Opinion

Felix Salmon

Judging TARP

By Felix Salmon
October 7, 2010

Warren Olney had a very interesting conversation this afternoon about TARP, as the official disbursements come to an end and the debate begins over whether or not it succeeded.

The official spin is that TARP was a great success. But the official spin is decidedly unconvincing:

Businesses have added jobs for eight straight months. Private investment and confidence in banks have returned. The cost of borrowing for businesses, municipalities and individuals has declined dramatically.

This is true, but it has nothing to do with TARP: instead, it’s almost entirely a function of monetary policy. TARP might have arrested the global panic for long enough that Bernanke’s policies had time to start working, but that’s about it.

Treasury complains that the public think of TARP as being mainly a bank bailout — but in fact that’s exactly what it was. The Detroit bailout might have been done very well, but it was an afterthought, done with funds left over which hadn’t gone to banks.

As a bank bailout, TARP was if anything too successful. The banks were largely responsible for causing the global financial crisis which left millions of people kicked out of their homes, laid off from their jobs, or both. But then, with the TARP bailout, they rapidly bounced back; the bankers who remain — and that’s most of them — are now anticipating bonus checks to rival what they were receiving at the height of the credit bubble. The little guy was hurt hard; the fat-cat bankers are smiling, unremorseful, and back to their old ways already.

Politically speaking, bank bailouts are always going to be fraught things. And the way to prevent the kind of public anger we’re seeing right now is to ensure that while the banks might survive, the bankers have to be prosecuted — just the way they were in the 1930s and in the 1980s, after the S&L meltdown. That hasn’t happened: there has been no accountability for the financial crisis at all. Which is naturally going to make people angry.

And the government tends to go very quiet when asked whether TARP has lived up to its stated aims, which included much more than rescuing banks. TARP was meant to boost small-business lending, for instance; it hasn’t done that. And it was also designed to help the foreclosure crisis — which instead has got worse.

Finally, TARP failed at the very thing enshrined in its name: doing something permanent to solve the problem of troubled assets at banks. Under its original conception, TARP was meant to be used to buy up those assets and get them off banks’ balance sheets. But that plan went by the wayside, and was never resurrected. And so all those troubled assets are still there, festering.

We’re still a long way from being able to render a final verdict on TARP. But the best that can be said for it at this point is that it helped to arrest the sickening downward spiral that the global financial system was falling into, and that it came in handy for bailing out the automakers. Against that, it failed to get banks lending again; it failed to do anything about the foreclosure crisis; it failed to make any kind of a dent in the unemployment crisis; it failed to hold bankers accountable for their actions; and it succeeded in generating a broad-based mistrust of institutions: the government and the financial-services industry certainly, and the judicial system possibly as well.

TARP was always a rushed, ad hoc policy; even its architects never really had much of a vision for how it should be used. As such, its failure comes as little surprise. But let’s not try to pretend that it was some great success. Yes, it’s good that most of the money is likely to be repaid. But that’s neither necessary nor sufficient for TARP to be considered a success.

Comments
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“TARP was always a rushed, ad hoc policy; even its architects never really had much of a vision for how it should be used.”

That may well be true, but the general framework was conceptually correct: save the firms long enough to get them back on their feet, and gain participatory profit on the upside–which can be used to help prevent this happening again.

I hate the “TARP is almost profitable” meme for precisely that reason–they’re trading that possibility of upside gain (which would have been, effectively, the “fee” to ameliorate future crises) for “well, we sorta kinda broke even, if you ignore reality.”

It’s scary that Tim Geithner has made Hank Paulson look like a Public Servant by comparison.

Posted by klhoughton | Report as abusive
 

Recall, TARP was not just about giving the banks the funds, it was about FORCING them to take the funds, whether they wanted them or not. Presumably, having excess capital would encourage them to lend. Allowing the banks to pay back the TARP funds almost immediately (to allow their bonuses) meant that TARP was never really implemented, and that private gain once again trumped public good. (Leaving aside the question of whether TARP would have been effective.)

Posted by maynardGkeynes | Report as abusive
 

TARP Needs a Publicity Agent

If the US Treasury is even close to their projections that, at the end of the day, the TARP bailout will cost US taxpayers no more than $50 Billion and actually might turn a profit, how can we view this program as anything less than a resounding success?

