Oct. 29, 2013 |
Five years ago this week, the U.S. Treasury bought $115 billion worth of stock in eight of the nation’s largest banks, launching the controversial Troubled Asset Relief Program (TARP). Over the next 14 months, Treasury would put another $89 billion into 700 additional banks.
By most accounts TARP achieved its primary purpose: To help bring about stability in the midst of the worst financial crisis since the Great Depression. It is hard to remember just how rapidly the nation’s financial structure was deteriorating in September and October of 2008.
• The Dow Jones Industrial Average lost 27 percent of its value between Aug. 29 and Oct. 24. Three of its five worst trading days in history happened in September and October.
• Then, as now, Congress played a role, first defeating the Bush Administration’s proposal to create TARP before agreeing to step in after stock markets plunged.
• Huge financial institutions were collapsing on what seemed like a daily basis. On Sept. 6, the federal government took over Fannie Mae and Freddie Mac, the two largest mortgage lenders. Lehman Brothers, an investment house that had been in business since 1850, filed for bankruptcy on Sept. 15 after government officials and major banks refused its pleas for help. The same day, Bank of America agreed to acquire Merrill Lynch, another of the largest brokerages. The next day, the government stepped in with an $85 billion loan to AIG, the biggest insurance company. The largest bank failure in American history happened Sept. 26, when bank regulators took over Washington Mutual and sold its remains to JPMorgan Chase. On Oct. 3, Wells Fargo acquired Wachovia; even though the deal didn’t require government assistance, it was reached under prodding from bank regulators. Finally, on Oct. 5, Congress agreed to the Emergency Economic Stabilization Act and TARP.
Behind nearly all the turmoil was the collapse of the nation’s housing and mortgage markets, which had seen massive expansion in the previous five years. Much of the growth, it turns out, had been fueled by overly aggressive lenders who had made loans that borrowers couldn’t repay. Many of those loans were packaged into bonds and sold as investments to banks and credit unions. When the underlying loans went sour, so did the investment vehicles, eroding the capital of the financial institutions that had purchased them.
Bank assistance was only one part of TARP, which also contained billions in assistance to the auto industry, to AIG and to help homeowners through mortgage modifications. Altogether, Congress authorized the Treasury to spend as much as $700 billion on all the TARP programs; ultimately, about $420 billion was given out, most of that to banks and AIG.
From the outset TARP was controversial. By many accounts, the large banks didn’t especially want the money because they feared it would label them as weak. To the general public it was a “bailout” of reckless banks.
“The Troubled Asset Relief Program (TARP) is at once one of the most hated, misunderstood, and effective policies in modern economic history,” Government Accounting Office economist Michael Hoffman wrote in 2012. “In concert with other policies executed by the federal government, TARP was responsible for restoring financial stability at a time when systemic failure in the banking system threatened to bring about a downturn of a magnitude not seen in the United States since the Great Depression. Not only was financial stability restored in short order, the ultimate budgetary cost is likely to be quite modest.”
Despite Hoffman’s conclusion and similar arguments, TARP remains a hard sell for the public. Five years later, three in five Americans think TARP was a bad idea, according to a recent New York Times/CBS News poll, and eight out of 10 think that more people in the financial industry should have been prosecuted for their actions that might have caused the crisis.
Indeed, while many banks have paid billions in fines for violations relating to their mortgage activity (JPMorgan reportedly is about to agree to a record $13 billion payout), no senior executives — and only a handful of lower-ranking officials — have gone to jail.
Ironically, perhaps, the special inspector general (SIG) for the TARP programs has not been hesitant about investigating and prosecuting executives for attempts to defraud the government.
In a report to Congress in July, the IG said, “In our 4½ years, SIGTARP investigations with its law enforcement partners have resulted in 144 defendants being criminally charged, including 92 senior executives. Already 107 of these defendants have been convicted, while others await trial. In addition to the 51 defendants already sentenced to prison, 9 defendants were sentenced to probation, and 47 additional convicted defendants await sentencing. Our investigations have resulted in court orders for $4.3 billion in assets to be returned to victims or the government. This includes forfeiture to the Government of 38 vehicles, 25 properties, 20 bank accounts, bags of silver, U.S. currency, antique and collector coins, artwork, and antique furniture.”
The report also says, “The average prison sentence for TARP-related crime investigated by SIGTARP is 68 months, nearly double the national average length of prison sentences involving white-collar crime. Ten defendants investigated by SIGTARP were sentenced to 10 years or more in Federal prison. Many of the criminal schemes uncovered by SIGTARP had been ongoing for years, involve millions of dollars, and complicated conspiracies with multiple co-conspirators.”
Some banks began buying their way out of Treasury’s grasp as quickly as they could. Centra Financial Holdings of Morgantown, W.Va., kept its $15 million only two months, from January through March of 2009. By June 2009, several of the biggest banks — chafing under executive pay restrictions imposed under TARP – got permission from regulators to buy back Treasury’s investments.
The cost of TARP still is a bit hard to pin down. By Treasury’s accounting, its TARP bank investments have made a profit so far. By Treasury’s accounting, it still holds the stock in 108 institutions, with a face value of $2.3 billion. The largest outstanding investment is $935 million owed by Popular Bank Inc. of San Juan, Puerto Rico.
But that doesn’t count another $2.3 billion owed by banks that swapped their TARP investments for money from the separate Small Business Lending Fund. And it seems unlikely that Treasury can recoup its entire investment in the 108 banks that remain in its portfolio. Since the beginning of 2012, Treasury has lost nearly $1.4 billion on the sale of stock in 250 banks as it has moved aggressively to end its ownership in banks.
Most of the remaining bank investments are small, but they are in institutions that still are under stress from the financial crisis. Seventy-five of the banks in which Treasury owns stock are not current on their dividend and interest payments, with a total of more than $140 million due to the government. Several of those banks have not ever made a dividend or interest payments.