The American Spectator

Jeff Cox at CNBC picks up on something I’ve mentioned before: If TARP was so great because it’s not going to cost taxpayers as much as originally thought, why not more bailouts? 

As Treasury feeds us a steady diet of how much money taxpayers are making off the Troubled Asset Relief Program, you have to wonder why nobody thought of this idea sooner.

After all, if the worst that can happen from the collapse of the banking system is that we make money rescuing failing institutions, then who really cares how much risk they take? Can the Department of Bank Bailouts be far behind?

In his story, though, Cox relates a claim from the National Taxpayers Union that I’m not sure stands up to scrutiny. Cox quotes NTU as saying that the TARP profit is “a myth, a fiction of Washington accounting…because the banks that got bailed out through TARP shuffled all their bad assets over to Fannie Mae and Freddie Mac, which got their own separate bailout. So, really, it should be no surprise that they’re relatively healthy.” And also: “They cut out the cancer and passed it right along to Fannie and Freddie…. The banks have issues with the current foreclosure mess, but the worst loans are no longer their problem, they’re taxpayers’ problem.”

The worst loans may no longer be the banks’ problems, but it’s not the case that they were moved to Fannie and Freddie’s books. AEI scholar and former Fannie Mae exec Ed Pinto has told me that he doesn’t think that Fannie and Freddie have aided the banks in any way by taking bad bank assets onto their own books. For a very detailed look at Fannie and Freddie’s losses, look at this Economics21 piece from last year:

Amazing as it may seem, the losses generated by Fannie and Freddie come from the asset-backed securities (ABS) and loans acquired during the “boom” of 2005-2007. Over 93% of losses are accounted for by securities and loans the GSEs already owned or guaranteed as of December 31, 2007. The remaining 6% of losses come from loans originated in 2008 and 2009 to fund new mortgages (or refis), not stinker loans acquired from banks. 

The numbers add up: Fannie and Freddie are not executing a “backdoor bailout” of banks. 

That doesn’t mean that TARP has been a success, not by a long shot. There are many other ways that the government can and has aided the banks that also received TARP funds. The biggest has been the Fed’s near-zero interest rate policy, which, as an indirect effect, has allowed investment banks to reap risk-free profits. The recent Wall Street Journal article on TARP by three Congressional Oversight Panel members sums up the other interventions clearly: “In fact, other Fed and FDIC programs added another $2 trillion of taxpayer money at risk to the 19 stress-tested banks alone, on top of the $1.1 trillion of MBS purchased by the Fed. TARP is but one-eighth of that total.”

Assistant Treasury Secretary Tim Massad objected to that characterization of the totality of the government’s aid to banks, claiming that “the direct fiscal cost of all our interventions, including the actions of the Federal Reserve, the FDIC, and our efforts to support Fannie and Freddie, is likely to be less than 1 percent of GDP.” That again misses the point: if the government supports a firm in crisis with low-cost funds, loan guarantees, and favorable bad asset purchases, it shouldn’t be a surprise when that firm starts returns to profitability. 

Hence Cox’s point that if the bailouts worked so well in terms of fiscal cost to the government, the government should start bailing out everybody. The fact that TARP isn’t going to cost as much as anticipated is no reason whatsoever to think it was a good idea or that it was properly executed.