted by the government because it doesn’t have an immediate impact on me that I can feel.
It’s just too abstract that it was somehow my money and I’ll be paying tax to cover the interest bill later on.
Anyway it’s their money too cause they are taxpayer also aren’t they? And since they are not poor people they can’t waste it can they?
I know the paragraph above makes no sense but I’m trying to grasp how the powerful vested interests manage to get away with what they do. They must know that Jo\Jane Blow does not care about something he\she doesn’t understand and won’t affect him in the near term. This lets those with great interest in these things…because it makes them smart and mysteriously powerful…do more or less what ever they want.
This is one of the fundamental flaws with fiat money. If we all thought about the government treasury as being full of gold that was gathered with great risk and effort we would not be complacent about how it was spent knowing with out a doubt that the tax collector would be coming knocking for our gold very soon to replace it.
The knowledge that more of it can just be printed, as Mister Benanki said in 2002, means we can all nod and sigh and say it may all turn out badly in the end but maybe it won’t maybe the magicians at the Fed know what they are doing and there is such a thing as a free Lunch…maybe.
ndk,
I had rolled up balance sheet, leverage, and quality into my (admittedly nebulous) term “genetic diversity”. What I was trying to do was isolate “size” as a characteristic and demonstrate that small is not necessarily beautiful.
I take it you believe a large size leads to “moral hazard”. Fair enough. I have a worse notion: that it wasn’t moral hazard (at least not solely), but career risk and misalignment of interests. Bankers were taking risks with other people’s money, and in a rising and benign market, those risks paid off. Bankers who didn’t take those risks were fired. Getting saved by the Fed needn’t even be considered: the banks themselves had no voice; only the individual bankers, looking after their own interests.
Smaller institutions seem to have preserved some genetic diversity: some spectacularly “fit”, and then spectacularly not so (e.g. WaMu). Others which were less fit during the boom are now more fit during the bust.
The environment that the big banks operated in was apparently much higher pressure, because all the big banks resembled each other to a frightening degree.
—
Yves, OK, you got me: no, I didn’t read the report. I remain skeptical that any process so politicized can generate a sober critique: the career risk for anyone defending the TARP is substantial; the penalty for bogus critique is non-existent.
Nonetheless, I will, on your advice, read the damn thing before I comment again…
…with one last jab at the counterfactual: at least the lights are still on for me to read by. And gas at the station… and food in the supermarket…
We need FDRs Bank Holiday …
To sort out the bad from the good. The Fed is still running many markets because they are frozen CP, Libor, etc,etc, …
Until we know what’s on those balance sheets TARP or NO TARP the situation gets worse …
Time for FDRs Bank Holiday yet no one will say it …
This entire financial mess is retarded and I’m very sick of it; can we at least point out that people like Bernanke need to be fired ASAP?
Remarks by Governor Ben S. Bernanke
At the meetings of the Eastern Economic Association, Washington, DC
February 20, 2004
The Great Moderation
FYI: Conclusion
The Great Moderation, the substantial decline in macroeconomic volatility over the past twenty years, is a striking economic development. Whether the dominant cause of the Great Moderation is structural change, improved monetary policy, or simply good luck is an important question about which no consensus has yet formed. I have argued today that improved monetary policy has likely made an important contribution not only to the reduced volatility of inflation (which is not particularly controversial) but to the reduced volatility of output as well. Moreover, because a change in the monetary policy regime has pervasive effects, I have suggested that some of the effects of improved monetary policies may have been misidentified as exogenous changes in economic structure or in the distribution of economic shocks. This conclusion on my part makes me optimistic for the future, because I am confident that monetary policymakers will not forget the lessons of the 1970s.
Yves,
OK, I read the COP report and I too stand by my original remarks: I figured it was heavily politicized, and I was right.
Lets consider your remark: However, the TARP was not even aimed at where the collapse in credit (not lending) took place, namely, the securitization market and the shadow banking system..
