The Financial Times published a commentary on Monday talking about the success of the Troubled Asset Relief Program (TARP). The basic premise of the story seemed to be that for a piece of legislation that has been roundly criticized — demonized even — TARP has actually been successful in doing what it was supposed to do. In a sense TARP is the Rodney Dangerfield of legislative programs.
The occasion was the official end of TARP and in a sense the story is correct in that TARP will not cost as much as first thought and much of the money paid out in TARP loans has been repaid. But it doesn’t ask some critical questions, like was it necessary in the first place. Former FDIC Chairman and current chairman of LECG Global Financial Services Bill Isaac has made the point on numerous occasions that the FDIC and Federal Reserve could have provided the capital infusions to banks on their own without a massive legislative effort and would have executed it more efficiently. If you recall the Treasury required some banks to take funds even if they didn’t request or need them. They didn’t want to isolate problem banks — which on the face of it is silly.
Isaac adds that they also could have done it without creating the panic and firestorm in the fall of 2008, which he says is the biggest cost of the legislation.
One has to remember as well that the Treasury never did implement TARP as it was written, choosing to do a capital infusion instead of purchasing toxic assets as first planned by the legislation. Many experts agree that this was a better approach and I would defer to their judgment on that, however, the idea that Congress can pass a major and controversial piece of legislation and then a Secretary of the Treasury execute a vastly different plan with the money allocated for that policy is disturbing.
The underlying problem between perception and reality regarding TARP is quite easy. Those at least partially responsible for the financial crisis, the large investment banks, received a massive bailout and are now profitable ---hugely so with the balance sheets and bonuses to prove it while the rest of the country is mired in tough economic times with double digit unemployment. How is that appropriate? How can that result be defined as a success?
The FT piece also does not address all of the other ramification of TARP and the various policies enacted to address the credit crisis. Isaac in an op ed piece for CNBC discusses this and cites work from John Talbott that attempts to tally the entire cost of TARP and related bailouts. We also tend to forget that the Federal Reserve was working feverishly creating products to help bailout the financial sector and offset the crisis more than a year before the Lehman Bros. debacle brought the crisis to a head.
Though I would agree with Isaac that many of the figures provided are exaggerated--Talbott puts the price tag of the various bailouts and their related consequences at a hair under $15 trillion--all of them are not and the figures are huge. As we noted here at the time, if the situation is as serious as people claim, then it would be appropriate to explain it rationally in detail rather than rely on scare tactics and vague warnings of impending doom.
We still feel that is the case and we are still waiting for an honest accounting of the financial crisis that we are still mired in.