Bailouts: The Final Word

Two and a half years ago, Wall Street faced death's door -- and deservedly so. It created its own mess.

The U.S. faced a stark choice. Would we let the financial system implode, possibly taking everyone else down with it, or endorse a word that became the mark of public ire: bailout?

We chose the latter, with a bailout known as TARP -- the Troubled Asset Relief Program.

Most Fools never agreed with TARP. Even those who supported it were disgusted with the plan. Nothing good came from it. The best that can be said is that we avoided an even more miserable experience than we endured.

But like it or not, it happened. We bailed out our economy. The question now: How'd it go?

On Wednesday, the Congressional Oversight Panel, the organization tasked with watching over TARP, released its final report on the program.

Let's start with the scorecard. Of the $700 billion allocated to TARP, only a fraction was ever spent. Most has been, or very likely will be, repaid. The Congressional Budget Office now estimates TARP's final cost to taxpayers will be $25 billion. "An enormous sum, but vastly less than the $356 billion that CBO initially estimated," the report notes.

TARP has doled out $419 billion to date, $256 billion of which has been repaid. Contrary to popular belief, not all of these outlays went to banks. Here's how the numbers work out:

Segment

Amount Spent

Amount Repaid So Far

Banks $250 billion $216 billion
Auto industry $81.7 billion $29.5 billion
AIG $69.8 billion $9.1 billion
PPIP (credit market assistance) $15.9 billion $700 million
Homeowners assistance $1 billion --
Community development $570 million --
Small-business loans $368 million --
TALF (more credit market stuff) $100 million --
Other housing measures $200 million --
Total: $419 billion $256 billion

Source: Treasury, COP.

Taxpayers' position is realistically better than this shows, since the Treasury owns massive chunks of General Motors (NYSE: GM  ) and AIG (NYSE: AIG  ) common stock that it hasn't yet sold. How much it can fetch for these shares remains to be seen -- as does the time it will take to shed these stakes. (TARP, it's important to note, wasn't the only bailout, but it was the largest taxpayer-funded program, and the most visible in the public eye).

We had a chance to speak with former Sen. Ted Kaufman (D-Del.), chairman of the COP, about TARP's existence on Wednesday. Below is an edited and condensed transcript of our conversation.

What is the biggest misconception that the public holds about TARP?
That we lost all the money. The Congressional Budget Office estimates we'll lose $25 billion. The vast majority of the money will be returned to taxpayers.

Has the problem of "too big to fail" been solved?
No. When you do something like the TARP, you create a moral hazard, because institutions believe they're too big to fail. And other organizations think they're too big to fail, like the ratings agencies who now give higher ratings to big banks than they do to small banks, and that gives them a competitive advantage.

What needs to be changed to prevent the next financial collapse and bailout?
I think most of it's in the Dodd-Frank legislation. We still have to wait and see what the regulators actually do, because, as you know, most of the decisions have to be made by the regulators.

Very aggressive oversight by all regulators, and especially by Congress, would be a good way to prevent something like this from ever happening again.

What would Congress have done differently with TARP with the benefit of hindsight?
The Congressional Oversight Panel oversees how Treasury implemented the TARP, not whether Congress should have done the TARP or not.

That being said, when you look at where the country was at that time, we were on the edge of a deep, deep hole. We could have destroyed the financial system of the United States and of the world. You have to give some of the credit for survival to TARP, the Federal Reserve, the FDIC, and the stimulus act. All those things brought us back from the precipice. But the basic act of TARP creates a problem of moral hazard.

What worked the best, and what was the biggest failure?
By far, the best was that we avoided a financial crisis and second depression. Second best was that it's going to cost, according to the CBO, $25 billion as opposed to the $700 billion we started with.

The first big minus is the problem of moral hazard inherent to TARP, which Treasury I think exacerbated. People believe that they are too big to fail, so they take risks because they get a higher return, whereas they don't need to be concerned about what happens if they fail. Ratings agencies give better ratings to the big banks than to the small banks, which is a competitive advantage for them. And we've expanded the concept of "too big to fail" beyond banks to include automobile companies, automobile finance companies, and AIG.

The second big problem is that Wall Street clearly came out a lot better than Main Street did. The foreclosure modification program has done very little. None of the big Wall Street center banks went down, but over 300 now small- and medium-sized banks failed. Meanwhile Wall Street came out really, really well.

