Friday, October 27, 2017

TARP Paid Off: But What about the Foreclosures?

TARP, the "bailout" for banks rather than mortgage borrowers, was the first big issue facing the Obama administration before the roughly $800 billion stimulus plan and the health insurance overhaul that stoked the rise of the Tea Party movement. After supporting TARP, several Republicans lost in the elections of 2010 largely because of their votes. For many Americans, TARP is a symbol of big government at its worst, intervening in private markets with taxpayers’ billions to save Wall Street plutocrats while average Americans continued to struggle to make mortgage payments or lost their houses outright.  “This is the best federal program of any real size to be despised by the public like this,” said Douglas J. Elliott, a former investment banker now associated with the Brookings Institution. “It was probably the only effective method available to us to keep from having a financial meltdown much worse than we actually had. Had that happened, unemployment would be substantially higher than it is now, the deficit would have gone up even more than it has,” Mr. Elliott added. “But it really cuts against the grain for a public that is so angry at banks to think that something that so plainly helped the banks could also be good for the public.” TARP was good for the public not in that the funds enabled Wall Street bonuses; rather, the good was solely on the macro level, as the frozen credit markets eventually thawed such that the financial system meltdown was averted.  However, this does not mean that it was "the only effective method available."

Specifically, the TARP funds could have been used to subsidize mortgage borrowers demonstrating difficulty in making the payments. On a CBS news show May 15, 2011, Speaker Boehner was asked about the four foreclosure programs of the U.S. Government. "They have all failed," he told the journalist. However, the Speaker then refused to have the government get involved; the best we can do is wait for the market to solve the problem as more buyers enter. However, that would only spur foreclosures, as more buyers would make it easier for banks to sell their foreclosed houses. It is interesting that hundreds of billions of taxpayer dollars could go the big banks, enabling record executive bonuses, whereas all we can do is rely on the market to mitigate the foreclosures. This squalid double-standard can be explained by simply looking at the bankers' interest, which is at odds with that of the mortgage borrowers. Considering the problematic way in which the sub-prime mortgages had been produced (e.g., liars' loans and no-document mortgages), I contend that the interests of the banks' customers ought to be given primacy here. The problem is that the borrowers are dispersed, whereas the bankers have concentrated leverage via their capital and lobby over government officials who would like to be re-elected. In a republic, the leverage ought to go in the opposite direction: elected representatives coming down on the bankers for their shaddy lending and related double commissions at the expense of the borrowers.

Laying the power reality aside, an alternative to TARP can be envisioned. This exercise, although inexorably futile, can tell us something about the opportunity costs involved in enabling the powers that be rather than holding them accountable. Along with a federal law limited the rate resets on the ARM sub-prime mortgages (resisting the pressure of the banking industry that recklessly had originated or bought the mortgages), subsidies could not only have removed a major toxic element from banks' balance sheets and thus opened up lending, but also perhaps fortified the housing markets in the U.S. such that homeowners duped into houses over their heads could have had some time to sell and find more suitable housing. In other words, the "two birds with one stone" could have applied, instead of the top-directed infusion. TARP did not come with requirements that lending reach a minimum level so even though the banks did not fail, it took even the TARP banks a long time to raise lending again; the return to lending should have been immediate.

It could be argued that the TARP funds put into banks gave the U.S. Government the corresponding benefit of bank stock. To be sure, selling the stock has made up a large part of the TARP funds already by 2011, but it was at that time uncertain whether the government would make a profit. In the fourth quarter of 2010, the U.S. Treasury projected that taxpayers wouuld lose less than $50 billion at worst, but at best could break even or even make money. Its best-case assumptions, however, assume that A.I.G., which had received $182 billion in TARP funds, and the auto companies would remain profitable and that Treasury would get a good price as it sells its corporate shares in coming years.

In May 2011, AIG and the Treasury Department announced that they would sell $9 billion in stock altogether, but for less than half of the expected price. As of May 10th, the AIG stock pre-market price was thirty cents off from the government's breakeven point. AIG stock had slid from the mid 40s to the mid 20s. I submit that these considerations of U.S. profit-taking, although appealing from a capitalist standpoint, misses the bigger picture in terms of a government's mission. I contend that governments do not exist to make profits. Furthermore, a government's primary charge is to protect citizens, whether from foe or famine. Failing to mitigate or obviate foreclosures even as banks got funds to keep them afloat is thus a blight on the U.S. Government. To be sure, maintaining the viability of the financial system is legitimately part of the government's job, that function could have been accomplished by protecting citizens who otherwise lost their homes. This is not to say that the homeowners deserved to stay indefinitely in houses too big for them; rather, it is to say that homeowners could have been kept from being tossed onto the street. The U.S. Government could have helped two birds with one bag of birdfeed while meeting its own obligations as a government.


Jackie Calmes, “TARP Bailout to Cost Less Than Once Anticipated,” The New York Times, September 30, 2010.

The Huffington Post, "AIG, U.S. Will Sell $9B in Stock -- But for Less than Half of Expected Price," May 11, 2011.