5 ms·

It is no surprise that Treasury made a profit on its investments in troubled companies, since the fact of investing in them effectively rigged the market in the

by penrod 12y ago

It is no surprise that Treasury made a profit on its investments in troubled companies, since the fact of investing in them effectively rigged the market in their favor: If the government declares that it will not allow a company to fail, the company’s borrowing costs are reduced and it now has a competitive advantage over companies that do not qualify for government intervention. Of course the qualifications for this special treatment were: being very big, being politically well-connected, and having taken stupid risks. So every well-run, medium sized bank that didn’t have an army of lobbyists got screwed. And now we see that our favorites have prospered and declare “profit!” while ignoring the red ink for everyone else in the economy.

rhino369 12y ago
It's not just that they boosted the credibility of the banks. The "toxic assets" that TARP bought weren't as bad as people feared. But the market wasn't buying them because nobody knew their true value. Everyone lost faith in the ratings agencies so it was chaos. Small banks benefited from this as well. It stabilized the market for mortgage securities, which small banks had large exposure to. It solved the liquidity crunch so the banks could stay open. If the big banks fail, it would take the small ones with them. It would also take a lot of good businesses with it. The whole economy runs on lines of credit.
- adventured 12y ago
  The market would have bought them, at one point or another, exactly because there was value there (either at the time or eventually that realization would have been made, just as it had been so many times throughout US history that didn't require a program like TARP). That process would have bankrupted nearly every major bank. Buying the toxic assets was an extreme bailout for the banks, that were carrying trillions in liabilities that suddenly went under. Most of the majors were completely insolvent.
  - autokad 12y ago
    I'm sorry but you are wrong. The market wasn't buying anything, period. Trying to fall back on the 'as it had been so many times throughout US History' is also wrong, as History, specifically the great depression, has shown us: no. At that time, there were no willing buyers (of toxic assets or banks otherwise), and if things progressed there would be no willing buyers. Tarp both directly and indirectly included the autos. Directly, because the auto bailout was funded under tarp, and indirectly because the way cars are sold - through loans, was about to be a broken process. if you remember, companies were no longer processing orders of auto parts companies unless they were paying in cash, for fear they might go under. The same situation happened in the banks. if the autos had gone, just that alone would have added another 2 million to unemployment in a month. Ford, the healthiest of the autos would have gone under too - as the companies that made GM and Christler's parts also made theirs. This alone would have destroyed the world economy for decades, let alone the financials all going kaput all at once. there were aspects of TARP that could have been implemented better, such as stipulations on c suite bonnuses, but overall TARP was needed or else we would be in a really bad place right now.
    - adventured 12y ago
      No, I'm correct. The market always buys value, and historically always has. The sole question is price. There were in fact willing buyers after the great depression. You're admitting I'm right by pointing out the great depression: all of those assets were eventually purchased by the market, that's a tremendous example of what I'm talking about. The only thing you can say is: it took too long, but that's merely an opinion. Besides, the government not only caused the great depression, but then made it much worse. I'd argue the market would have corrected dramatically faster had the government & Fed not screwed things up so massively. The problem in this case was the market price would have bankrupted the banks that were sitting on worthless loans. And the price deterioration in the housing market from the sinking toxic assets would have wiped out trillions in wealth for the middle class.
      - syllogism 12y ago
        > No, I'm correct. The market always buys value, and historically always has. The sole question is price. https://en.wikipedia.org/wiki/Keynesian_beauty_contest https://en.wikipedia.org/wiki/Keynesian_beauty_contest https://en.wikipedia.org/wiki/Pluralistic_ignorance https://en.wikipedia.org/wiki/Pluralistic_ignorance The market can't buy value if everyone believes everyone else believes that the value isn't there. (Actually you can go any number of layers of belief; what you need is shared knowledge, in the sense logicians use the term.) Everyone in the market is trying to guess what everyone else in the market will do, who are also trying to guess what the market is doing. Once you crash, you don't just need sentiment-of-value to improve, or even sentiment-of-sentiment-of-value. You need sentiment-of-sentiment-of-sentiment...etc. So, you can get grid-lock. Which is why you need the government to step in.