What about the TALF? Isn’t that aimed at the securitization market?
I raise the issue because the COP doesn’t seem to like the TALF; if you look under question 6, page 25, the report is critical of the idea of pushing more credit on consumers. Which is fine – it’s quite true that household debt has to contract – but I would expect a fair and honest report to at least acknowledge the distinction between pushing more debt and the complete collapse of the credit card securitization market (not to mention the student loan securitization market). The COP makes no such distinction; efforts to recover from the absolute collapse of the credit card ABS market are disingenuously treated as pushing more debt on consumers.
Then there is the question of small business loans – also covered by the TALF. Now small business loans are also touched on in the COP report: question 4, page 21. Here the COP sites approvingly the British model of demanding the banks continue lending to the SMB sector at 2007 levels. Daft! The sane businesses don’t want to borrow! And if you let the consumer debt ABS market collapse (as the COP appears to desire), who’s going to buy stuff from small and medium sized businesses!
This is just one example of inconsistency. I could go on. On a scale of 1 to 10, where a 10 is “have you stopped beating your wife yet” level question, I’d say the COP ranges between a 3 and an 8.
I’ll read Kashkari’s responses; I glanced through the beginning and found he treated the Fed and the Treasury responses as a coordinated whole, which is I think the right way to look at it.
Back to the securitization market: I note the TALF has provision to extend to MBS; the Fed has already been in the market buying paper. The Treasury and the Fed are teaming up, using the Fed to lever up TARP capital.
Question: do you approve of this tactic?
Maybe I’m oversimplifying here, but while TARP was a poorly constructed and wasteful program, lewy14 is right, without it things would have been far worse. Paulson should have come up with something far better, like following the Swedish model, but because of incompetence, or philosophical limitations [too socialistic] he didn’t.
To me, TARP is similar to the little Dutch child sticking his/her finger in the dike, not the best solution by far, but it staved off the collapse until better heads could come and hopefully create a better solution.
If we have to lend (it is a loan, right?) taxpayer money to someone, I’m all in favor of giving it to banks that don’t need it. That makes it more likely that the taxpayers will get paid back.
It’s the loans to banks who ‘need it’ that I’m most concerned about.
«I have a sinking feeling that a Japanese style “lost decade” is not a bug, it’s a feature, and perhaps the best we can aspire to. The alternative might be widespread runs, massive FDIC liability on deposits, complete ownership of the financial system by the government,»
The latter points have in effect already6 happened, but it has been masked by government subsidies and guarantees much, much bigger than shareholder equity in the banks.
«the S&P at about 300, and a full on deflationary economic collapse.»
This demented scenario is based on the foolish idea that the tail wags the dog, that is the health of the real economy depends on the health of the financial sector.
This is foolish because by and large the financial sector is a hygienic factor, that is something that is a cost centre for the economy, like say the legal system or accountancy.
Also, the financial sector performs two very distinct functions, which are running the payment system and wholesale capital allocation.
The former is systemically valuable, and could be done by “utility” stile businesses, even government owned the latter is not.
Because capital allocation can be done retail, driven by profit, and profit is driven by sales.
Currently the government is running an industrial policy where it is subsidizing the financial sector, allocating to it colossal amounts of free capital.
If it instead subsidizes the real economy, with better unemployment and health insurance, and lower sales and payroll taxes, and yes, with public capital projects, this would create the opportunity to make sales and banks or no banks enterprising Usians would be driven by sales profits.
Instead the government wants to drive the acquisitive spirits of parasitical bankers by allowing them the profits of easy financial arbitrage based on cost-free government capital, while letting the real economy go down the drain.
@lewy14,
I have been following Elisabeth Warren for 4 years and her work is very sound, great work in examining the social class structure. Middle class equity and its state from the seventy’s to present. Also yelled at the top of her lungs about credit card contracts years ago and their impending doom upon us.
Yes, she is working in a political environment and no one can hope to do such works with out it contaminating it, to a degree. How far has that played into the report is ones poison. But as for me, I give her more credit than the rest involved in this matter.
