Home > finance, news, rant > We didn’t make money on TARP!

We didn’t make money on TARP!

August 29, 2011

There’s a pretty good article here by Gretchen Morgenson about how the banks have been treated well compared to average people- and since I went through the exercise of considering whether corporations are people, I’ve decided it’s misleading yet really useful to talk about “treating banks” well- we should keep in mind that this is shorthand for treating the people who control and profit from banks well.

On thing I really like about the article is that she questions the argument that you hear so often from the dudes like Paulson who made the decisions back then, namely that it was better to bail out the banks than to do nothing. Yes, but weren’t there alternatives? Just as the government could have demanded haircuts on the CDS’s they bailed out for AIG, they could have stipulated real conditions for the banks to receive bailout money. This is sort of like saying Obama could have demanded something in return for allowing Bush’s tax cuts for the rich to continue.

But on another issue I think she’s too soft. Namely, she says the following near the end of the article:

As for making money on the deals? Only half-true, Mr. Kane said. “Thanks to the vastly subsidized terms these programs offered, most institutions were eventually able to repay the formal obligations they incurred.” But taxpayers were inadequately compensated for the help they provided, he said. We should have received returns of 15 percent to 20 percent on our money, given the nature of these rescues.

Hold on, where did she get the 15-20%? As far as I’m concerned there’s no way that’s sufficient compensation for the future option to screw up as much as you can, knowing the government has your back. I’d love to see how she modeled the value of that. True, it’s inherently difficult to model, which is a huge problem, but I still think it has to be at least as big as the current credit card return limits! Or how about the Payday Loans interest rates?

I agree with her overall point, though, which is that this isn’t working. All of the things the Fed and the Treasury and the politicians have done since the credit crisis began has alleviated the pain of banks and, to some extent, businesses (like the auto industry). What about the people who were overly optimistic about their future earnings and the value of their house back in 2007, or who were just plain short-sighted, and who are still in debt?

It enough to turn you into an anarchist, like David Graeber, who just wrote a book about debt (here’s a fascinating interview with him) and how debt came before money. He thinks we should, as a culture, enact a massive act of debt amnesty so that the people are no longer enslaved to their creditors, in order to keep the peace.

I kind of agree- why is it so much easier for institutions to get bailed out when they’ve promised too much than it is for average people crushed under an avalanche of household debt? At the very least we should be telling people to walk away from their mortgages or credit card debts when it’s in their best interest (and we should help them understand when it is in their best interest). 

Categories: finance, news, rant
  1. Naive about money I guess...
    August 29, 2011 at 1:47 pm

    “At the very least we should be telling people to walk away from their mortgages or credit card debts when it’s in their best interest.”

    Wow! How does that work? I always thought the bank or credit card company you owed money to would hunt you down and force you to pay somehow.

  2. Bindicap
    August 30, 2011 at 2:51 am

    It is hard to tell someone else what is their best interest… They may want to stay in the neighborhood and keep the kids in the same school. People do value maintaining their credit too.

    The way to discharge debts has a lot of negative associations — bankruptcy. But you cannot modify your home mortgage, and student loans cannot be discharged. I actually think residential mortgage cram down as here http://www.calculatedriskblog.com/2007/10/just-say-yes-to-cram-downs.html would have been good policy and still would be. Ideally more negotiated modifications would result too.

    Regarding the Morgenson column based on Bloomberg reporting — they have basically been feuding with the Fed and punishing them with ridiculous wrong reporting. Sounds like a kooky conspiracy, I know, but see Altig (http://macroblog.typepad.com/macroblog/2011/05/secret-loans-that-were-not-so-secret.html, there is a link to a different take by Felix which did not impress me). It’s perfectly proper to review our institutions’ performances and hold them accountable, but it should be based on the real record and not nonsense that makes a good story.

    Rather than complain the Fed did a good job maintaining the financial infrastructure, it makes much more sense to complain that we are not doing enough on the most critical issues of jobs and growth. This is one half of the Fed’s mandate and it’s really discouraging that it is not seen as a highest priority now. Unfortunately the Fed’s tools, even if it did have the will, are limited where we already have minimal rates. People complained about QE used for this, and the Fed’s independence even seems under threat these days.