Why did TARP's homeowners programs never get off the ground?
I don't think there was an emphasis on it. Securitization presents incredible conflicts of interest. Servicers want to foreclose because they make more money. Fannie Mae and Freddie Mac said they aren't going to police robo-signing because they have so many other things they're dealing with the servicers on.

I really like your article about what was supposed to happen with the Notes and what actually happened with them. Clearly, nobody looked into how securitization would affect modifications in the real world. And what started as a subprime problem became a prime problem because when people are unemployed they can't make the payments.

What are you most concerned about?
Personally, I'm very concerned about the fact that we haven't done a lot about capital requirements.

Second, I think there's going to be a number of reports coming out shortly that point out in detail how difficult it would be to resolve gigantic failing banks with investments all around the world.

Third, the assets of the six largest banks [Bank of America (NYSE: BAC  ) , JPMorgan (NYSE: JPM  ) , Citigroup (NYSE: C  ) , Wells Fargo (NYSE: WFC  ) , Goldman Sachs (NYSE: GS  ) , Morgan Stanley (MS)] are 62% of GDP, up from 17% 15 years ago.

Finally, the House of Representatives' effort to cut funding for the SEC, I mean, is just counterproductive when the biggest reason for our deficits is because we didn't have proper oversight. If you live in Washington, you get to love ironies.

What are your thoughts on regulators leaving to work in the private sector, and vice versa?
The revolving door is an extraordinary threat to the future of our system. They're not bad people, but you're creating incredible conflicts of interest, so we need to take a detailed look at how to fix the conflict-of-interest rules.

If necessary, would having another TARP in the future be politically feasible?
Right now? Oh my God, absolutely, positively not. You couldn't get the first vote for it in Congress right now.

But this is a lesson of life for me: It's very difficult to make decisions when you're under incredible stress and incredible consequences. It's hard for us to go back and say what it was like to be like to be in that room when George W. Bush, a raging free-market guy, decided that TARP was the answer.

So we should be doing things now, with that fact in mind, to prevent another TARP, because otherwise decisions are going to be made in split seconds, and you're not going to be able to fine-tune them.

At some future date if we have some incredible financial crisis and the only answer is to have a TARP, yeah I think that's going to happen. The markets basically believe that.

As we see what's happening in Japan, you can have a series of circumstances that no one ever figures on that can bring you to a financial crisis.

We should be doing everything we can now to prevent the possibility of ever having to have another TARP program.

What do you think about TARP? Drop us a line in the comment section below. Pitchforks welcomed and encouraged.

And if you'd like us to keep you updated on financial reform and shareholder rights, just shoot a blank email to imoscovitz@fool.com.

Morgan Housel owns preferred shares of Bank of America. Ilan Moscovitz doesn't own shares of any company mentioned. General Motors is a Motley Fool Inside Value selection. The Fool owns shares of Bank of America and JPMorgan Chase. Through a separate Rising Star portfolio, the Fool is also short Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (25) | Recommend This Article (37)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 17, 2011, at 5:07 PM, AHACoop wrote:

    "The vast majority of the money will be returned to taxpayers."

    I beg to differ with this statement. The money will be returned to the federal goverment, right?

    I'm a taxpayer. The federal government's pockets are not mine and mine are not theirs.

  • Report this Comment On March 17, 2011, at 5:11 PM, TMFHousel wrote:

    ^ If true, then the bailouts never cost you anything to begin with.

  • Report this Comment On March 17, 2011, at 5:46 PM, TMFRoyal wrote:

    Hey, Morgan and Ilan,

    Thanks for the great article.

    While it's good that the government is getting back almost all TARP money, that should not be construed as the sum total of all the costs of the financial crisis (not that you or Kaufman claim otherwise). I just want to emphasize that Wall Street's recklessness severely exacerbated the recession, and that the cost of the crisis is also displayed in the output gap (in the trillions) as well as massive unemployment, some of which has destroyed and will destroy American's careers and ability to find meaningful employment in the future. As you and Kaufman stress, we need a system that prevents such excesses.

    Fool on!

    Jim

  • Report this Comment On March 17, 2011, at 5:52 PM, xetn wrote:

    " If true, then the bailouts never cost you anything to begin with." Do you contend that taxpayers did not (were not forced) to pay for any of the above and that AHACoop's tax money cost him nothing?