Skippy
There has been a lot of talk about a good bank/bad bank strategy being employed early in the Obama administration.
That is a step in the right direction. However, the key questions are – does the current executive management get replaced, do equity holders get wiped out, and do bondholders take a haircut? If the answers are no, no, and no, then we’re going to end up with an even bigger transfer of wealth from Joe Taxpayer to the financial elite.
For those who like a good visual laugh, this caught my eye: http://www.covingtoncorner.org/?p=195
Click on the picture… that’s one clever shot of Bernanke if ever I saw one. Lol…
Skippy,
I don’t doubt Ms. Warren’s abilities or intentions – I am just evaluating the words on the page. I called out sections which I believed to be inconsistent and disingenuous, with a political slant.
I see Michael Santoli has joined me in taking the other side of the TARP bashing trade – here’s his proposed banker’s letter to the Financial Services Committee:
Dear Mr. Chairman: Our bank used the TARP funds to continue its existence. Oh, and capital is money, and money is fungible, so therefore every loan we’ve made and every credit line we’ve rolled over since the fall has in part been a use of TARP funds.
Santoli does echo one part of the COP (Question 8, page 29) – How is Treasury deciding which financial institutions receive TARP money? This was one of the better sections.
Santoli also reminds me of something I forgot to put to Yves: the need to attract private capital. Yes, the preferred stock deal is not punitive to banks. The idea was to not crowd out private investors. Honestly, to date, this seems to have failed, and perhaps it’s time to give up and nationalize everything – but I’d submit it wasn’t clear at the time.
And that gets to my last gripe (for now) – is the concept of “too big to fail” real, or not? If you buy it (e.g. Lehman, whose failure the system almost did not survive), then we do need to do what it takes to keep banks independent, because unwinding them will cause more damage than propping them up. Kinda like Chernobyl, don’t bother dismantling, just entomb in place. No need to “shrink the financial system”, it will just wither.
Or, assert there is no such thing as too big to fail. (Anon@6:57’s point that the health of the real economy does not depend on the health of financial institutions is thinking along these lines). In which case, fail away… except, all that falloff in economic activity in the wake of Lehman going down… just coincidence, I guess…
Over in the UK they TARPED their banks with, as a wag put it, Capital with Punishment and took equity instead of preferred stock.
In addition, they tried to force ALL the big banks to take the money under the same theory the US
was advancing that to allow some banks to refuse would make those that accepted seem weak though in the UK some banks did refuse the British TARP money because it was expensive and came with a lot of strings.
In terms of increasing bank lending
neither the US TARP or its British equivalent seems to have been effective. Now the British Government is keen to set up a Bad Bank to clean up the balance sheets of its major banks. Question I have is if, as Lewy14 noted, all the big banks have more or less the same balance sheet, then whatever price the UK Bad Bank
pays for the ‘hard to value’ assets
it takes from its banks becomes the price our banks will have to use to value their own.
If this is the case then won’t US banks then have to disclose what is truly on their balance sheets and we go from their for better or worse.
“Fair enough. I have a worse notion: that it wasn’t moral hazard (at least not solely), but career risk and misalignment of interests. Bankers were taking risks with other people’s money, and in a rising and benign market, those risks paid off. Bankers who didn’t take those risks were fired. Getting saved by the Fed needn’t even be considered: the banks themselves had no voice; only the individual bankers, looking after their own interests.” Lewy14 at 3:23am
Charles Prince, “At long as the music is playing, you gotta keep danicing”
You know, maybe, just maybe, we stock holders, clamoring for return, got what we deserved. How many bank shareholders would settle for below par returns for 2,3,4 or 5 years, waiting for the implosions?
Couple comments:
1)There is absolutely no, not one shred evidence that if nothing had been done things would be/will be worse.