    Even beyond the Fed, we should see a greater focus on this from congress and the executive. We finally are seeing stories that the president will have some kind of jobs package next month, but it’s hard to be hugely optimistic and all the politics surrounding this are very broken.

  3. human mathematics
    August 30, 2011 at 4:35 pm

    The crux of the question is: what do investment bankers *actually do* for society? They broker deals for corporations, which has a social value — but how much? If we regulated away all financial innovation, how badly off would our society be?

    The Economist cited an economics paper saying that long-term growth in countries with “advanced financial systems” beat the growth rate of the complement by 1% year-over-year. That’s a huge social value, as long as the wealth /income/jobs aren’t trapped by the highest decile. But what about specific risky financial innovations like swaps on high leverage, on a murky balance sheet? Were those necessary to the extra 1% year-over-year?

  4. FogOfWar
    August 30, 2011 at 8:23 pm

    I’d be interested in the paper if you have a link or title/author. In particular, what’s the definition cutoff for “advanced financial system”? My intuition is that having things like centralized check clearing or regulated stock markets for 401(k) holders or a transparent futures market for simple contracts for commodities or the FDIC/deposit insurance help growth, but the presence or absence of things like knock-in/knock-out OTC interest-rate swaps bear no relation to GDP growth at all.

    The term “financial innovation” is often used by the industry as a blanket term to conflate those two very different things and argue that the set including the latter (which is, IMHO, largely useless to society) should be protected along with the more useful former list…

    -FoW

    • human mathematics
      August 31, 2011 at 9:24 pm

      http://www.economist.com/node/12926120

      It’s I guess a reference to Martin Wolf’s book “Fixing Global Finance”.

      Mr Wolf, chief economics commentator for the Financial Times, begins with a truth that is easy to forget: sophisticated finance does bring benefits. Finance allows the creation of vast enterprises out of the combined capital, supplied at modest cost, of millions of people. It permits upstarts to launch companies, challenging the power of incumbents. It allows people to smooth their spending over a lifetime. It facilitates risk sharing and insurance. Empirical studies confirm that these advantages are real. Countries that had large financial sectors in 1960 grew faster over the next three decades than those that did not. A doubling in the size of private credit in a developing country has been shown to boost the growth rate by an average of 2 percentage points a year. Developing countries that open their stock markets to foreign investors reap big benefits: output per worker grows by 2.3 percentage points faster than it would have done otherwise.

      So financial sophistication is a boon. But it is also dangerous….

  5. Danny Black
    September 3, 2011 at 6:08 am

    Erm, 15-20%? She might want to check the annualised returns they got on GS TARP money. Typically Morgensen, unable to get basic facts right. As far as I can tell it is a requirement for financial journalists to be utterly clueless about their field and have low single-digit IQs.

    • September 3, 2011 at 6:52 am

      No she didn’t claim we got those returns. She claimed we should have. Please see the quote from the article.

  6. September 8, 2011 at 3:36 pm

    Thanks for your concepts. One thing we’ve noticed is banks along with financial institutions are aware of the spending practices of consumers and as well understand that the majority of people max away their credit cards around the getaways. They properly take advantage of this fact and begin flooding your own inbox as well as snail-mail box having hundreds of Zero APR card offers soon after the holiday season finishes. Knowing that for anyone who is like 98% of all American public, you’ll hop at the possible opportunity to consolidate credit card debt and shift balances for 0 annual percentage rates credit cards.

  7. September 27, 2011 at 12:02 am

    The Daily Tarp Update as of Sept 26th, 2011 reports a gain of just under 5% for the bank bailout on a cash basis. That 5% does not include (as far as I can tell) any tax benefits, buy backs, time value of money, opportunity cost of capital, or the low cost of money associated with the bailout/Fed actions.

    http://www.treasury.gov/initiatives/financial-stability/briefing-room/reports/tarp-daily-summary-report/Pages/default.aspx

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