    The fact remains that the bulk of the bailouts went to the banks (including GS in the form of a payoff to AIG which then remitted a large sum to GS). Of course we cannot overlook the influence of GS in all the decisions (Paulson et al). And we certainly cannot overlook the presence of the Fed whose prime concern is to protect the large banks. (Notice that it let hundreds of small banks (although members of the Fed) fail and the remains passed on via FDIC to the large banks with no recourse to them.

    We (the US) is not supposed to be a fascist state, but one build on capitalism. And, although we are far from a free-market, we normally believe that people should bare the responsibility for their own actions. As the senator stated: they created a moral hazard by bail outs.

    And, to top it off, we now have (probably have had for some time) the mindset that if existing regulation(s) do not do their intended job, then more will "fix" the problem. There is ample evidence that this is a false concept.

    Perhaps what we need instead of more regulation is less GS alum in the federal government.

  • Report this Comment On March 17, 2011, at 6:25 PM, buffalonate wrote:

    We should all be thankful they did enact Tarp or we would be in a depression that would last for a decade. If the banks go under the economy goes under. The only alternative I see would be to zero out the investors and have the government recapitalize the banks and own the banks outright. Does anybody really want that?

  • Report this Comment On March 17, 2011, at 8:25 PM, DonkeyJunk wrote:

    "'If true, then the bailouts never cost you anything to begin with.' Do you contend that taxpayers did not (were not forced) to pay for any of the above and that AHACoop's tax money cost him nothing?"

    I believe the response was meant to be considered more tongue-in-cheek.

    Supposing that the money the government uses to fund programs like TARP is somehow unattached to an individual's money doesn't make any sense. Is the government going to hand out $5 bills to every US citizen as a process of the TARP refund? No. No more than the government came to your house and took $5 out of your wallet to fund it. However, the government loaned taxpayer money, the money that comes out of every paycheck, and is getting taxpayer money back to replace what was loaned.

    Because the money is being returned we can hope that money will not be taken from other programs or result in raised taxes to cover the shortfall. That was the big fear, which has for the most part been alleviated.

  • Report this Comment On March 17, 2011, at 8:31 PM, ajtrombone wrote:

    700 billion is $6250 per taxpayer. Invested in the S&P 500 two and a half years ago would have given each taxpayer about $8500. About $6050 will be paid back per taxpayer net loss: $2450. Numbers can be deceiving and I admit I don't truly know if this was worth it or not. Way too many variables involved.

  • Report this Comment On March 17, 2011, at 8:59 PM, doctorolds wrote:

    No one's taxes have gone up one penny for TARP!

  • Report this Comment On March 17, 2011, at 10:09 PM, kstoltz wrote:

    The big question Fools need to answer for themselves is if TARP never happened, do we have a 2 year plus bull market as we've had?

  • Report this Comment On March 17, 2011, at 10:25 PM, wjcost wrote:

    TARP never was intended to be an expenditure. It was a line of credit that kept the global economy from freezing solid. The essential liquidity was purchased at a cost that is now estimated to be $25 billion, certainly not chump change but far less than the $700 billion extended in the line of credit. It was a cheap price to pay to avoid a global financial meltdown which would have resulted in truly catastrophic social problems, as if a tsunami hit all over the world. Our leaders who had created the problem by irresponsible deregulation and failure of oversight, acted at the last minute to prevent a plunge over the cliff. What now? Proponents of extreme deregulation are revealed as idiots. Wall Street profited unfairly from their necessary rescue and must be made to pay, to recover the $25 billion and then some. Two proposals: (1) change the obscenely low tax rate on "carried interest" in which money managers reap profits on money not at risk, and tax it as ordinary income which it surely is, and (2) tax market transactions at a very low rate that would be virtually unnoticeable for investors buying and selling on the merits of the investment but would be painful indeed to computer program traders attempting to profit from microsecond arbitrage. It would stop that flash crash nonsense and inject a reality vaccination that the markets sorely need.

  • Report this Comment On March 17, 2011, at 10:59 PM, TMFDiogenes wrote:

    "Two proposals: (1) change the obscenely low tax rate on "carried interest" in which money managers reap profits on money not at risk, and tax it as ordinary income which it surely is, and (2) tax market transactions at a very low rate that would be virtually unnoticeable for investors buying and selling on the merits of the investment but would be painful indeed to computer program traders attempting to profit from microsecond arbitrage."

    I think it's going to take more than that, but yeah, I'm definitely with wjcost.

    Ilan

  • Report this Comment On March 17, 2011, at 11:05 PM, whereaminow wrote:

    You guys were joking when you called Bush a free market guy right?