2)Talking about the financial meltdown without including the larger context of the economy is of little value. There has been tremendous changes in the American/Global economy in the past 30 years, what’s happened in the financial system is only one aspect, and without placing it in respect to the rest of the economy has little value.
3)Economics is not a science. I’ll repeat economics is not a science. The only scientific aspect of economics is accounting and one only need look at all the creative accounting — financial innovation — to know in part how we got here.
Economic preaching is valueless without understanding it in the larger context of political economy. It is a social, political, and cultural system.
That said, the greatest reason one wouldn’t want five big banks is because it would be anti-democratic. Centralization, as Jefferson understood, is inherently undemocratic.
Finally, we are looking partly at the problems of a financial system that is basically a hundred years old. It is what was put in place by Wall Street and the Industrialists after they crushed the Populists. If you want to know why Populism is such a nasty word amongst Greenspan and the financial world, because despite all the mis-information and slander of Populism, it was a genuine and intelligent (small d)democratic movement. Look up their ideas for a sub-treasury system, a much more democratic and completely logical way to control money.
The first republic of America died with the Populists and the next republic starting with the founding of the Fed was much less democratic, because if you don’t have a democratic system for controlling money, you limit democracy to the extreme. Greider’s “Secrets of the Temple” is great history on this and Goodwyn’s “The Populist Moment” a good honest read on the Populist.
Also Greider has a good piece with some good points on placing the financial crisis in a larger context “The Crisis is Global”
1) TARP had another purpose considered more primary than to stimulate lending and that was to “restore financial stability.” This is the soundbite that rationalized the doling out of taxpayer monies to BAC and C in recent weeks. It will be the mantra to dole out trillions more taxpayer dollars as well. And the flaw in this pursuit is that the design of the financial system has been flawed since the 1970’s. That flaw has increased financial instability by design, instability is a feature of the financial system not a bug. So, throwing more borrowings at the system is to pull a “Lewis.” Yes, our policies are pulling a Ken Lewis folks. Lewis made some very big bets late in the “subcrime’ game and proceeded to “averaged-down” until it damn near killed BAC were it not for us the taxpayers to backstop BAC. Now, the obvious point made excellently by Richard Kline Commenting on the sub-primordial ooze Bank of America was hellbent on acquiring in 2008:
Here’s a lesson for those who feel that they are qualified to executor a money center financial administration: you don’t eat the Blob,the Blob eats you. So one had better be sure that one is shaking hands with someone/thing which is definitely NOT a Blob. Lewis twice, —
TWICE — broke that rule, and he has just about killed his firm therefore.
Before this is all over, the government will realize when it is far too late that it too pulled a Lewis and got eaten by the Blob that is Over-indebtedness ~ ala Fisher. The Blob will eventually get the government, and by extension the taxpayers who are the true patsies in this drama.
Which brings up point number 2:
2) “or was the seeming cluelessness, as some have suggested, a cover for a program to transfer funds to the financial sector,” asks Yves regarding TARP? Most assuredly, if this was a “cover” it was most “blatantly advertised” and sold to the public as for our own good. These freaking scumbags play with the market, and rather than be disciplined by the market for their recklessness, they transfer the market discipline to us the taxpayers under the rubric that “the alternative would be much worse” said Paulson. And here we have people posting on this blog that they are buying into that pig-in-a-poke Paulson and company are selling us. How easy the masses internalize this crap and go on to defend the army of Paulsonites on the Hill and wander off into consideration of the “counterfactual of what if nothing had been done.”
Let’s just consider what has been done and leave aside what isn’t or what ain’t! What our policymakers have done throughout 2008 and will do in 2009 is precisely a huge transfer of wealth/money to the private financial sector. In short, policymakers have been feeding the Blob!
