The $700 billion Troubled Asset Relief Program (TARP) officially came to an end yesterday (Sunday), two years to the date after it was signed into law. As the economic debate throttles up to evaluate TARP, allow me to offer my two cents—a rather cheap price considering that my two cents is less than 10 to the minus 13th power of TARP, itself.
However, before I offer my input, I feel it is important to add this disclaimer. I am not a “PhD Economist” nor have I ever been awarded a Nobel Prize. I have never been employed by the Federal Reserve, the Department of Treasury, nor have I ever been a member of Congress.
What I do have, however, is a different form of experience and education from that mentioned above. I have an M.B.A. degree from The Wharton School. I have more than 20-years of unique experience monitoring the housing industry during which twelve-years (1988-2000, including the period of the S&L crisis) was spent directing the team of analysts that monitored the risk associated with 7 million home loans and Ginnie Mae’s $600 billion portfolio of mortgage-backed securities. In 1995 I received a Vice-Presidential award, presented to me by the Secretary of the Treasury, for designing and developing the risk systems for Ginnie Mae.
Now here is my two cents regarding TARP.
TARP did not save us from a Great Depression; instead, it nearly drove us into a Great Depression. TARP was a dangerous mistake that affected not just Americans, but the entire global population. Instead of using readily available information to calm the situation in the fall of 2008, our financial leaders panicked and with their ill-conceived TARP program threw “oil onto a fire” that was already burning quite well by itself.
TARP was conceived not by evil leaders, but by leaders who did not understand the real situation with “the banks too big to fail” and leaders who did not have the slightest idea of the real situation relating to derivatives and with housing in America either.
Here is the justification for those statements.
First, let me use the marketplace as part of my justification. By the fall of 2008 and prior to TARP, all the world’s stock markets had already dropped by nearly 20% from their highs a year before. For example, the Dow Jones had dropped from 14,038 in October 2007 to 10,847 by October 2008. If you look at other world market indices (e.g., NIKKEA, HIS, FTSE, DAX, SMSI, FCHI, etc.) you will find similar results for the same period. The free market system was working. All information available to the public (including the deteriorating problems with the banks) had already been factored into the global market place.
However, immediately following the initiation of TARP in October 2008, stimulated by the uncertainty and the ensuing confusion generated by our leaders, the markets panicked and dropped another 40% of their value. In fact, by March 9, 2009, just a little over five-months after TARP, the Dow Jones bottomed at 6440. Shortly, after this bottom, sanity actually returned to the marketplace, and “all” global markets returned to the levels of today, which is essentially the same level that they were at the time prior to the initiation of TARP in America.
Now I fully understand that based upon the above, some will say it was TARP not sanity that saved us from the Great Depression. Since I say it was sanity, let me continue with my argument.
The “banks too big to fail” were never going to fail. In fact, the problems the big banks were having never came close to making them fail. The only thing that would have made the “banks too big to fail” to actually fail would have been a complete collapse of our economy and a Great Depression brought on by “world panic”—something I claim that TARP nearly caused as I am implying in the above paragraph.
By October 2008, the banking industry had already begun paying the hit for their lending mistakes, but they were far from going broke. Although net income for the entire banking industry had declined to near zero levels from a “pre-lending problem” era where quarterly net incomes averaged approximately $35 billion per quarter, the banking industry was still reporting to the FDIC more than $1.3 Trillion in Equity with less than $200 billion in delinquent assets more than 90-days delinquent or in foreclosure. And as any housing expert knows, some delinquent home loans heal without any loss and most retain at least some of their book value.
For the period ending 09/30/2008, the four largest American banks (Bank of America, JP Morgan/Chase, Citigroup, and Wells Fargo) were reporting to the FDIC, Equity in the range of $500 billion with $75 billion of non-performing assets—again most in residential housing. Annualized net income for 2008, based upon third quarter FDIC figures for the four banks mentioned above was being reported as a “positive” $30 billion.
Yet despite these numbers reported to the FDIC in October 2008, our leaders told us our financial system was about to collapse and that we needed to give Bank of America $45 billion, Citigroup $45 billion, JP Morgan/Chase $25 billion, and Wells Fargo $25 billion in TARP funds just to survive. By the way, that is a total of $140 billion in TARP funds when the same banks were reporting Equity of $500 billion, non-performing assets of $75 billion, and annualized net income of $30 billion.
Go figure, but based upon the above, is it any wonder that the “banks too big to fail” managed to pay back their much needed TARP funds within a year—after finding out, of course, the penalty they were having to pay for accepting the TARP funds in the first place? I might also mention that these banks managed to make these paybacks even while the housing situation in America continued to deteriorate as unemployment rose from 6.1% in October 2008 to above 10% a year later. Go figure, again.
Three very important things that the Economists at the Federal Reserve and the Department of Treasury did not seem to understand in the fall of 2008, but need to learn now, is this.
One, derivatives result in a “zero sum game”. Derivatives don’t just result in losers, but winners, too. Money doesn’t just disappear because people invest in derivatives, but instead, if derivative money is lost somewhere, it can be found again somewhere else.
Two, most homeowners with a mortgage (i.e., 95% of them) will do almost anything to continue paying their mortgage on time, including paying their monthly principal and interest payments even if their Government leaders cause a panic that essentially drives down the value of their home to a point it is hard to know the true value of the home anymore.
Three, American business is strong and American businessmen and women are not toxic. In fact, there is a very small percentage of “toxic assets” in America’s business outside of the books of the American banks.
It was investors who understood the above three points, not TARP, that brought sanity back into the marketplace and saved us from a Great Depression.
Thank goodness for those investors, thank goodness for the American homeowner who keeps making his and her monthly mortgage payment, and thank goodness for the American businessperson who keeps chugging along. Keep hanging in there, you heroes. One of these days, whether our leaders and economists believe it or not, we are going to work our way out of this Great Recession—with or without their support.
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