remarkEon 12y ago
In principle I agree. It remains to be seen how much moral hazard this little excursion into the loan markets by the federal government creates. One program that doesn't really get much attention in the media (maybe because it was more nuanced and complicated?) was the TALF program [1]. I did a summer internship in 2009 with the Federal Reserve Bank in New York and it really seemed like that program was their primary concern because it was much more directed at the private loan market with targeted loans at "normal" spreads (whatever that meant at the time...) To date, I guess, they've made ~$173m [2]. The design of TALF was wayyy different than TARP, both in scale and objective. At the time I was working on drilling down on the demographic data of who, exactly, was applying for TALF loans. Really interesting stuff. Not sure we'll be able to actually understand the ramifications for a while. [1] http://en.wikipedia.org/wiki/Term_Asset-Backed_Securities_Loan_Facility http://en.wikipedia.org/wiki/Term_Asset-Backed_Securities_Lo... [2] http://blogs.wsj.com/economics/2013/01/15/treasury-turns-173-million-profit-on-crisis-era-talf-program/ http://blogs.wsj.com/economics/2013/01/15/treasury-turns-173...
nraynaud 12y ago
That's interesting, because there is a very fine line to walk between destroying the competition by distorting the market and deciding that the state shouldn't let a company die. At least the U.S. got out of all this pure capitalist makeup. We can now talk about what we allow in competitive markets.
- marincounty 12y ago
  Yea, now we can't stomp around and espouse how Capitalism doesn't need government oversite--Period! Personally, there's a part of me that wanted the banks to fail; and see what arose from the ashes, but that's another story. (Some banks like Jamie Dimon's bank didn't need or want the money). I think what bothered me about the whole process is the economy is better for some people--people who have assets, or have skills that are currently in vogue. The average dude just getting by, and relying on interest from their cd(because they can't afford to speculate anywhere in life) was not given a party gift in this recovery. There were a lot of smaller banks who weren't in trouble. They weren't in trouble because they were located in the right communities, and were very consertative. Meaning they only lent to people with a lot of equity(sure bets), gave very little interest on any financial instrument, always charged fees for eveything, counted on the fact that a lot of people just drop their money in the bank and never touch it, but are Very nice, and remember your birthday--Hello Bank of Marin. I think Obama foresaw the future and figured the only lasting gift he could give to the middle class and the poor was access to the health care system--even though they (the Republicicans) insisted on bringing in private Insurance companies?
  - TheOtherHobbes 12y ago
    Bank failures are endemic, regular, and predictable. 2008 was a slightly warped replay of many earlier events. (Who remembers Savings and Loan in the 80s?) It would have been possible to restore confidence in other ways. Traditionally, good assets are collected into good banks, and bad assets are dumped into bad banks. The bad banks get thrown under a bus, and the good banks get full government backing until trust is restored. It's a tried and tested formula that has worked in other countries. What TARP didn't solve was the endemic corruption and criminality that caused 2008. (Remember how some banks launched foreclosure farms that rubber-stamped property seizures - and sometimes stole property that didn't even have an outstanding loan?) Unfortunately the corruption goes all the way to the Fed and the Congress, so a full restoration of Glass-Steagall, and jail time for the main perps, was never going to happen. A few billion in 'profit' sounds like a lot, but it's a drop in the ocean compared to the incredible destruction and loss of economic potential caused by the persistent fraud, aversion to adult supervision, and deep-seated social irresponsibility endemic at all levels of the financial industries.
lettergram 12y ago
Although I agree with you for the most part, companies such as Capital One or Discover who did not have intervention grew much faster and took much more of the market than other banks. Further, Ford did exceptionally well when the other automakers were having trouble and I was thoroughly impressed.
- deleted 12y ago
  [deleted]
- seanmccann 12y ago
  Discover got $1.2 billion. Capital one got $3.6 billion. Both are a small fraction of the $25 billion Wells Fargo and Citigroup got.
  - spuiszis 12y ago
    What's important is the amount of money relative to the size of the institution. Discover and Capital One were a faction of the size of WF + Citi. In 2008, WF had $1.2 Trillion in assets[1], Discover has $78bn today (had trouble hunting down the '08 #). [1]https://www08.wellsfargomedia.com/downloads/pdf/invest_relations/wf2008annualreport.pdf https://www08.wellsfargomedia.com/downloads/pdf/invest_relat...