And as I elaborated on my blog this past week regarding the govt $138 billion bailout of Ken Lewis’ f-ups,”These policies are not working; pursuing them is akin to staying the course and sailing into a worsening storm. Frankly, I’d like to ask when is the Fed and Treasury going to get a grip on reality, stop sailing the ship into the ever-worsening storm, There is more of that storm where it comes from if we stay on this course. And in the end, that debt-financed storm will prove to be a bigger bazooka than anything the Treasury of Fed can fire at it. And you know why it is that the storms bazooka is bigger than ours: for the simple reason that that storm grows every time we finance it with more debt and more borrowings – ala Fisher. This is truly the definition of insanity. We truly need our policymakers/captains to modify their course and behavioral response to this crisis. See the storm for what it truly is: a ginormous debt-financed storm. Do not fire more debt and borrowings into it anymore please, it will only grow larger! Throw the public borrowings in another direction, cast your nets to the other side of the boat.
“You will see the benefits” when the economy improves”, Lewis told investors. Huh?
Investors should note that BACs credit default swaps fell 10 bps following the govt-funded bailout. While this may be a great relief to BAC investors, I promise you that there was a corresponding increase in the credit default swaps of the US government today as the Blob gets closer to its next big meal.
I am pissed and this is no way to spend a Sunday afternoon. So, I am splitsville for awhile.
Oh, but let me leave you with this tidbit Ellen Brown dug up back in the early 1890’s when home foreclosures were escalating to record levels. She found a document called “The Banker Manifesto of 1892” that showed intent to disenfranchise farmers and laborers from their homes and properties:
“We must proceed with caution and guard every move made, for the lower order of people are showing sings of restless commotion. The Farmers Alliance and Knights of Labor should be carefully watched by our trusted men and we must take immediate steps to control these organizations in our interest or disrupt them. Capital must protect itself in every possible manner through monopoly (bank acquisitions) and legislation (TARP and beyond). The courts must be called to our aid…When through the process of law, the comon poople have lost their homes, they will be more tractable and easily governed through the strong arm of the government applied to a central power of imperial wealth under the ontrol of the leading financiers. People without homes will not quarrel with their leaders.”
The origins of the Manifesto are not known, but it was introduced to Congress by Representative Charles Lindbergh Sr who served in Congress between 1903-1913 (when the Federal Reserve came into being ~ wonder if there may be a coincidence to this overlap)
Sion,
It is entirely understandable that you feel it is “hard to get upset about money wasted by the govt bc it doesn’t have an immediate impact” on you that you can feel.”
This is precisely the sentiment the financial sector is counting on – “that you do not consider your future feelings.” That when the rage hits you, it will be too late to act on it constructively. In effect, it puts you behind the curve to be pro-active. Learn to distrust your complacency/apathy please. I am glad you are reading this blog and would hope you encourage others to do so and begin to examine your complacency. This is a good start. If hundreds of millions more would do the same, we would be getting somewhere.
You are absolutely
lwey14,
Your worse notion that it wasn’t moral hazard but career risk and misalignment of interests is well-founded. But career risk and mis-alignment of interests could not have evolved if the markets were regulated not to encourage moral hazard in the first place. The financials as Yves has pointed out before have exceeded their role as financial intermediaries in our society. And how did this happen, praytell, if the lobbyists hadn’t spent all of their time seeing to it that the laws and accounting rules were modified to encourage reckless lending in the first place.
It is a lousy cultural milieu and its role in society needs to shrink.
See how the financial ruling class is sacrificing America’s future to save their own asses. http://seekingalpha.com/article/115275-8-important-facts-about-the-federal-reserve
GO TO GOOGLE, SEARCH “PLUNGE PROTECTION TEAM”!!!!
I was at a CLE seminar where the CFO of a large anc profitable community bank spoke. I asked him why his bank took the TARP money, since it didn’t look like his bank could lend it out for a large enough spread over the 5% dividend to make money. He agreed. He said the reason the bank took the money is that they thought it might come in handy when the economy recovered.
lewy14, I just wanted to remark that I think you make some excellent points, and that the responses to them have been pretty weak.
