Time reveals the truth about TARP bailouts

Now that it’s been about a year since the nation stood on the brink of financial catastrophe, we are in a better position to understand what actually happened when the government poured trillions of taxpayer dollars into the nation’s financial institutions via the TARP program – one of the most hotly debated government actions in the nation’s history.

Those who are in support continue to argue that our economy would have been even more devastated had this money not been pumped into the financial system. Those who are against the bailouts continue to argue that TARP was one huge gift of taxpayer money to the bankers at the expense of the regular guy and that we would have made it through the crisis without the TARP program. It may have been more painful, but sticking with our free-market beliefs would have been the truer expression of American economics.

With the benefit of some hindsight, we can now see that both sides of the argument are turning out to be right in many ways.

There is little question that had the Fed and Treasury not taken dramatic action to pump up the financial institutions, what became a serious recession would have likely become something far worse. So give some credit to these government institutions for reacting to a potential catastrophe and taking steps to save the situation from the worst possible result – even if they should have seen it coming long before it hit. While we will never know for certain what it would have been like had the Fed not stepped in, we know enough to conjecture that life could have grown even darker in America for considerably more than those currently suffering under crushing unemployment.

At the same time, the U.S. Government made a bad deal….a really bad deal.

Think of this in terms of  ’corporation A’ spotting another company that is in trouble. Corporation A recognizes that rescuing the failing company by acquiring it would be good for its own business in the long term. The board makes a smart decision to buy the company. But when corporation A sits down to negotiate the deal with the failing company, corporation A somehow fails to realize that it is holding all the cards. As a result, corporation A buys the company but makes a really bad deal. They overpay, guarantee jobs to existing management, etc.

While corporation A will have done the right thing for its shareholders by taking advantage of the opportunity, they will have served the same shareholders poorly by making a far worse deal than what could have been accomplished. At the very least, such a deal would leave corporation A’s shareholders wondering why their board of directors negotiated so badly.  Were they just dumb or was there something else at work – something that is being hidden? Was the chairman of the failing company the brother-in-law of the chairman of the purchasing company? Why else would the guy who ran his company into the ground still have a high paying job? After all, nobody would make such a ridiculous deal unless there was something in it for someone.

This is what happened with TARP. Using the above analogy, the taxpayers are the shareholders of ‘company A’ and our board of directors (the government) did what would appear to be in our best interest but made a really stupid deal in the effort.

The question that grates on the American public is – why?

Virtually none of the bankers who had led us to the brink of disaster by operating Wall Street casinos with investor money were ever held accountable for their behavior. That’s just stupid. If we were going to save their businesses, how could we not toss out the management who got the business into trouble in the first place? That’s bad business.

Investors who had put their money to work by purchasing the stock of these financial institutions were never made to pay for their bad judgment. Again…stupid. When investing in the market, if one chooses well, they will receive their reward in the nature of rising share value. But, if one chooses poorly, well…that’s life. Yet, this is not what happened with the TARP bailouts. Investors who made a bad bet were never made to pay the price for their bad judgment.

And then there were the guarantees. We socialized the debt of these failed financial institutions when the taxpayers put up $4.3 trillion of taxpayer money to guarantee the risk of the institutional debt, while leaving the profits to the financial institutions we were saving. So, when Goldman Sachs roared back to life this year with record profits, there wasn’t much in it for the taxpayers who had allowed Goldman to stay in business in the first place. Their successful year paid off big for Goldman’s management and investors, but those of us who made it possible got ‘bupkis’.

Dumb…dumb…dumb.

In a report issued today, Elizabeth Warren, Chairwoman of the Congressional Oversight Panel charged with the responsibility of serving as the watchdog of the TARP program, commented on the problems created by such a guarantee program.

It’s a very dangerous tool. It did well this time but we might not always be so lucky.
Via AP

Warren, who is widely regarded as possibly the only person in a position of authority who is telling the full truth about TARP to the public, expresses concern that we made it far too easy for the banks. While it looks like the taxpayer is going to make out okay on the guarantees (we will likely end up earning a small profit), by not exacting a severe, or at least a reasonable price for our collectively generosity, we made it too easy for banks to be tempted to continue their errant business practices knowing that there is precedent for being bailed out when they screw things up. The result is that the financial institutions are far more likely to lead us right back into another financial disaster somewhere down the road.

While we now know that the government likely acted correctly to save the large financial institutions so as to avoid trashing the entire financial system, we also know they acted poorly in the deals they cut when giving away the money.

The question we must respond to is – why?

The more cynical among us have good reason to suspect that this bad deal was the direct result of the cozy relationship between government entities such the Treasury and the Fed and their friends on Wall Street. Many, if not most, of the Treasury’s top officers come from Wall Street. Hank Paulson, the man responsible for not being on top of the situation in time to cut a better deal and then handing out money like it was candy is a past CEO of Goldman Sachs.

But there may be another explanation. Panic. Sources tell me that Henry Paulson had a reputation of not doing well under pressure going back to the days of his supremacy on Wall Street. While he was a clever, inventive trader and innovator of financial instruments, pressure situations were just not his thing.

Imagine the pressure he was getting as everything began to cave in. He had a boss who, already facing a highly questionable legacy, did not want to be the President of the United States when the nation’s financial establishment went into a tailspin, driving us into a full scale depression. You can just hear Bush saying, “I don’t care what you do or how you do it – just fix it!” Memories of Paulson getting down on one knee and pleading with Speaker Pelosi to do as he was asking (that did actually happen) reinforce the notion that Paulson was in full panic mode.

However, Wall Street did not panic – and they most certainly took advantage.

Whatever took place during those strange days in 2008, one thing we know for sure is that regulation is required to make it harder for Wall Street to take us down with them someday in the future.

But will it happen?

Sadly, you shouldn’t hold your breath. If you thought the health industry lobby was impressive, wait until you get a load of Wall Street’s government manipulators who will soon be stepping up to the plate as Congress gets around to the attempt to regulate the financial industry.

Believe me – you ain’t seen nothing yet.