by penrod 12y ago

rhino369 12y ago

It's not just that they boosted the credibility of the banks. The "toxic assets" that TARP bought weren't as bad as people feared. But the market wasn't buying them because nobody knew their true value. Everyone lost faith in the ratings agencies so it was chaos. Small banks benefited from this as well. It stabilized the market for mortgage securities, which small banks had large exposure to. It solved the liquidity crunch so the banks could stay open. If the big banks fail, it would take the small ones with them. It would also take a lot of good businesses with it. The whole economy runs on lines of credit.

adventured 12y ago
The market would have bought them, at one point or another, exactly because there was value there (either at the time or eventually that realization would have been made, just as it had been so many times throughout US history that didn't require a program like TARP). That process would have bankrupted nearly every major bank. Buying the toxic assets was an extreme bailout for the banks, that were carrying trillions in liabilities that suddenly went under. Most of the majors were completely insolvent.
- autokad 12y ago
  I'm sorry but you are wrong. The market wasn't buying anything, period. Trying to fall back on the 'as it had been so many times throughout US History' is also wrong, as History, specifically the great depression, has shown us: no. At that time, there were no willing buyers (of toxic assets or banks otherwise), and if things progressed there would be no willing buyers. Tarp both directly and indirectly included the autos. Directly, because the auto bailout was funded under tarp, and indirectly because the way cars are sold - through loans, was about to be a broken process. if you remember, companies were no longer processing orders of auto parts companies unless they were paying in cash, for fear they might go under. The same situation happened in the banks. if the autos had gone, just that alone would have added another 2 million to unemployment in a month. Ford, the healthiest of the autos would have gone under too - as the companies that made GM and Christler's parts also made theirs. This alone would have destroyed the world economy for decades, let alone the financials all going kaput all at once. there were aspects of TARP that could have been implemented better, such as stipulations on c suite bonnuses, but overall TARP was needed or else we would be in a really bad place right now.
  - adventured 12y ago
    No, I'm correct. The market always buys value, and historically always has. The sole question is price. There were in fact willing buyers after the great depression. You're admitting I'm right by pointing out the great depression: all of those assets were eventually purchased by the market, that's a tremendous example of what I'm talking about. The only thing you can say is: it took too long, but that's merely an opinion. Besides, the government not only caused the great depression, but then made it much worse. I'd argue the market would have corrected dramatically faster had the government & Fed not screwed things up so massively. The problem in this case was the market price would have bankrupted the banks that were sitting on worthless loans. And the price deterioration in the housing market from the sinking toxic assets would have wiped out trillions in wealth for the middle class.
    - syllogism 12y ago
      > No, I'm correct. The market always buys value, and historically always has. The sole question is price. https://en.wikipedia.org/wiki/Keynesian_beauty_contest https://en.wikipedia.org/wiki/Keynesian_beauty_contest https://en.wikipedia.org/wiki/Pluralistic_ignorance https://en.wikipedia.org/wiki/Pluralistic_ignorance The market can't buy value if everyone believes everyone else believes that the value isn't there. (Actually you can go any number of layers of belief; what you need is shared knowledge, in the sense logicians use the term.) Everyone in the market is trying to guess what everyone else in the market will do, who are also trying to guess what the market is doing. Once you crash, you don't just need sentiment-of-value to improve, or even sentiment-of-sentiment-of-value. You need sentiment-of-sentiment-of-sentiment...etc. So, you can get grid-lock. Which is why you need the government to step in.

