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.
A Shocking Decision
September 23, 2010
Nobody seems too surprised about the resignation of Larry Summers from his position as Director of the National Economic Council. Although each commentator seems to have a unique theory for Summers’ departure, the event is unanimously described as “expected”.
When Peter Orszag resigned from his post as Director of the Office of Management and Budget, the gossip mill focused on his rather complicated love life. According to The New York Post, the nerdy-looking number cruncher announced his engagement to Bianna Golodryga of ABC News just six weeks after his ex-girlfriend, shipping heiress Claire Milonas, gave birth to their love child, Tatiana. That news was so surprising, few publications could resist having some fun with it. Politics Daily ran a story entitled, “Peter Orszag: Good with Budgets, Good with Babes”. Mark Leibovich of The New York Times pointed out that the event “gave birth” to a fan blog called Orszagasm.com. Mr. Leibovich posed a rhetorical question at the end of the piece that was apparently answered with Orszag’s resignation:
The shocking nature of the Orszag love triangle was dwarfed by President Obama’s nomination of Orszag’s replacement: Jacob “Jack” Lew. Lew is a retread from the Clinton administration, at which point (May 1998 – January 2001) he held that same position: OMB Director. That crucial time frame brought us two important laws that deregulated the financial industry: the Financial Services Modernization Act of 1999 (which legalized proprietary trading by the Wall Street banks) and the Commodity Futures Modernization Act of 2000, which completely deregulated derivatives trading, eventually giving rise to such “financial weapons of mass destruction” as naked credit default swaps. Accordingly, it should come as no surprise that Lew does not believe that deregulation of the financial industry was a proximate cause of the 2008 financial crisis. Lew’s testimony at his September 16 confirmation hearing before the Senate Budget Committee was discussed by Shahien Nasiripour of The Huffington Post:
During 2009, Lew was working for Citigroup, a TARP beneficiary. Between the TARP bailout and the Federal Reserve’s purchase of mortgage-backed securities from that zombie bank, Citi was able to give Mr. Lew a fat bonus of $950,000 – in addition to the other millions he made there from 2006 until January of 2009 (at which point Hillary Clinton found a place for him in her State Department).
The sabotage capabilities Lew will enjoy as OMB Director become apparent when revisiting my June 28 piece, “Financial Reform Bill Exposed As Hoax”:
Another victory for the lobbyists came in their sabotage of the prohibition on proprietary trading (when banks trade with their own money, for their own benefit). The bill provides that federal financial regulators shall study the measure, then issue rules implementing it, based on the results of that study. The rules might ultimately ban proprietary trading or they may allow for what Jim Jubak of MSN calls the “de minimus” (trading with minimal amounts) exemption to the ban. Jubak considers the use of the de minimus exemption to the so-called ban as the likely outcome. Many commentators failed to realize how the lobbyists worked their magic here, reporting that the prop trading ban (referred to as the “Volcker rule”) survived reconciliation intact. Jim Jubak exposed the strategy employed by the lobbyists:
You have one guess as to what agency will be authorized to make sure those new rules comport with the intent of the financial “reform” bill . . . Yep: the OMB (see OIRA).
President Obama’s nomination of Jacob Lew is just the latest example of a decision-making process that seems incomprehensible to his former supporters as well as his critics. Yves Smith of Naked Capitalism refuses to let Obama’s antics go unnoticed:
Ms. Smith has developed some keen insight about the leadership style of our President:
Yes, the Disappointer-In-Chief has failed to deliver for his allies once again – reinforcing my belief that he has no intention of running for a second term.
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