Here's billionaire investor George Soros on CNN's Fareed Zakaria GPS, discussing how President Obama handled the financial crisis:
He made one major error. He had to bail out the banking system, because without it, we would be in a depression. But the way he did it was the wrong way. Because he should have injected capital where it was missing. There was a hole in the equity, and he should have provided equity, instead of nationalizing the liabilities of the banks.
Ahem.
First, not that it matters much, but the design and execution of the bank bailout program occurred under the Bush administration -- from the time TARP was conceived in Sep. 2008 to the time the checks were actually written in Oct. 2008.
More importantly, TARP did provide equity. Banks involved in TARP were injected with cash in return for preferred equity stakes, plus common stock warrants. The new preferred stock bolstered banks' equity capital ratios, particularly Tier 1 capital -- something debt capital would not do.
This was a very important distinction to make, since some preferred stock (namely, shares with fixed maturities) doesn't count as equity. The Federal Reserve pointedly issued a memo in October 2008, clarifying that "the Senior Perpetual Preferred Stock may be included without limit in the Tier 1 capital of bank holding companies."
In fairness, the injection of preferred equity was a point of contention at the time. Citigroup (NYSE: C) and Bank of America (NYSE: BAC) looked like they needed common equity -- preferred equity wasn't doing them much good. In hindsight, those fears were probably overblown, and TARP's preferred stock helped tide them over until they were stable again.
For others like JPMorgan Chase (NYSE: JPM) and Goldman Sachs (NYSE: GS) and hundreds of smaller banks, preferred capital did the trick just fine. It bolstered balance sheets and sent a message that the government wasn't going to let the financial system fail. And it didn't take over banks' common equity, which would have constituted outright nationalization. The Treasury's most recent TARP report shows the results: $205 billion was injected into banks; $171 billion has already been repaid, with $31 billion still outstanding. Actual losses stand at $2.6 billion, which is dwarfed by the $7.1 billion in proceeds from stock warrants.
I don't intend to blindly applaud the bailouts. They were bad, ugly, messy, and unfair. But if their goal was to inject equity into the financial system and prevent collapse, and do it in a manner that allowed taxpayers to quickly be repaid, they actually worked quite well. This point still seems lost upon many of the world's brightest minds -- including George Soros.
