This makes the claim that the bailout had no strings attached true in what manner?
I specifically stated in my post that none of what I was posting made the bailout a good thing, only that the OP was mischaracterizing the nature of the bailouts. The fact that people have been charged with violating the TARP kind of proves that it couldn’t have been no strings attached, doesn’t it?
Fine, it wasn’t no strings.
As I understand it, the current proposal allows banks to bet on swaps etc. in such a way that if things go sour they can collect depositors’ insurance against their losses. I suppose that doesn’t amount literally to ‘no strings’, sorry for the imprecise language, but it is still a payout. Effectively the taxpayer covers banks’ gambling losses.
I wonder if we are talking about the same parts of TARP? My mental model of the 2008 bailout isn’t a loan- the government purchased hundreds of billions of dollars worth of scammy, questionable loans from the banks. Right up to that point the banks had been writing as many loans as they could (remember NINJAs?), knowing they’d get bailed out when things blew up. Now they can do that again- buy the credit default swaps, collect on those if their crappy mortgages default, maybe sell the crappy mortgages to the government again, too!
Paulson made billions off these IIRC. Unless you believe he provided billions of dollars worth of service to the community, investments like this are some kind of scam.
The thing is, bailing out the big banks was the right thing to do in the situation but it has harmful consequences down the road. Sortof like buying a kid a toy to get them to shut up, or negotiating with terrorists–you win in the short term but in the long-run you’re worse off. If the banks aren’t held entirely responsible for their actions they’re going to assume a sub-optimally high level of risk. Also, as septimus pointed out, the return on the investment was low in absolute terms and even worse when you consider that we were basically taking on junk-bond levels of risk.
The optimal scenario, ultimately, is that banks are precisely regulated such that they assume only an efficient level of risk and do not assume more risk if they get bailed out (and the tricky thing is, when billions of dollars are in play, whether or not the government makes the investment bailout whether or not it will succeed). The problem is that bankers are always going to one step ahead of the regulators, because bankers are overwhelmingly very rational and self-interested and the private sector will pay more. There is no perfect outcome.
The payback thing bothers me some. Where did they get all that money? In a relatively short amount of time, while not doing shady shit? If that amount of profit in such a short time is possible on the legit, why aren’t they* always* legit? If they can dig their way out of a huge hole that quick and easy, why dig the hole in the first place?
I’m with Lizzy Warren on this, banking should be boring. Deadly dull, no suprises, modest profits gained from cautious investing.
But that chokes off their entrepreneurial zest, their aggressive investment strategies that maximize leverage!
Yes. Yes, it does. Good.
I read Barofsky’s book Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street and would quote from it, but my library is so disorganized I can’t even find the book quickly. :o (Barofsky was the Special Inspector General for TARP.) But, IIRC, the money advanced to banks in TARP had only very weak strings attached. The prosecutions by Barofsky’s office weren’t for nitpicking rule violations, but for gross and blatant attempts to steal money. And, again, these weren’t prosecutions for the egregious frauds that led up the credit crisis – just for frauds committed with the TARP money itself.
The taxpayers and citizens could have “had their cake and eat it too” – saving the financial system from ruin without rewarding bad behavior.
A privilege and duty of banking regulators is to determine whether banks have adequate capital and to insist that they get more capital if not. This means issuing new stock in the banks and selling it to the highest bidders. Warren Buffett, Princes of Arabia, etc. would have had the opportunity to get sweetheart deals. The Government would have needed to step in* only if private investors could not be found* and the price paid for bank stocks would have been as much as any private investor valued the shares at. (In fact adequate investors could not be found, though IIRC Warren Buffett made a few sweetheart billions helping one bailout.)
Read up on crises in the 1980’s and 1990’s. “White Knights” willing to risk their money to bail out financial firms in critical shape got much much more than a 1.2% annual return on their money.
The result would have been perfect, IMO. Banks saved; taxpayers enrichened; moral hazard confirmed. Yet, AFAIK, this approach was never even proposed. :dubious: :eek: :smack:
ETA: Another alternative, helping banks and homeowners, would have been a program of mortgage delays and renegotiations. Again, proposals lacked political support and went nowhere. The only constituents Government seemed to hear were Wall Street, Wall Street and Wall Street.
Of course it was, Bank of America bought Merrill Lynch at a pretty strong premium under heavy pressure from the Fed.
No. What I meant was: If no private investor could be found Then the government would take common stock in the bank(s). Reward to match the risk. With the bank’s recovery, “taxpayers” would have gotten rich! (It would be interesting to know what “fiscal conservatives” would think of this. Surely, large profits would be good for those who claim to want to reduce deficits.)
Instead the taxpayers were given only the risks; the old stockholders were allowed to reap the rewards.
Ah, I see what you mean.