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The Spectacle Blog
On Tuesday, Treasury Secretary Tim Geithner went before the Congressional Oversight Panel and testified that the big banks have repaid about 75 percent of the TARP funds they received, and that the government expects “TARP investments in banks to generate a positive return on the whole” for taxpayers.
But if the message that the administration wants the public to hear is that TARP has proved a good deal for taxpayers, it should be met with skepticism. Taxpayers did not get a good deal on TARP. Instead, the big banks got a very advantageous bailout and put it on the government’s tab. Unfortunately, as the financial reform bill wends its way through Congress, there is little indication that anyone other than Rep. Jeb Hensarling understands this.
In his testimony, Geithner laid out the administration’s excuse for claiming that taxpayers got a good deal on TARP:
To date, banks have repaid approximately 75 percent of TARP funds they received, and TARP investments in banks have generated taxpayers $21 billion in income from dividends, sales of warrants and stock, and fees from cancelled guarantees.
There are two problems with Geithner’s system of accounting. First, taxpayer support for the big banks during the financial crisis went beyond TARP funds. Second, as financial blogger Yves Smith explains, merely recovering TARP funds does not constitute a good deal - far from it:
Most important, the key metric as to whether the deal was a good deal is not the speed of repayment, as the Adminstration’s boosterism implies, but whether the deal was a good one given market conditions as of October 2008. Answer: not at all. The deal was lousy on its face, and it did NOT serve to advance what should have been the overarching objective, namely, putting the industry on sounder terms, say by using the leverage to extract key concessions. Instead, this was another manifestation that the officialdom has adopted through the entire crisis: patch the system up with duct tape and baling wire, and if it looks even remotely operational, tout it as tremendous success.
In other words, in late 2008 and early 2009, Wall Street was in big trouble and would have failed without government aid. If the banks were insolvent, as opposed to merely illiquid, as then-Treasury secretary Hank Paulson argued, they had nowhere else to turn, and would have made enormous concessions in return for immediate help. The feds could have demanded that the banks agree to stringent reforms, as Smith suggests, or they could have stipulated punitive terms to ensure that taxpayers were rewarded monetarily for taking on the risk of injecting capital into the banks.
Instead, Paulson, Geithner (as New York Fed chief), and company required neither, and instead gave the banks very favorable terms. Now that the banks are doing well enough to pay back TARP funds in dividends and warrant sales, Geithner is claiming that they were liquid all along, and that the Paulson plan worked to perfection.
The reality, though, is that the investment banks were insolvent, and that they profited not just by TARP but also by the government’s rescue of Fannie and Freddie and by the Fed’s extremely accommodative monetary policy. It’s questionable that the big banks would be profitable today in the absence of these measures.
Look at the non-big banks that the government decided needed bailouts. They are still largely insolvent: Fannie and Freddie are expected to lose around $400 billion. Geithner acknowledged in his testimony that AIG will probably never pay back the $182 billion in TARP funds it received, and the same goes for GM and Chrysler. Many of the community banks deemed troubled enough for TARP are having trouble paying taxpayers back.
What is the difference between these non-investment bank bailout recipients and the TARP recipients Geithner brags about? The investment banks profited by exploiting a simple carry trade: borrowing short term at the Fed’s near-zero rates and selling longer term debt with higher yields. Without this “transfer from savers to banks,” the investment banks would probably be in the same position as the other bailout recipients - insolvent to this day.
For buying stakes in banks that were insolvent without their aid, the taxpayers deserve more than merely getting their money back. A good deal would have been enormous profits and the end of “too big to fail.” Geithner’s deal - breaking even on TARP loans to banks and instituting some meaningless regulations - falls far short.
Since the bailouts allowed the banks to survive and become as profitable as they are today, and Fannie and Freddie’s resolution is looking like by far the most expensive piece of the financial rescue efforts, it only makes sense to put the investment banks on the hook for the endless Fannie and Freddie bailouts. Jeb Hensarling’s attempt to do exactly that was a smart move.
View all comments (12) | Leave a comment
More Blog Posts by Joseph Lawler
http://spectator.org/blog/2010/06/24/geithners-good-deal-for-taxpay
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Ken (Old Texican)| 6.24.10 @ 5:07PM
Joseph,
We taxpayers got "raped" ...not "hosed".