    As for the bailout, like the Credit Crunch Hoax, it goes down as one of the biggest scams/thefts in American history.

    David Stockman, former director of the OMB, carefully pens in the following article:

    "Still, the urban legend persists that in September 2008 the payments system was on the cusp of crashing, and that absent the bailouts, companies would have missed payrolls, ATMs would have gone dark and general financial disintegration would have ensued.

    But the only thing that even faintly hints of this fiction is the commercial-paper market dislocation. Upon examination, however, it is evident that what actually evaporated in this sector was not the cash needed for payrolls, but billions in phony book profits, which banks had previously obtained through yield-curve arbitrages that were now violently unwinding." - Stockman

    Read the rest here:

    http://mises.org/daily/5113/The-End-of-Sound-Money-and-the-T...

    David in Qatar

  • Report this Comment On March 17, 2011, at 11:11 PM, whereaminow wrote:

    Excuse me, I realize it was Kaufman who said Bush was a free market guy. I mispoke.

    David in Qatar

  • Report this Comment On March 18, 2011, at 5:52 AM, MartinSamuelson wrote:

    Why can't the US split up banks that are too big to fail? That wouldn't be unprecedented, as the government can split up company that are deemed monopolies.

  • Report this Comment On March 18, 2011, at 6:03 AM, Stonewashed wrote:

    This urban legend that most the money was paid back doesn't count toxic assets that simply went away. Poof. Magic. Washed off the "trustworthy" banks balance sheets. It also doesn't count the vendors they screwed out of their money, who btw can only take those assets off their balance sheet by showing and taking the loss, known to the less politically connected as bad debts.

    http://money.cnn.com/2009/03/25/news/companies/blackrock.for...

  • Report this Comment On March 18, 2011, at 9:38 AM, johwell wrote:

    This article is not up to the quality I expect from TMF. It is simply political propoganda. But the line that cracks me up more than the rest, is the one in which Mr. Kaufman advocates for "aggressive" federal oversight. Every piece of legislation thus far has increased costs and "oversight" and, yet, somehow, people out there continue to play these games. Though, this is the first time I can recall that not only did investment bankers (people who supposedly understand the term "risk" better than most) managed to miscalculate and then get the rest of us to pay for it.

    The problem with TARP, regardless of any benefits, is that it did not address this fundamental issue: how does the American taxxpayer get out of guaranteeing every idiotic trade made by those protected by the likes of Bank of America and GS. I don't care what they trade, or how they trade, but I don't get to knock on their door when HGG drops 35% and I consider taking a stop-loss. And, according to my doctor, I'm approaching "too big" as well!

  • Report this Comment On March 18, 2011, at 10:55 AM, XMFSlydo wrote:

    Regarding the question as to why we can't split up the banks that are too big to fail, I recall the NY Times arguing repeatedly during the '90s that the U.S. was behind the curve because our banks were too small to compete. In 1991 they wrote

    "The United States, with more banks, also has more bank failures. Again, the geographic restrictions are partly to blame. Banks legislatively confined to one state or region are hostage to local markets...The benefits of scale and diversity in banking have been proved repeatedly over the years." http://nyti.ms/heJk27

    Yes, we may have had more failures, but their scope and impact were confined. Seems it really was better back in the good old days.

  • Report this Comment On March 18, 2011, at 11:32 AM, ChuckWoolery wrote:

    I blame the regulators and the government for allowing this to happen. If we had people who were properly trained to identify the risk of the investments banks were making and to aggressively pursue baks that were making mortgage backed securities bets, repackage them and sell this bad assets to the public under a different name we wouldn't have this problem.

    The banks should have never made the investments that they did but our government sat on the sidelines and allowed and even encouraged through Fannie and Freddie Mac these derivatives to be sold. We need tighter regulation and separation of banks investments to curb this bad behavior or else we are setting ourselves up for disaster again. Capital requirements or ceilings should be installed as well. Too big too fail is very real as we are surging again as the markets came flying back since 2008. I don't thiuk we can afford another bailout despite the $25 billion lost of the 700.

  • Report this Comment On March 18, 2011, at 3:18 PM, Nahzuul wrote:

    Johwell, you said the article wasn't up to your standards. I think you meant that you didn't agree with the facts presented, because you didn't give any other cogent reason. I don't know what you meant by "political propaganda" and I'm not sure that is even worthy of a response. You then provide zero evidence to support your statements like "Every piece of legislation has increased costs" without specifying them, stating how you reached that conclusion, or providing any evidence to support the claim. The article did discuss the problem with TARP, as the phrase "moral hazard" was mentioned several times. You didn't actually expect the author to solve this problem, did you?

