By Dr. Pitchfork
It's almost impossible to keep up these days. TARP apologists, especially the Democrat variety, keep popping up like whack-a-moles in this last month before the mid-term elections. On Sunday, we had Steve Rattner spitting his venom in the pink pages of the Financial Times ("How an Unloved Bail-Out Saved America"). Outraged as a spurned debutante, Rattner just cannot fathom why people in fly-over country aren't more appreciative of his efforts. And why are they so gosh darn angry about the "bail-outs" (his quotes)? Having played a major role in the auto portion of the TARP bailouts (no quotes), you might think Rattner would put some major effort into defending it. Instead, we get little more than insult and vitriol. Were we not so "grumpy," "bitter" and afflicted with "financial illiteracy," he says, we'd be grateful to the people who did such a bang-up job trying "to save the financial system." As their propaganda efforts continue to fail, expect to see TARP apologists grow more numerous and unhinged as we approach November 2. For now, time to play whack-a-mole.
In his case, it almost seems as if Rattner didn't even try. His "argument" consists entirely of the following paragraph:
- "No one can doubt that without Tarp financing sources would have fled in terror from the banking system. Almost immediately institutions that dwarfed Lehman in size – potentially, AIG, Citigroup and Bank of America – would certainly have collapsed. Runs on other banks would have followed, causing credit to evaporate in the economy. A depression-era landscape of shuttered banks is easily imagined."
Actually, there's no argument here at all, just a fairy tale -- a fairy tale that ends with this utterly absurd happily-ever-after:
- "Among the few courageous defenders of Tarp has been Mr Geithner, who recently pronounced it to be 'one of the most effective emergency programmes in financial history' and praised the Bush team for having developed it. In the fullness of time, Secretary Geithner will be judged to have been speaking the truth."
Sure, in the "fullness of time," Geithner might become a hero of our kleptocratic ruling class, but in the meantime we little people would prefer to just stick with the facts. First, as we all know by now, credit markets were never "frozen." Neither before TARP, nor after. See here, here and here. In other words, banks were in fact lending to one another and private sources of funding were available. But so were funds from the Fed. As researchers from the NY Fed and MIT have shown, right through the entire crisis period, hundreds of billions of dollars were loaned in the interbank market – and paid back – EVERY SINGLE DAY. Both before and after Lehman, both before and after TARP.
There were stresses in the credit markets, no doubt about that, but TARP had almost nothing to do with helping to alleviate those stresses. More on that in a second.
Let's establish another important fact. Contrary to what Rattner and almost every single other TARP apologist implies, TARP was never the only option available for dealing with the crisis. Their strawman argument is that the "responsible" people in government chose action over inaction, while the idiots and ideologues wanted to do nothing while the world burned. The choice, they want us to believe, was between a) full-bore bailouts of bondholders, bonuses and boardrooms or b) doing absolutely nothing.
But let's be clear about the alternatives to TARP. These alternatives are not the result of Monday-morning quarterbacking. They were proffered during the crisis period, before TARP was even voted on. See here and here.
And how do we know that some of the alternatives to TARP would have actually been feasible and effective during the crisis period? Because some of these alternatives were already being put into use by the Fed and Treasury at the time!
- The Treasury, for example, stopped Paul Kanjorski’s fabled “electronic run” on the money market funds by issuing a blanket guarantee of all money market funds on September 19 – before TARP was even passed.
- The Fed announced that it would intervene in the commercial paper market on October 7 -- four days after TARP was passed and nipped that problem in the bud.
- Further, the Fed stepped up its activity under the TAF (Term Asset Facility) to $600-700B per month in the crisis period. Along with its intervention in the CP market, the TAF was used to both supplement and reinforce the inter-bank lending market.
- As for Rattner's claim that AIG would have failed without TARP, this is demonstrably untrue. On September 17, AIG had already begun sucking tons of cash from a lending facility the Fed had set up the day before. TARP had nothing to do with it. At that time, TARP was nothing more than a few jots and tittles in Hank Paulson's panic-addled brain.
- Though the TARP bill raised the FDIC limit to $250K, new legislation wasn’t needed for the FDIC to do so, or even for the FDIC to guarantee all bank deposits under a systemic risk exception – something which Bair, Paulson, et al. declared almost immediately after the bill was passed. There was almost zero risk at this point of a depositor-led bank run, and the actions taken by the FDIC here could have been accomplished just the same whether it came as part of the total TARP legislation or not.