I’m no Paulson/TARP fan for a number of reasons I don’t have time to go into, but I’m distressed that the counters to your arguments have been so shallow and feeble. I think, as you seem to indicate, If we’re going to come out of this with our skin, we need much more sophisticated thinking on these issues than we’re getting around here and most other places.
For example, if I could just hear someone address the counterfactual in some vaguely satisfactory way, I’d be much more content. But such sure doesn’t seem to be forthcoming.
Mary,
The idea that the TARP has done any good is completely spurious. No one treated it seriously because anyone who reads the news at all closely has plenty of evidence.
First, Paulson changed direction so many times that he undermined confidence. He asked for spending power without a plan. That shows he is either a fool or playing the public for one.
Second, the proximate cause of the market turmoil in Sept-Oct was the forced uwninding of hedge fund positions. The TARP did not thing to alleviate that. That nearly brought the markets to their knees.
Third, as discussed in the post, a lot of the money has gone to sound players. That is a waste, particularly since there is plenty of reason to believe the banking system is insolvent.
Fourth, there is no evidence that any banking crisis could not have been handled through the Fed and the FDIC, with a Congressional authorization to backstop the FDIC. By all accounts, the FDIC is very competent at assessing and resolving dud or near dud banks. The Treasury, by contrast, was scrambling to hire people and was reportedly inadequately staffed to implement the TARP.
Fifth, banks have not used the proceeds to lend. That was allegedly a big objective. So measured against stated objectives, the program has failed.
Sixth, there is no particular reason to believe that propping up bank zombies is a positive development. It was a bad idea in Japan (in fact, the rest of the world complained that Japan needed to clean up it bad loans) and the IMF paper cited in the thread above (which you chose to ignore) also said that approach is not very successful.
Mary, thank you. My remarks were quite pointed (more so, on reflection, than I would have liked), and so Yves was gracious to respond at all.
I indicated above that I’ve been reading and watching Chris Whalen; he’s a convincing and credible critic of the TARP. He doesn’t seem to believe in the “too big to fail” thesis, he thinks that receivership for any insolvent institution is the answer – seize early and often.
Like Fox Mulder, I WANT TO BELIEVE – but I have a couple of questions:
1) “too big to fail” is really “too complex to unwind” – think AIG, or Goldman. Whalen seems to think taking Goldman through receivership is a piece of cake. I’m not so sanguine.
2) capacity and throughput at the FDIC. I believe the banking system was facing the mother of all runs in October. Could the FDIC have seized all the big banks over a weekend?
These are messy questions and issues and reasonable people may differ.
I have this “null hypothesis”, that the Treasury and the Fed did a reasonable job under difficult circumstances. I observe that this idea is enormously unsatisfying on a gut / emotional level – who doesn’t want to be ‘long’ government incompetence! I share this tendency like anybody else – to think the muddling performance of Paulson and Bernanke was actually reasonable is distressing.
Yet I sense a gap between the visceral energy of the critiques, and the substance of them. Not that the Fed and Treasury have been perfect or prescient, only that the level of screw up doesn’t quite rise to the volume of the criticism – given the uncertainties and downsides to all options under consideration.
[Auspiciously, my Blogger word verification for this post is “grouse” – like I said, reasonable people may differ.]
“I have a sinking feeling that a Japanese style “lost decade” is not a bug, it’s a feature, and perhaps the best we can aspire to.”
Wrong. It’s a bug. It’s a bug in the short-term-oriented thinking that pervades decisions when pols are in crisis mode. They will ‘fix’ 2009 with band aids that will hobble us in 2011 and beyond. It’s a bug in Keynesianism, which tries to solve the wrong problem – the problem is NEVER insufficient demand, the problem is always insufficient long-term economic investment, production and growth, and the enablers of same (which are not helped by govt tax-and-deficit-spend).
