TARP update and a few afterthoughts on the crisis of ’08
There has been a flurry of activity lately surrounding TARP. You remember “TARP” don’t you? The legislation that was passed with great debate and outrage in early October 2008. It was derided as a massive “bank bailout” sure to cost the taxpayers hundreds of billions. Even more important, many politicians, pundits and commentators shouted that in addition to the cost, it wouldn’t work. Not only would TARP fail, but the proper course of action was to do nothing. Mostly Republican and free-market purest voices were heard to repeat, to varying degrees, that such intervention was futile- simply letting events unfold as they may is the only truly prudent course of action. No “bailout” was needed, they said; the system would right itself, they said; we aren’t really facing a complete financial meltdown they argued.
Well, I’m going to use an argument from authority to illustrate just how close we came to Financial Armageddon. But I’ve chosen my authorities very carefully. I think you will agree they occupy positions that provide extraordinary insights into the financial system. First up is Ken Chenault, CEO of American Express. He provided an interview in the October 26th issue of Fortune magazine and the crisis was one topic discussed with the benefit of looking back one year. (As an aside, I highly recommend Fortune. I especially recommend Fortune over its main competition, Forbes. Roughly half of Forbes commentary seems to be an extended selling of Steve Forbes’ political views and is quite irritating. They do have some good articles when discussing individual companies though.) In response to a question about Ken’s worst fears at the time he said (emphasis mine):
“The reality is that we were on the verge of an absolute disaster and collapse“
When pressed a little further, he added shortly:
“Without naming names, there were some very large companies that had to go into the market on a regular basis. Most of them have survived, but it was a very scary period. Some companies had a great fear that if there was not some opening in the commercial paper markets and some support from the government, they would go under.”
So there you have it from a CEO at the center of the storm. He watched in real time as “some very large companies” teetered on the brink. “Most” of those companies survived, but not all. Imagine what would have been if nothing was done and the commercial paper markets didn’t open up?
Moving along, let’s see what one of the greatest business minds to ever walk the earth had to say. A recent WSJ article discusses in depth what Buffett was thinking. It begins by reminding us that Buffett is 79 and has seen a lot of things. Quoting Buffett, the WSJ points out just how truly awesome this meltdown was:
“I bought my first stock in 1942, and this roller coaster surpassed anything that I’ve seen“
That ought to add some context. In the weeks before Lehman failed, Buffett fielded phone calls asking for money from no other than Freddie Mac, Wachovia, AIG, and Barclays. There are probably few people with not only the access to information Buffett has, but also the proven analytical capability to see reality at such times. Buffett does not panic. Period, end of story. Yet, the journal reports that on Sunday, September 14th, 2008- the day before Lehman declared bankruptcy:
“By this point, Mr. Buffett was beginning to worry about the entire financial system. In phone conversations, the normally loquacious Mr. Buffett was less talkative and sounded nervous, according to one person who was speaking with him regularly at the time.”
What?! Buffett was “nervous”? This was about the time that people were reciting Treasury Secretary Andrew Mellon’s infamous advice to President Hoover as the Great Depression was unfolding “Liquidate labor, liquidate stocks and liquidate farmers!” His point was that nothing should be done, just liquidate them all- that’s how capitalism works.
Just a few days after Lehman failed, the Reserve Primary Fund, an institutional money market product and one of the oldest in the country, “broke the buck” on September 16th. The commercial paper essentially froze at this point. Quoting the WSJ “The resulting chaos, Mr. Buffett concluded, could have crashed global financial markets, threatening Berkshire”. Berkshire, mind you, is built to be “Fort Knox” according to Buffett. That is, he has designed it to withstand anything except perhaps a disaster like that depicted in the movie “2012”. Even then, I’d personally rather have my money with Buffett. The Journal goes on to quote Buffett again (emphasis mine):
“I felt that this is something like I’ve never seen before, and the American public and Congress don’t fully understand the gravity” of the problems, he recalls. “I thought, we are really looking into the abyss.”
There you have it in the words of one of the smartest men alive (and a true financial genius too). Not only did he have front row seats to all the action, but he had a direct line to all the players including then Treasury Secretary Hank Paulson, who sought out his advice. So, to all those who thought nothing needed to be done, to those who argued and lobbied against government intervention, I say you should thank every dollar to your name that cooler and less ideological heads prevailed.
Circling back to TARP and its success at preventing actual eye-witness accounts to “the abyss”, we have some updated numbers regarding the program. According to a GAO audit of the Treasury program, through September 30, 2009, $73 billion of the $364 billion dispersed under TARP has been returned. The Treasury earned and additional $12.7 billion of profit on the returned money for a return of over 17%. On December 10th, 2009, Secretary Geithner reported to Congress that $116 billion has been returned through that date with a profit of $15 billion or almost a 13% return. This $116 billion returned so far has been mostly from the giant banks everyone criticized as bound to never again get out from under the government.
It is important to note that the rest of TARP, some $248 billion may still prove to be money flushed. And we may learn that these same banks suddenly find themselves short of capital again. True, the “too big to fail” problem hasn’t been addressed (it is now the “even too bigger to fail” problem). Yes, the legislation was vague. Yes, I would have done it differently too. Yet so far, the program has worked in stabilizing the financial system by having bought time for the banks to raise private capital. It essentially stopped a very real and very literal “run on the bank”. In the process, it helped keep “the abyss” at bay.
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