September 16, 2010
I never liked the TARP program. As we approach the second anniversary of its having been signed into law by President Bush, we are getting a better look at how really ugly it has been. Marshall Auerback picked up a law degree from Corpus Christi College, Oxford University in 1983 and currently serves as a consulting strategist for RAB Capital Plc in addition to being an economic consultant to PIMCO. Mr. Auerback recently wrote a piece for the Naked Capitalism website in response to a posting by Ben Smith at Politico. Smith’s piece touted the TARP program as a big success, with such statements as:
The consensus of economists and policymakers at the time of the original TARP was that the U.S. government couldn’t afford to experiment with an economic collapse. That view in mainstream economic circles has, if anything, only hardened with the program’s success in recouping the federal spending.
Marshall Auerback’s essay, rebutting Ben Smith’s piece, was entitled, “TARP Was Not a Success — It Simply Institutionalized Fraud”. Mr. Auerback began his argument this way:
Indeed, the only way to call TARP a winner is by defining government sanctioned financial fraud as the main metric of results. The finance leaders who are guilty of wrecking much of the global economy remain in power – while growing extraordinarily wealthy in the process. They know that their primary means of destruction was accounting “control fraud”, a term coined by Professor Bill Black, who argued that “Control frauds occur when those that control a seemingly legitimate entity use it as a ‘weapon’ to defraud.” TARP did nothing to address this abuse; indeed, it perpetuates it. Are we now using lying and fraud as the measure of success for financial reform?
After pointing out that “Congress adopted unprincipled accounting principles that permit banks to lie about asset values in order to hide their massive losses on loans and investments”, Mr. Auerback concluded by enumerating the steps followed to create an illusion of viability for those “zombie banks”:
Both the Bush and Obama administration followed a three-part strategy towards our zombie banks: (1) cover up the losses through (legalized) accounting fraud, (2) launch an “everything is great” propaganda campaign (the faux stress tests were key to this tactic and Ben Smith perpetuates this nonsense in his latest piece on TARP), and (3) provide a host of secret taxpayer subsidies to the systemically dangerous institutions (the so-called “too big to fail” banks). This strategy is the opposite of what the Swedes and Norwegians did during their banking crisis in the 1990s, which remains the template on a true financial success.
Despite this sleight-of-hand by our government, the Moment of Truth has arrived. Alistair Barr reported for MarketWatch that it has finally become necessary for the Treasury Department to face reality and crack down on the deadbeat banks that are not paying back what they owe as a result of receiving TARP bailouts. That’s right. Despite what you’ve heard about what a great “investment” the TARP program supposedly has been, there is quite a long list of banks that cannot boast of having paid back the government for their TARP bailouts. (Don’t forget that although Goldman Sachs claims that it repaid the government for what it received from TARP, Goldman never repaid the $13 billion it received by way of Maiden Lane III.) The MarketWatch report provided us with this bad news:
In August, 123 financial institutions missed dividend payments on securities they sold to the Treasury Department under the Troubled Asset Relief Program, or TARP. That’s up from 55 in November 2009, according to Keefe, Bruyette & Woods.
More important — of those 123 financial institutions, seven have never made any TARP dividend payments on securities they sold to the Treasury. Those seven institutions are: Anchor Bancorp Wisconsin, Blue Valley Ban Corp, Seacoast Banking Corp., Lone Star Bank, OneUnited Bank, Saigon National Bank and United American Bank. The report included this point:
Saigon National is the only institution to have missed seven consecutive quarterly TARP dividend payments. The other six have missed six consecutive payments, KBW noted.
The following statement from the MarketWatch piece further undermined Ben Smith’s claim that the TARP program was a great success:
Most of the big banks have repaid the TARP money they got and the Treasury has collected about $10 billion in dividend payments from the effort. However, the rising number of smaller banks that are struggling to meet dividend payments shows the program hasn’t been a complete success.
