Why TARP Was a Taxpayer Failure But a Political Class Success
Almost two years ago, the political class was in a tizzy, claiming that if the Congress and the President did not immediately pass the massive TARP program to bailout out the country's financial institutions, the entire world banking and economic system would collapse. And when they said immediately, they did not mean in a few months. At that time, the politicians of the time were frantically claiming that the bill had to be passed in a few days, weeks at most, to avoid financial catastrophe.
At the time, however, there were two major questions regarding the haste that the politicians said was required. First, if this disaster was so large and so imminent, how could the political class have been so blind and ignorant not to see it coming? Second, even when the political class has years to study a problem, they rarely get the solutions right so the odds were definitely stacked at them getting a hastily written, voted, and implemented TARP right, both from a waste and fraud perspective.
Now that we are almost two years removed from the TARP implementation, it might be a good time to see if the program actually did any good and whether or not the hundreds of billions of dollars involved were well spent. Now, I am not an expert on sophisticated financial and government Treasury concepts, I am ignorant of what the warrants were that the Treasury Department purchased, and other high finance tools. However, I do understand the following facts:
- According to Wikipedia, the TARP legislation was signed on October 3, 2008.
- Fortune magazine reported on October 29, 2008, that the biggest financial institutions received their first TARP payments.
- On June 17, 2009, a New York Times article reported that JP Morgan and nine other banks had already repaid their TARP money.
- In that article, JP Morgan chief executive, Jamie Dimon, said that his bank never needed the money in the first place.
- A similar article on CNNMoney.com reported that Chicago based bank, Northern Trust, also confirmed it was going to pay back the Treasury Department the $10 billion TARP payment it received. However, contrast this action with a recent article in the August 16, 2010 issue of Fortune Magazine which stated that Northern Trust has had twenty two consecutive years of profits (including the years of The Great Recession), it's savings deposits were up 50% in 2009 vs. 2008, and during the financial crisis, Northern Trust customers waited in long lines to deposit about $90 million a day that those customers were bringing in from other financial institutions.
- This CNNMoney.com article also reported that the larger lenders had been working hard to get out from under the TARP requirements and restrictions for several months and that many had raised billions of dollars in fresh capital ands had issued debt without government backing.
- Several months prior to the onset of the TARP payments, the Associated Press reported that many of the big financial institutions that received government bailout money had made big contributions to each political party's Presidential convention. Four of these companies alone, AIG, Citigroup, Goldman Sachs, and Freddie Mac donated a combined $3.1 million. Note that three of these four, the exception being Goldman Sachs, turned out to be in the most dire financial straits when the the bailout money became available.
- The Center For Responsive Politics posted an interesting article on its website on February 4, 2009 which listed out how much money each financial institution received from the TARP fund and how much money those companies had spent in lobbyist expenses and campaign contributions, contributions that were made to the very same people in Congress who would decide how much taxpayer bailout money those companies would receive. According to the website, members of Congress were able to specify to some extent where the money should go, and they have lobbied regulators to urge them to inject funds into specific banks and financial institutions including those in their own districts. In other words, taxpayer money was not distributed on need and merits but on political considerations.
- The article goes on to say that some of the top recipients of campaign donations from those companies were the people in the most powerful positions in Congress to decide where TARP money went.
The article's analysis shows that, with some exceptions, those companies with the highest amount of money spent on campaign donations and lobbying received the most TARP money.
- News reports have already reported that at least two members of Congress, a Hawaiian Senator and a California Congresswoman, allegedly and personally lobbied the Treasury Department to save local banks in which these two members of Congress held considerable personal financial stakes.
- A Huffington Post article from November, 2009 reported that the TARP Inspector general was actively investigating 65 cases of fraud regarding TARP payments.
- And finally, an article in the August 16, 2010 issue of Fortune magazine wrote about how upstart investment banks are taking business and bankers from battered larger competitors. In other words, new financial institutions have sprung up to fill the void left by the demise of failed financial institutions. It's called the free market.
What should we conclude from these know facts? With all due respect to those that think TARP saved the world, we really should conclude that TARP was an unnecessary waste of taxpayer money. Consider the following conclusions:
- Within three or four months of receiving the billions of dollars from the government, most financial institutions were already working on ways to give it back, mostly succeeding, by June, 2009, barely seven months after the program began. If these financial institutions were in such bad shape, how were they able to pay back the money so quickly? I think the Jamie Dimon quote above says it all, many of the financial institutions really did not need the money. I believe they thought they were getting a free lunch and belatedly found out how many restrictions came with the bailout, including the all important executive compensations limits, and quickly decided that this was not a free lunch after all. This conclusion is confirmed by Northern Trust's performance through the past few years, they continued to thrive despite the recession, maintaining their two decade run of profitability. They also could not wait to return the unnecessary money.
- A cynic could conclude that the political class saw an opportunity in two areas. First, they could use taxpayer money to both pay back those banks that had helped them celebrate and party at their Presidential conventions and and also provide themselves a new source of slush fund campaign donations, directing TARP money to those companies that donated the most to their re-election campaigns. Second, some politicians saw an opportunity to bailout local banks to the politicians' personal benefit. Neither of these factors were to save the world's financial markets, it was to benefit the political class.
- A free market advocate would step back from the tizzies and realize that there were just a few financial institutions that actually were in deep, deep trouble. Nowhere above do you see where Bank of America and Citigroup were first in line to pay back their TARP money. These two banks probably were in serious danger of bankruptcy but their horrendous business performance was saved by the American taxpayer, i.e. they and their shareholders were rewarded for the incompetence of their management. If you believe the first conclusion above, most banks did not need the bailout, then we should have allowed Citi and Bank of America to crumble and fail, it's a natural process in the free market. Or, they themselves could have taken drastic steps that other companies take when in financial straits (e.g. lay off employees, cut dividends, sell more stock, sell off assets, look for someone to buy them, etc.) in order to raise money to get out of debt. At least them the shareholders would have suffered the pain, not the taxpayer. They made bad business decisions they should have went out of business, and allowing for more efficient and smarter competitors to take over their business or for new competitors, as listed in the Fortune article mentioned above, to arise from the ashes to start doing business. There would have been plenty of healthy financial institutions, new and old, to take up the slack if Citi or Bank of America failed.
- Given that there are dozens of cases of fraud being investigated, it is also probably a safe bet that many of the smaller TARP recipients did not need the bailout money from a bank operations perspective but the owners of those smaller banks so the opportunity to defraud the government and its taxpayers.
Fraud, lack of respect for the free market to take care of the strong businesses and punish the weak ones, a new source of campaign funding for politicians, and a potential source of free money, courtesy of the American taxpayer, were the reasons for TARP's existence, not the saving of the world's banking system. A lot of this waste from TARP is driven by insipid relationship between campaign donations, politicians, and companies. That is why the implementation of term limits for Congressional members is so important. Term limits would remove the incentive for politicians to use taxpayer money to fund their re-election campaigns, to the detriment of the American taxpayer.
TARP: just another example where Americans lose and politicians profit.