When we look back in 2012 at what was done in 2009, we wont care if the Q4 2009 numbers were this or that, we WILL care if we are saddled with an extra trillion of foriegn debt that we can’t easily pay back, suffering under subpar growth because our deficits and inflationary policies got out of hand and we had to ‘fix’ that with high-tax high-interest-rate stagflation-era policies. … Keynes was wrong. In the long run we aren’t dead, in the long run we look back, older and wiser, and say: “What the hell were we THINKING?!?”
http://travismonitor.blogspot.com/2009/01/risk-is-four-letter-word-pt-2.html
“I have a sinking feeling that a Japanese style “lost decade” is not a bug, it’s a feature, and perhaps the best we can aspire to.”
Wrong. It’s a bug. It’s a bug in the short-term-oriented thinking that pervades decisions when pols are in crisis mode. They will ‘fix’ 2009 with band aids that will hobble us in 2011 and beyond. It’s a bug in Keynesianism, which tries to solve the wrong problem – the problem is NEVER insufficient demand, the problem is always insufficient long-term economic investment, production and growth, and the enablers of same (which are not helped by govt tax-and-deficit-spend).
When we look back in 2012 at what was done in 2009, we wont care if the Q4 2009 numbers were this or that, we WILL care if we are saddled with an extra trillion of foriegn debt that we can’t easily pay back, suffering under subpar growth because our deficits and inflationary policies got out of hand and we had to ‘fix’ that with high-tax high-interest-rate stagflation-era policies. … Keynes was wrong. In the long run we aren’t dead, in the long run we look back, older and wiser, and say: “What the hell were we THINKING?!?”
http://travismonitor.blogspot.com/2009/01/risk-is-four-letter-word-pt-2.html
“Over in the UK they TARPED their banks with, as a wag put it, Capital with Punishment and took equity instead of preferred stock.”
US approach IMHO is better, since it is higher on the capital structure chain. This is the kind of investment Warren Buffet does.
We can complain about TARP, but IMHO we escaped worse fates. My ignorant uninformed view:
#1 – LIBOR is down, TED spread is down, as noted by another commenter, something has improved, if nothing was done, woul
#2 – Paulson’s original plan was far far worse. It was a $750b plan to buy up toxic cr*p, which could have been sold by *ANYONE* including foreign rich soveriegn fund holders of toxic MBS paper. It was lunacy. Sometime in early Oct – maybe the 20% fall in Dow knocked his brain cells loose – he figured out that it wouldnt work. Plan B, direct capital injection, is about 10X more effective.
#3 – Banks not lending more is NOT a failure, its a feature. The banks have toxic assets that need serious writedown. The TARP money gives them the capital to enable them to write down while maintaining the right capital ratios. This is about keeping banks from imploding.
#4 – hardly a bank giveaway, given what we have carved out of them, and stock prices are reflecting it (Govt action is more about helping bondholders, stock holders are getting short end of stick).
The fact that we are ‘bailing out’ companies like BAC which walked the plank to buy Merrill (at gunpoint of Barnanke and Paulson apparently), and getting nice 5% to 8% divvie preferreds for the trouble is smarter, cleaner and better approach.
Lets face it. Government sucks. It screws up more often than not. It wastes money. Its corrupt, venal and shortsighted. Given all that, I’d say the TARP expenditure, as bad as it is, managed to help stabilize the system and not be a total waste, so it is in the ‘above average’ column as a Govt use of money.
“Over in the UK they TARPED their banks with, as a wag put it, Capital with Punishment and took equity instead of preferred stock.”
US approach IMHO is better, since it is higher on the capital structure chain. This is the kind of investment Warren Buffet does.
We can complain about TARP, but IMHO we escaped worse fates. My ignorant uninformed view:
#1 – LIBOR is down, TED spread is down, as noted by another commenter, something has improved, if nothing was done, woul
#2 – Paulson’s original plan was far far worse. It was a $750b plan to buy up toxic cr*p, which could have been sold by *ANYONE* including foreign rich soveriegn fund holders of toxic MBS paper. It was lunacy. Sometime in early Oct – maybe the 20% fall in Dow knocked his brain cells loose – he figured out that it wouldnt work. Plan B, direct capital injection, is about 10X more effective.