remarkEon 12y ago

In principle I agree. It remains to be seen how much moral hazard this little excursion into the loan markets by the federal government creates. One program that doesn't really get much attention in the media (maybe because it was more nuanced and complicated?) was the TALF program [1]. I did a summer internship in 2009 with the Federal Reserve Bank in New York and it really seemed like that program was their primary concern because it was much more directed at the private loan market with targeted loans at "normal" spreads (whatever that meant at the time...) To date, I guess, they've made ~$173m [2]. The design of TALF was wayyy different than TARP, both in scale and objective. At the time I was working on drilling down on the demographic data of who, exactly, was applying for TALF loans. Really interesting stuff. Not sure we'll be able to actually understand the ramifications for a while. [1] http://en.wikipedia.org/wiki/Term_Asset-Backed_Securities_Loan_Facility http://en.wikipedia.org/wiki/Term_Asset-Backed_Securities_Lo... [2] http://blogs.wsj.com/economics/2013/01/15/treasury-turns-173-million-profit-on-crisis-era-talf-program/ http://blogs.wsj.com/economics/2013/01/15/treasury-turns-173...

nraynaud 12y ago

That's interesting, because there is a very fine line to walk between destroying the competition by distorting the market and deciding that the state shouldn't let a company die. At least the U.S. got out of all this pure capitalist makeup. We can now talk about what we allow in competitive markets.

marincounty 12y ago
Yea, now we can't stomp around and espouse how Capitalism doesn't need government oversite--Period! Personally, there's a part of me that wanted the banks to fail; and see what arose from the ashes, but that's another story. (Some banks like Jamie Dimon's bank didn't need or want the money). I think what bothered me about the whole process is the economy is better for some people--people who have assets, or have skills that are currently in vogue. The average dude just getting by, and relying on interest from their cd(because they can't afford to speculate anywhere in life) was not given a party gift in this recovery. There were a lot of smaller banks who weren't in trouble. They weren't in trouble because they were located in the right communities, and were very consertative. Meaning they only lent to people with a lot of equity(sure bets), gave very little interest on any financial instrument, always charged fees for eveything, counted on the fact that a lot of people just drop their money in the bank and never touch it, but are Very nice, and remember your birthday--Hello Bank of Marin. I think Obama foresaw the future and figured the only lasting gift he could give to the middle class and the poor was access to the health care system--even though they (the Republicicans) insisted on bringing in private Insurance companies?
- TheOtherHobbes 12y ago
  Bank failures are endemic, regular, and predictable. 2008 was a slightly warped replay of many earlier events. (Who remembers Savings and Loan in the 80s?) It would have been possible to restore confidence in other ways. Traditionally, good assets are collected into good banks, and bad assets are dumped into bad banks. The bad banks get thrown under a bus, and the good banks get full government backing until trust is restored. It's a tried and tested formula that has worked in other countries. What TARP didn't solve was the endemic corruption and criminality that caused 2008. (Remember how some banks launched foreclosure farms that rubber-stamped property seizures - and sometimes stole property that didn't even have an outstanding loan?) Unfortunately the corruption goes all the way to the Fed and the Congress, so a full restoration of Glass-Steagall, and jail time for the main perps, was never going to happen. A few billion in 'profit' sounds like a lot, but it's a drop in the ocean compared to the incredible destruction and loss of economic potential caused by the persistent fraud, aversion to adult supervision, and deep-seated social irresponsibility endemic at all levels of the financial industries.

lettergram 12y ago

Although I agree with you for the most part, companies such as Capital One or Discover who did not have intervention grew much faster and took much more of the market than other banks. Further, Ford did exceptionally well when the other automakers were having trouble and I was thoroughly impressed.

deleted 12y ago
[deleted]
seanmccann 12y ago
Discover got $1.2 billion. Capital one got $3.6 billion. Both are a small fraction of the $25 billion Wells Fargo and Citigroup got.
- spuiszis 12y ago
  What's important is the amount of money relative to the size of the institution. Discover and Capital One were a faction of the size of WF + Citi. In 2008, WF had $1.2 Trillion in assets[1], Discover has $78bn today (had trouble hunting down the '08 #). [1]https://www08.wellsfargomedia.com/downloads/pdf/invest_relations/wf2008annualreport.pdf https://www08.wellsfargomedia.com/downloads/pdf/invest_relat...