TARP’s paramount objective was to stabilize the US financial services industry and by extension, the global markets. Yes, there were many other items on the wish list of objectives for the program but stabilizing the markets was by far the 800 pound gorilla of the program’s objectives. Even the severest critics of the program have to admit that this objective was met and perhaps, even exceeded (i.e. saved some companies that might not have needed saving).

Yet despite all this positive vibe coming out of the program and the results tallied by the Treasury this week, the general consensus in the media and academic circles is that TARP was/is a failure.

Certainly, one can understand the general public’s conjugation of the word TARP to include solving everything from job creation to healthcare, as the word TARP has come to symbolize the failure of government to address these more “localized” symptoms of the Great Recession. However, for folks who should perhaps know better, the easy path has been to simply avoid making a distinction between TARP and other policies and programs.

The fact of the matter is that the long debated healthcare legislation and the recently passed Todd-Frank financial services reform legislation have much more to do with the affairs and the relative improvement of the lot of the average US citizen, as we recover from this mess of historical proportion.

Makes one think that, if TARP were an actual person (let’s call him Tom TARP), and he was looking for some advice, I might suggest that he spend some of that profit the program might generate to hire a good public relations firm and get the “real story” out there.

If it wasn’t such a serious topic it might be humorous to reflect on the “Mother of All Bailouts”, the Resolution Trust Corporation, and how that, purportedly, very successful bailout of the US Savings and Loan Industry cost US taxpayers approximately $160 Billion. Compare that ‘conventional wisdom” against the current TARP cost estimates of no more than $50 Billion (and possibly a profit) and the relative size and scale of the two events and TARP is a clear winner; a first round knockout!

Maybe Mr. Giethner should convene a séance to call back the ghost of Bill Seidman to serve as his chief spokesman. Now there was a guy who could sell a bailout program! While he’s at it, maybe Bill could help “Steve Securitization” with his image too!

Mark F. Ferraris
Editor
securitization monitor

Posted by markferraris | Report as abusive
 

@Mark: The first rule of Public Relations is that you you can’t convince someone of something they don’t already believe. That pretty much explains why TARP’s present PR firm, headed by President Barack Obama and Tim Geithner, has been so notably unpersuasive to date. What they are saying is believed by almost no one, and for good reason. BTW, the analogy to the RTC is so flawed in so many ways, that I think you need to reexamine the historical record. (Hint: RTC seized the assets of the failed banks, booted out management, and referred prosecutions to DOJ.)

Posted by maynardGkeynes | Report as abusive
 

I think you underestimate the global calamity that TARP was almost solely responsible for preventing.

If the Titanic’s engineers had managed to keep the ship afloat after hitting that iceberg, passengers like you would have still complained about the list.

Posted by RobRob | Report as abusive
 

And people like you and Obama would have reappointed the Captain.

Posted by maynardGkeynes | Report as abusive
 

You and others are vindicated for certain being Barofsky is admitting you were right all along.

Please read the whole article by him below, but this part is especially telling:

“The act’s emphasis on preserving homeownership was particularly vital to passage. Congress was told that TARP would be used to purchase up to $700 billion of mortgages, and, to obtain the necessary votes, Treasury promised that it would modify those mortgages to assist struggling homeowners. Indeed, the act expressly directs the department to do just that.

But it has done little to abide by this legislative bargain. Almost immediately, as permitted by the broad language of the act, Treasury’s plan for TARP shifted from the purchase of mortgages to the infusion of hundreds of billions of dollars into the nation’s largest financial institutions, a shift that came with the express promise that it would restore lending.

Treasury, however, provided the money to banks with no effective policy or effort to compel the extension of credit. There were no strings attached: no requirement or even incentive to increase lending to home buyers, and against our strong recommendation, not even a request that banks report how they used TARP funds. It was only in April of last year, in response to recommendations from our office, that Treasury asked banks to provide that information, well after the largest banks had already repaid their loans. It was therefore no surprise that lending did not increase but rather continued to decline well into the recovery. “(

read the rest here:
http://www.nytimes.com/2011/03/30/opinio n/30barofsky.html?_r=1

Posted by hsvkitty | Report as abusive
 

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