Are you guys scared to use the correct terms?
I am personally sick of euphemisms.
Please grow some.
paul nelson| 6.24.10 @ 6:11PM
the key point here is that anyone who had held savings in instruments denominated in US dollars had the bulk of those savings confiscated. If there are three times as many dollars existant now than there were three years ago then each dollar is worth roughly a third of what a dollar was worth three years ago. some of those savings were transferred to money center banks and the federal government as the world's biggest devtor kept some of it for themselves. It really doesn't matter if the saver was a little old lady in Kansas or the Chinese government--savers were truly raped.
Purple Lips| 6.25.10 @ 7:47AM
Excellent point. Since Dec 2008, the Treasury printed over $2 trillion in new cash and coin. That lute was depositied in the Federal Reserve Bank, from which it enters the financial system and has thus put downward pressure on the dollar (if one doubts this inflationary pressure, just look at gold and commodities. Or better yet go grocery shopping).
But it gets better, still. Private commerical and investment banks have used the Feds low interest rates to borrow huge sums of money and purchased short term T-Notes at 3.5-3.75% interest. If Goldman borrowed $100 billion at negative interest rates and bought 6 month T-Bills, Goldman would make $3.5 billion plus the inflated rate of the dollar (when interst rates are negative, the person who lent the money actually loses money). This explains the near record bonuses Wall St has endured since Obama came to town. Lending money to the government is the new thing.
If anyone wishes to know why banks are reluctant to lend to private businesses look no further than DC. Why should a bank risk its cash when it has a prefect means of making money?
Alas, nothing good lasts forever. Even Bernecke is now worried. Last month he convened a pow-wow with top officials to discuss the possibility that the Obama Magic may not work at all. The year 2011 may be very painful for everyone.
Curly Smith| 6.25.10 @ 8:21AM
Where did all of the "toxic assets" go? When TARP was passed, the stated theory was that the Feds could hold the assets until they were no longer "toxic" because the government could take a longer view.
As I read the article it seems to me that the Big Banks might have used the money that they skimmed off of consumers to write-down the bad loans. But, I don't get the sense that they did. Rather, I get the sense that the Banks (plus Fannie and Freddie) are still sitting on piles of bad loans and merely enriched themselves at taxpayer and consumer expense.
In other words, we took $800B out of circulation with TARP, the banks then took $800B plus a tidy profit off of consumers to "repay" TARP, and all of the bad mortgages are sitting in a "toxic asset landfill" waiting to re-emerge. We did a $2 trillion two-step that accomplished nothing but rewarding the individuals who were instrumental in the collapse. And we're still "unexpectedly" surprised that the economy hasn't recovered?
Purple Lips| 6.25.10 @ 8:34AM
Here's what happened to the toxic assets. Slowly the federal government bought them from the morgage and commerical banks. In March of 2009, Congress removed the Mark-to-Market accounting rules from the Sarbox law. And bingo! By the magic of congressional action, these assets were no longer toxic! Shazaaam! For those banks that could hold on to those assets long enough for Congress to remove M2M, they no longer needed TARP. And once those assets that the Treasury and Fed owned no longer were toxic, they auctioned them off right back to the banks. Sweet.
Here's a dirty little secret. As early as August 2008, Congress was being lobbied to remove the M2M accounting rules. They didn't budge. I'm not into conspiracy theories, but a whole lot of grief (and taxpayers money spent) could have been avoided.
Curly Smith| 6.25.10 @ 9:33AM
So when's the other shoe going to drop? The article mentions the $400B that Fannie and Freddie will lose, but there's got to more bad loans than that. I recall the idiocy of M2M but removing the restriction shouldn't change anything for many areas where housing prices dropped 50% and there are vast swaths of empty houses. Those prices might recover within the life of the 30-year mortgage but the loans are worthless if you forecast reasonable price growth. At some point those loans will have to be written off as bad debts otherwise any banking regulation is absolutely useless.
Ryan| 6.25.10 @ 11:06AM
This is what happens when you have a government guarantee behind some of these assets.
Remove the guarantee, and banks decide that it isn't worth the risk.