Of course, the TARP program’s success (or lack thereof) will be debated for a long time. At this point, it is important to take a look at the final words from the “Conclusion” section (at page 108) of a document entitled, September Oversight Report (Assessing the TARP on the Eve of its Expiration), prepared by the Congressional Oversight Panel. (You remember the COP – it was created to oversee the TARP program.) That parting shot came after this observation at page 106:
Both now and in the future, however, any evaluation must begin with an understanding of what the TARP was intended to do. Congress authorized Treasury to use the TARP in a manner that “protects home values, college funds, retirement accounts, and life savings; preserves home ownership and promotes jobs and economic growth; [and] maximizes overall returns to the taxpayers of the United States.” But weaknesses persist. Since EESA was signed into law in October 2008, home values nationwide have fallen. More than seven million homeowners have received foreclosure notices. Many Americans’ most significant investments for college and retirement have yet to recover their value. At the peak of the crisis, in its most significant acts and consistent with its mandate in EESA, the TARP provided critical support at a time in which confidence in the financial system was in freefall. The acute crisis was quelled. But as the Panel has discussed in the past, and as the continued economic weakness shows, the TARP’s effectiveness at pursuing its broader statutory goals was far more limited.
The above-quoted passage, as well as these final words from the Congressional Oversight Panel’s report, provide a greater degree of candor than what can be seen in Ben Smith’s article:
The TARP program is today so widely unpopular that Treasury has expressed concern that banks avoided participating in the CPP program due to stigma, and the legislation proposing the Small Business Lending Fund, a program outside the TARP, specifically provided an assurance that it was not a TARP program. Popular anger against taxpayer dollars going to the largest banks, especially when the economy continues to struggle, remains high. The program’s unpopularity may mean that unless it can be convincingly demonstrated that the TARP was effective, the government will not authorize similar policy responses in the future. Thus, the greatest consequence of the TARP may be that the government has lost some of its ability to respond to financial crises in the future.
No doubt.
Two Years Too Late
October 11, 2010
Greg Gordon recently wrote a fantastic article for the McClatchy Newspapers, in which he discussed how former Treasury Secretary Hank Paulson failed to take any action to curb risky mortgage lending. It should come as no surprise that Paulson’s nonfeasance in this area worked to the benefit of Goldman Sachs, where Paulson had presided as CEO for the eight years prior to his taking office as Treasury Secretary on July 10, 2006. Greg Gordon’s article provided an interesting timeline to illustrate Paulson’s role in facilitating the subprime mortgage crisis:
By now, the rest of that painful story has become a burden for everyone in America and beyond. Paulson tried to undo the damage to Goldman and the other insolvent, “too big to fail” banks at taxpayer expense with the TARP bailouts. When President Obama assumed office in January of 2009, his first order of business was to ignore the advice of Adam Posen (“Temporary Nationalization Is Needed to Save the U.S. Banking System”) and Professor Matthew Richardson. The consequences of Obama’s failure to put those “zombie banks” through temporary receivership were explained by Karen Maley of the Business Spectator website:
Chris Whalen’s recent presentation, “Pictures of Deflation” is downright scary and I’m amazed that it has not been receiving the attention it deserves. Surprisingly — and ironically – one of the only news sources discussing Whalen’s outlook has been that peerless font of stock market bullishness: CNBC. Whalen was interviewed on CNBC’s Fast Money program on October 8. You can see the video here. The Whalen interview begins at 7 minutes into the clip. John Carney (formerly of The Business Insider website) now runs the NetNet blog for CNBC, which featured this interview by Lori Ann LoRocco with Chris Whalen and Jim Rickards, Senior Managing Director of Market Intelligence at Omnis, Inc. Here are some tidbits from this must-read interview:
Of course, this restructuring could have and should have been done two years earlier — in February of 2009. Once the dust settles, you can be sure that someone will calculate the cost of kicking this can down the road — especially if it involves another round of bank bailouts. As the saying goes: “He who hesitates is lost.” In this case, President Obama hesitated and we lost. We lost big.