Posted on Monday, April 4, 2011
NEW YORK -- On Wednesday, the Treasury Department celebrated the fact that its $250 billion investment in the nation's banking system has officially made money. What's more, the entirety of the federal government's efforts to rescue a financial system that sowed the seeds of its own demise will also eventually do the same, according to new Treasury projections.
Treasury did not, however, commemorate the hundreds of billions of dollars in taxpayer aid left to be repaid; the billions the Troubled Asset Relief Program will ultimately cost taxpayers; the extraordinary actions of the Federal Reserve and Federal Deposit Insurance Corporation that made Treasury's bank profits possible; or the fact that the entire enterprise of pumping taxpayer cash into a financial system rife with unrecognized losses will likely be remembered as a "dismal failure," in at least one Nobel Prize-winning economist's estimation.
In other words: not so fast.
The worst financial crisis since the Great Depression spurred an alphabet soup of federal programs designed to calm markets and allow banks to rely on taxpayers as credit froze and investors fled. One of those programs, TARP, became the face of the government's unprecedented involvement in the financial sector.
In the fall of 2008, Congress authorized then-Treasury Secretary Henry Paulson to spend $700 billion to rescue the rapidly-failing financial system. At the time, stock markets around the world were tanking, borrowing costs were skyrocketing and the prices of all but government-guaranteed financial instruments were plummeting as confidence sank. Investors and policymakers feared Armageddon.
Paulson used the money to invest in banks, auto companies and the insurance giant AIG. His Obama-nominated successor, Timothy Geithner, continued that policy, and added a few more programs to spur lending and rescue homeowners.
Only looking at dollars and cents, the bank investment has been the most successful. Treasury obligated $250 billion to support banks like Citigroup, JPMorgan Chase and Bank of America. The agency has now recouped those funds and then some, thanks to fees and dividends. It's officially in the black.
"Today is an important milestone in our efforts to recover taxpayer dollars as we continue winding down TARP," Geithner said in a statement Wednesday.
But that profit figure doesn't acknowledge that of the $475 billion in TARP funds promised to auto companies, insurers and borrowers, about $187 billion remains outstanding, according to Treasury data through Tuesday. In the end, the Congressional Budget Office forecasts that TARP will cost taxpayers about $19 billion.
It also masks the extraordinary lengths the U.S. government took to ensure that its biggest banks did not fail, beginning with the Federal Reserve.
The Fed lowered the main interest rate to nearly zero percent, lowering borrowing costs for banks and other financial companies.
The cheap funds allowed banks to continue lending to creditworthy borrowers at normal rates -- if not higher, given the uncertain economy -- and book easy profits.
Last year, for the first time since 1962, banks paid less than 1 percent for their funds. In 2007, their borrowing costs were about three times higher, at 2.76 percent, FDIC data show.
Banks have been able to weather losses from sour loans thanks to rock-bottom interest rates. In effect, the Fed allowed banks to earn their way out of the crisis with taxpayer money.
The Fed also flooded the financial system with trillions of dollars in guarantees, short-term loans and asset purchases.
It purchased more than $1 trillion in government-backed mortgage securities, allowing banks easy profits off lending fees without having to shoulder any of the risk by simply transferring it to the taxpayer. More than nine out of 10 new home loans are guaranteed by taxpayers.
In addition, the central bank lent banks cheap money at a time when no one else would, allowing them to weather a volatile market, and allowed banks to pledge junk-rated collateral in return.
The FDIC also played a part in the banking industry's comeback, at one point guaranteeing nearly $350 billion in bank debt as investors shunned a weakened industry, according to the agency. If the banks couldn't make their payments, taxpayers would have stepped in.
The taxpayer guarantee gave banks access to cheap funds, lowering their borrowing costs and signaling to investors that many of them simply would not be allowed to fail.
About $267 billion of that debt remains unpaid, according to FDIC data through Dec. 31. The nation's biggest banks, like Citigroup, Goldman Sachs and JPMorgan Chase, are among the biggest beneficiaries.
The FDIC also guaranteed a wider range of deposits, allowing banks to benefit from even more cheap cash as depositors flooded the firms with money.
The average deposit account yielded 0.79 percent at the end of last year, according to Market Rates Insight, a data provider. In 2007, the average rate stood at 4.15 percent. Retail deposits now make up 80 percent of all bank liabilities, up from 72 percent in 2007, according to the firm.
But Treasury didn't acknowledge the factors that enabled it to book a profit from its bank investments. Instead, officials celebrated the extraordinary actions the department took to rescue a teetering financial system.
Those programs will generate a $23.6 billion profit, according to Treasury projections released Wednesday. It'll take another decade to get to that point, the projections show, as taxpayer aid for government-controlled mortgage giants Fannie Mae and Freddie Mac winds down. Meanwhile, trillions of dollars in taxpayer aid and asset guarantees remain outstanding.
Federal overseers, like the departing Special Inspector General for TARP, Neil Barofsky, argue that the cost of that rescue shouldn't merely be measured in dollars and cents. Rather, the cost will manifest itself in other ways, as the nation's largest financial firms will likely continue to make risky bets because they expect taxpayers to bail them out in times of crisis.
"The good financial news should not distract from the careful and necessary assessment of TARP's considerable, non-financial costs that, while more difficult to measure, may be even more significant," Barofsky told a Congressional panel Wednesday. "Those costs include what is essentially at the heart of this hearing, the increased moral hazard and potentially disastrous consequences associated with the continued existence of financial institutions that are 'too big to fail.'"
Earlier this month, Nobel Prize-winning economist Joseph Stiglitz told another bailout watchdog that TARP has been a "dismal failure."
"It was hoped that it would play a pivotal role in dealing with the flood of mortgage foreclosures and the collapse of the real estate market that led to the financial crisis," Stiglitz said March 4 during testimony before the Congressional Oversight Panel.
"TARP and the recovery of troubled assets were not ends in themselves, but means to an end, namely the recovery of the economy," the Columbia University professor said. "In that ultimate objective, TARP has not only been a dismal failure -- four years after the bursting of the real estate bubble and three years after the onset of recession, unemployment remains unacceptably high and our economy is running far below its potential, a waste of resources in the trillions of dollars -- but the way the program was managed has, I believe, contributed to the economy's problems."
The ongoing moral hazard, Barofsky argued, is "precisely the sort of behavior that could trigger the next financial crisis, thus perpetuating a doomsday cycle of booms, busts and bailouts."
By Shahien Nasiripour, THE HUFFINGTON POST