  • Report this Comment On March 18, 2011, at 10:24 PM, TMFBuck wrote:

    Ilan and Morgan,

    Great coverage of an historic event. It's usually in times of crisis that American can really shine. This was an opportunity to address some serious long range fiscal problems which our country is facing. Unfortunately, it seems partisanship politics have won out again. At some point our government, like each household, must learn to live within its means.

    Here's hoping that politicians will someday have the courage to address these long term problems.

  • Report this Comment On March 20, 2011, at 11:23 PM, TMFDiogenes wrote:

    @ everyone who's asking why we didn't break up the banks (especially johnwell)

    Kaufman sponsored the bill that would have banned banks from being too big to fail:

    http://www.fool.com/investing/general/2010/04/28/nows-your-c...

    That idea got shot down by the banks and Treasury:

    http://www.fool.com/investing/general/2010/05/17/61-senators...

  • Report this Comment On March 25, 2011, at 4:00 PM, carolsmithhsa wrote:

    I seldom post here, but I have to on this one.

    Here is what I see as a practical middle class American who has saved my own money in 401k and IRA and CDs and brokerage accounts and non qualified DRIP programs. No bailout money came my way, just dwindled valuations in my savings and assets that have taken my entire career to accumulate..

    We will continue to have a revolving door between Wall Street and the regulators.

    I have no faith that this incest issue can be realistically resolved given the round-robin network of staffing Washington and Wall Street. Here is a long shot idea -- as an responsible Fool, I can provide a clear and vocal vote of non-confidence by abstaining from buying any stocks or bonds (no matter how currently attractive...) issued by BOA, Citigroup, AIG, GM etc and the like? And redirect my meager investment dollars into investments where there are real American consumers involved in the decision of what goes on at those companies through direct consumption -- like PG, JNJ, WMT, COST, KFT and other consumption companies.

    I left 2008 behind with the feeling that I trust none of the voodoo numbers provided now on bank and asset valuations from any of the US mega financial institutions. What has really changed that I should? Nothing. All these financial institutions are still too big to fail -- wink, wink, nudge, nudge....So why would you trust the numbers now after we were all hoodwinked and robbed blind in so many ways from government and financisal institution actions during the bailouts? .

    At least a "no vote of confidence' from the Fool community would send a grass roots message that might be heard. That is how the War in Vietnam was ended for those of you who are old enough to remember -- vocal grass roots speaking out and not kow-towing to government drivel and lies...

    You can all now comment that I am missing some good investments, but I cannot any longer invest in institutions in which I have no faith.

  • Report this Comment On March 26, 2011, at 1:00 AM, cornell22 wrote:

    The biggest problem is the CEO's did not lose any of THIER money for their reckless behavior. They need to have skin in the game. Better yet, bring back debtors prison. That would keep them more attentive to the interests of their shareholders.

  • Report this Comment On March 26, 2011, at 3:54 PM, Kauaicat wrote:

    In the summary of TARP money expended, I did not see the $145 billion used as of June 2010 to prop up Fannie Mae and Freddie Mac, so this analysis is worthless.

    http://www.bloomberg.com/news/2010-06-13/fannie-freddie-fix-...

    As the article indicates, this could increase to as much as $1 trillion (bankrupting the TARP in the process). Considering the number of defaulted or underwater home mortgages in this country, what is the realistic chance that this will not happen?

    Also, taking this article's (over)optimistic tone, does anyone really expect whatever will remain of the $700 billion when TARP is complete to be returned to the treasury to offset the deficit, or will it remain to be used at the discretion of the Treasury Secretary as a slush fund for their Wall Street cronies...

  • Report this Comment On March 26, 2011, at 4:01 PM, Kauaicat wrote:

    Adding to my previous comments, the original intent of TARP - unfreezing the credit markets using preferred stock callable in 5 years yielding 8% - was a reasonable solution IMO. However, forcing smaller (and solvent) banks to accept TARP funds to level the playing field for the big banks was wrong, and the direction of TARP since, particularly the payoff to the big banks through AIG of semi-worthless derivatives at 100%, is just a flatout ripoff of the taxpayer and more evidence of the crony capitalism in our government at work.

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