- The same is true of FDIC guarantees of all bank creditors. Under the systemic risk exception, the FDIC was authorized to do this without anything that came in the TARP legislation. Part of this guarantee was achieved through the needlessly convoluted TLGP (Temporary Liquidity Guarantee Program), but the effect of the gurantees were the same and had nothing to do with toxic asset purchases or bank equity infusions through TARP
It was this set of programs, and not the idiocy of TARP, that calmed the waters and kept the credit markets functioning through the crisis period. What were the effects of TARP? Well, what was billed as an asset purchase program quickly turned, as we all know, into an equity purchase program, neither of which scheme had any chance of calming the markets. On the balance-sheet level, TARP added capital, but it did so in the form of preferred shares that came with a hefty dividend AND restrictions on executive pay. In other words, bank executives had two very good reasons to get rid of the TARP cash as soon as possible. Thus, TARP funds were never seen as permanent or long-term additions to the banks' capital and so it likely had a negative, rathern than a positive, effect on bank lending into the real economy.
Instead of buying preferred shares in the banks in order to shore up capital levels, the same effect (or better, in fact) could have been achieved, at least for regulatory purposes, by repealing FAS 157 (mark-to-market accounting). This was not news to the architects of TARP, because the suggestion had been made loudly and frequently throughout 2008. Of course, mark-to-market was repealed, but not until more than six months later. If TARP really saved the banks and the financial system, then why go to the trouble in the spring of 2009 of repealing mark-to-market?
Besides its balance-sheet effects, TARP also had a profound psychological effect. Contrary to what the apologists claim, anyone who cares to remember knows that TARP did the very opposite of inspire confidence. TARP scared the bejesus out of people! People who had no idea there were problems (Joe Six-Pack) were suddenly told that the world was about to end. Meanwhile, people who knew there were problems suddenly wondered if they weren’t 10 times worse than they previously imagined. Because why, they wondered, would Bernanke and Paulson be running around like panic-stricken Cassandra's, unless the world really was about to end? Bernanke and Paulson were telling everyone they spoke to that the entire world economy was on the verge of collapse and that there would be martial law and tanks in the streets if TARP failed to pass. Yes, as you can imagine, this did wonders to inspire confidence.
TARP apologists also like to point out that the major indexes fell sharply when the first TARP vote failed. Need they be reminded of what happened in the weeks and months after TARP was passed? The major indexes were nearly cut in half. And TARP did what to calm the markets?
The ultimate effect of TARP was to make it next to impossible to resolve or restructure Citi or Bank of America, for example, once the panic had subsided. Rather than play extend-and-pretend in 2009, we could have restructured some of these failed institutions. Instead, calls to break up or restructure the banks were met with cries that we would lose our taxpayer funded "investment" through TARP. Whether intentional or not, the equity stakes from TARP had the effect of making it politically difficult, though not impossible, to do anything other than keep the bailouts going.
Because of the political entanglement from the equity stakes, there is another large and hidden cost associated with TARP. By design, the main drivers of bank earnings over the past two years have been the Fed's zero-interest rate policy (ZIRP) and a steep yield curve. Because Bernanke and Geithner chose to play extend-and-pretend, rather than take decisive action to kill the zombies, banks have been able to "earn" their way to repaying TARP at the direct expense of savers and pension funds. Bank CD's, which many retirees depend on for safe interest income, and governent bonds, which many pension funds are required to invest in, return a paltry 1-2% in the short to medium term and less than 4% in the long term. ZIRP has deprived ordinary people of hundreds of billions of dollars in interest income each of the last two years -- all so that banks can "earn" the money to pay us back.
In conclusion, those who want to claim TARP was a great "success" give the program credit where none is due, and ignore all the costs beyond its nominal price tag.
The bottom line on TARP is that almost no one has been held accountable. And almost everyone, even those most responsible, have kept their jobs, been promoted, been awarded huge bonuses, or have ridden off into the sunset with millions in ill-gotten gains. Our entire monetary and fiscal order has been re-arranged to serve the interests of a few at the very top of the pyramid. The middle class has borne most of the risk. And much of that risk is still with us, whether in terms of our currency, the national debt, or social and political unrest. All the talk about getting the TARP paid back is a red herring. If someone breaks into your house, tears the place up, and then sticks a gun to your head demanding $700B, you don't thank him when he pays you back. Because a) you had a gun stuck in your face, and b) your house is still a freakin' mess.
The message of the bailouts is clear. The guys at the top get served first, at our expense. And the buck stops nowhere.