Congressman Dean Heller (R-NV2) is fond of citing his opposition to the TARP program to recapitalize the U.S. financial sector in the wake of the housing bubble collapse. Continued opposition to the TARP program requires several inelegant moves and invites at least an equal number of questions.
The first dance step is usually an avoidance of alternatives. However, the question remains: What would the TARP opponent have done differently at the time? Having created a deregulated shadow system in which massive amounts of leverage had been applied to a decreasing valuation of assets, the banks were going under. They were going under so quickly that by the middle of September 2008 there were very real and justified fears that money market accounts were going to join the spiral into oblivion. It was all well and good to spout “Let Them Go Bankrupt” at the time, but the crucial point was that when speaking of “them” the critics were talking about the whole banking sector. Those who aren’t sure about this prospect should go back and take a look at the stock market in the immediate aftermath of the Lehman Brothers debacle.
The second maneuver tripping the light fantastic is to muddle the numbers. For example, critics are fond of charging that TARP reviews discount other costs to the government in the process of protecting the financial interests of the nation. The AIG portion of the program has been a favorite whipping boy. Opponents of the TARP funding are quick to cite the SIGTARP study which indicated higher than expected costs, however this raises yet another question: How was the Treasury Department supposed to audit the AIG or any other portion of the program? “SIGTARP, however, incorrectly claims that our report is inconsistent with TARP’s audited financial results from March 2010. And in doing so, SIGTARP seems to be arguing that when Treasury conducts any evaluation of the cost of its investment in AIG, it should pretend that the company’s exit strategy was never announced. “SIGTARP’s analysis seems to be stuck in a time warp if they believe that we should ignore AIG’s exit strategy in evaluating our investment in that company. Moreover, they demonstrate a fundamental misunderstanding of the difference between audited financial results – which are backward looking and represent a snapshot in time – and forward-looking valuations of future profits, such as Treasury’s recent report.” [WH] (emphasis added)
Closely related to the Muddled Numbers argument, is the contention that somehow the numbers were astronomical. Hyperbole surrounded any discussion of TARP costs, it was the most expensive ever dearest highest number in the entire whole wide world since Dinosaurs stomped the land. Hardly so. “An IMF study found that the average net fiscal cost of resolving roughly 40 banking crises since 1970 was 13 percent of GDP. The GAO estimates that the cost of the U.S. Savings and Loan Crisis was 2.4 percent of GDP. By contrast, 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.” [DoTreas] Surely 1% of our GDP wasn’t too great a price to pay for stabilizing our financial markets? And, by the way — the program has cost $25 billion, not the $700 billion first estimated.
The third terpsichorean move is to adopt the mantra “When In Doubt Flog Fannie and Freddie!“ This element combines the Wall Street Wish List item (Let us take over the entire secondary mortgage market) with Tea Party variations on a libertarian theme. The combination generates lovely sound bites, but obfuscates the real issues. Thus the question remains: How is the money being repaid? The answer is that this story has a happy ending, whether the critics want to admit it or not.
The Wall Street Journal continues to beat this drum, and got a direct response from the Treasury Department: “The op-ed notes that the cost of rescuing Fannie and Freddie was a major component of overall cost of combating the crisis, but this cost has also been decreasing, not increasing. In fact, it fell in each of the last two quarters as those institutions continue to pay dividends back to taxpayers. And the Office of Management and Budget forecasts that, over the next 10 years, the cost of rescuing Fannie and Freddie will decline from $134 billion today to a total of $73 billion – a decrease of $61 billion or 45 percent.”
Fourth on the list of dance steps is a pirouette into sloganeering: Too Big To Fail. The fact that this is now only tangentially related to TARP is ignored, as is the fact the the Dodd-Frank legislation provides for a process by which banks that are so large that their failure poses a systemic risk can wind-down into bankruptcy without sucking the entire financial sector along with them. [Treas] So, as of now: Who is too big to fail? No one. The key phrase in the Dodd-Frank bill is “orderly liquidation.”* If the FDIC, the Treasury, and the FED believe that the failure of a bank would create systemic risk, then the “orderly liquidation” process begins. Those wishing to consult the step by step process by which this alternative form of bankruptcy takes place should consult the WestLaw/Reuters summation of the provisions. *Evidently, bankers don’t like the word bankruptcy applied to themselves, so the law allows them to be Orderly Liquidated; a distinction without a real difference.
References and additional information:
How Dodd-Frank Orderly Liquidation Regime Works, WestLaw Thomson/Reuters February 2011
Fact Check on TARP, Department of the Treasury, WSJ edition
The Facts on AIG, White House, October 2010
The Bail Outs Worked, USA Today October 2010
Dividends From Fannie and Freedie Surpass Aid, NYT November 5, 2010
Testimony to Senate Oversight Panel, Timothy G. Massad, (pdf) March 4, 2011
TARP worked Updated, Reuters March 4, 2011
Oversight Panel Grudgingly Admits TARP worked, New York Magazine, December 9, 2009
Treasury: Bailout will cost 85% less than expected, Daily Finance, October 5, 2010