TARP Thoughts: I Told You So

Includes: IYF, KBE
by: Bob McTeer

A couple of people have mentioned to me that the TARP repayments are all over the news and suggested that I write about it. My response has been that I didn’t know how to avoid saying I told you so. I’ve written and said often that TARP would produce a profit for taxpayers, or only a small loss. However, I could always feel eyes rolling.

While I never bought the idea that TARP purchases of preferred stock was only from banks ALREADY in good condition, I do think it was limited to banks that WOULD BE expected to be in good condition AFTER the purchase. In many cases the government investment was conditional on the raising of private capital as well.

I didn’t contemplate the use of TARP for aid to Chrysler and General Motors, but losses there aren’t guaranteed either. The Chairman and acting CEO of General Motors has made repayment a priority and, given time, Chrysler may be able to follow suit.

Virtually all the coverage of the repayments focus exclusively on the largest banks (and former investment banks) despite almost 700 smaller bank and thrift recipients. This focus on the largest is unfortunate in more than one respect. It gives the impression that TARP was used only to bail out the largest banks who may have been culpable in the financial crisis when, in fact, most of the recipients of aid were the victims of the crisis, not the villains. The public has come to think of “Wall Street Banks” as all banks. A few of the smaller 700 may not make it, but the interest and warrant income from most of them will probably offset the cost of all.

My main focus in discussing TARP has been on the fact that it worked to stem the collapse of the banking system at little or no cost to taxpayers. This is in sharp contrast to the so-called stimulus program which has created very few jobs at a very high cost. We have effective and low cost on the one hand and ineffective and costly on the other hand. On that scale, the Federal Reserve’s actions are more like TARP, effective and inexpensive. Unfortunately, the public doesn’t seem to be aware of these distinctions. They lump everything together into one big ball of wax and damn it to hell. Unfortunately, financial journalists don’t usually make the distinction either.

To say that TARP was relatively effective is not to say that a different approach might not have been better. I don’t refer here to the original plan to use TARP funds to purchase toxic assets, which Senators and Congressmen bring up constantly as some sort of devious slight of hand or bait and switch on the part of Treasury Secretary Paulson. The fact was, and still is, that it is virtually impossible to establish appropriate prices for those assets, certainly to do so in a short period of time. This same problem is one important reason that PPIP has hardly gotten off the ground.

Bill Isaac acknowledges that the purchase of preferred bank stock was a better approach than purchasing assets, but he argues that it could better have been done by the FDIC. I hadn’t thought of that, but he would know.

The Treasury recently estimated that the cost of TARP would be about $200 billion lower than earlier estimates. That underestimates the saving since the budgeted cost was expected losses rather than the total cost of the program. I still expect the recovery of TARP funds as applied to banks will be close to 100 percent.

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