What You Think You Know About TARP and Wall Street’s Biggest Banks Is Wrong
Ten years ago this Saturday, on October 13, 2008, the CEOs of the biggest banks in the U.S. were summoned to a meeting at the Treasury Department where they all received taxpayer bailouts in the form of TARP (Troubled Asset Relief Program) money from the Federal government. The money was being given to the banks, we were told, to buy up bad mortgages from the banks and modify them to help borrowers, to stimulate lending to small businesses, and other activities meant to inject capital and confidence into the reeling financial system
Here’s the catch: The mythology of TARP is wrong.
Myth #1: TARP funds were to be used to help consumers with small business loans, mortgage relief and other assistance.
- In the months following the bailout, lending among the biggest banks actually went down. The largest decrease in lending also came from the biggest recipient of bailout money, Citigroup, which had a 3.1 percent drop in lending. Further, the inspector general for the bailout found that lending among the nine biggest TARP recipients “did not, in fact, increase.”
Myth #2: Some banks were forced to take TARP money even though they didn’t really need the help.
- The answer to the question, “Why didn’t the banks lend out the TARP money they received?” can be found in the fact that the banks needed it themselves to maintain their own financial health. In testimony before the Financial Crisis Inquiry Commission, then-Fed Chair Ben Bernanke admitted that 12 of the 13 most prominent financial companies in America were on the brink of failure during the time of the initial bailouts.
Myth #3: The Federal government “made money” on TARP.
- The Federal government was repaid the TARP funds but didn’t make money on the bailouts. According to the latest Treasury report to Congress, cumulative TARP collections exceeded the $440 billion in disbursements by just $2.4 billion, which is a ½ percent total return. Contrast that to Warren Buffett’s returns on his crisis investments: more than 70% (as we detailed in our Costs of the Crisis Report at pages 66-69). Most importantly, none of the money returned to taxpayers were on a risk-adjusted basis, which is the way only way returns can be evaluated and who Wall Street judges every loan and investment. The persistent myth that “the bailouts made money” has allowed the mega-banks to claim that since no money was lost, we no longer need the protections put in place by the Dodd-Frank Act, despite the vast damage the crisis inflicted on the American people.