#3 – Banks not lending more is NOT a failure, its a feature. The banks have toxic assets that need serious writedown. The TARP money gives them the capital to enable them to write down while maintaining the right capital ratios. This is about keeping banks from imploding.
#4 – hardly a bank giveaway, given what we have carved out of them, and stock prices are reflecting it (Govt action is more about helping bondholders, stock holders are getting short end of stick).
The fact that we are ‘bailing out’ companies like BAC which walked the plank to buy Merrill (at gunpoint of Barnanke and Paulson apparently), and getting nice 5% to 8% divvie preferreds for the trouble is smarter, cleaner and better approach.
Lets face it. Government sucks. It screws up more often than not. It wastes money. Its corrupt, venal and shortsighted. Given all that, I’d say the TARP expenditure, as bad as it is, managed to help stabilize the system and not be a total waste, so it is in the ‘above average’ column as a Govt use of money.
“Time for FDRs Bank Holiday yet no one will say it …”
I will say it: It’s a stupid idea. It wont help. It will hurt. Even then it was whacked, but in this day and age, that out of touch and completely wrong. Its a good way to create even more panic though.
“Time for FDRs Bank Holiday yet no one will say it …”
I will say it: It’s a stupid idea. It wont help. It will hurt. Even then it was whacked, but in this day and age, that out of touch and completely wrong. Its a good way to create even more panic though.
Hey lewy14,
That is a very good comment. I agree that the lost decade scenario may be the most viable. All else seem to point to horrible consequences for the taxpayer and the dollar.
Anonymous,
I wish I were wrong about the lost decade thing. About the most optimistic thing I can come up with is that “18 months is the new decade” – in other words, everything just happens faster now.
Freedom’s Truth: I agree that the TARP rates “above average” for the Government – a low bar, indeed.
As to whether Keynes is wrong, well, you have your opinion, and that debate has been raging for decades… but I find it hard to see how demand has nothing to do with the issue – if the problem is “insufficient long-term economic investment, production and growth”… how do you have growth, without demand?
It seems possible to me that creating some demand right now for with infrastructure spending could help, for the following reasons: 1) we need it – see, e.g., the electrical grid, and bridges. 2) Now is a good time, while unemployment is high (particularly in construction) and commodities are cheap, 3) We will likely finance much of the deficit ourselves, via increased savings, and 4) while our grandchildren will be paying for this, so too will they be reaping the benefits of improved infrastructure, so it doesn’t strike me as terribly unfair.
Agree that TARP as implemented is less-bad than Paulson’s original 3 page plan. And investment in preferred is better than overpaying for toxic waste.
But now (that we’re not looking again perhaps, or beaten down and worried more about our own problems, which have increased for many people) he wants to try again, and use the second 350B to overpay directly for toxic waste.
There are even economists cooperating with this, by complaining how TARP didn’t originally “fulfill its commitment” to do that.
I have much cynicism about the new administration and its economic direction. Obama knowingly nominated a tax cheat to head Treasury but hoped we would not find out. That’s the sort of folks we have steering the ship. They will steer it skillfully, but likely not in our interest.
How can we not have a lost decade, or (like what followed the Panic of 1873, which is very similar to what’s happened now) a 20 year “Long Depression”.
We need largely to restructure our economy. Many realtors, restaurant employees, finance employees, home builders, etc. will have to be recycled to more industrially useful work. Or they will have to live impoverished old age and be replaced by younger ones who can fit into the economy we must now have.
For a banker to lend, they must know the value of collateral or at least the value of what they are lending for. In my opinion, it would seem that the value of collateral is obfuscated by all of the smoke and mirrors: good bank-bad bank, mortgage rewrites, auto company bailouts, complex derivatives, etc. Maybe I am naive, but how can a banker lend money for any endeavor if they cannot establish market value? I vote for “true value transparency” regardless of the consequences.
Sounds like Freedom’s Truth is Geithner.