TARP Tall Tales
Phase 1: Spend $700 billion, Phase 2: ??, Phase 3: Profit?
There's an old business joke that goes like this:
Q: How do you make a million dollars in the airline industry?
A: Start with a billion dollars.
Reading the coverage this week of the "profits" rolling in from last year's Troubled Asset Relief Program (TARP) loans, one sees glimmers of the same joke, even less funny this time (if such a thing is possible), and told at taxpayers' expense.
The TARP version of the joke is more like this:
Q: How do you make $4 billion in the banking industry?
A: Start with $700 billion in taxpayer money. Round up a bunch of banks. Some of these banks should be on the brink of ruin. Others should be reeling from the shock of the market crash, but otherwise pretty much OK. Force all of the banks to accept hundreds of millions of dollars from the government. Note that force shall henceforth refer to very large number of conference calls with once-and-future Treasury secretaries Hank Paulson and/or Tim Geithner. The banks that don't really need the money will serve as a thin, temporary smokescreen to conceal information from the market about which banks are really in trouble.
Relatively soon, things will start to look up. (This may or may not be thanks to massive government intervention in the economy—that's neither here nor there for the purposes of the "joke.") The banks that never wanted the money in the first place will ask to pay back the loans ASAP. Lollygag around, musing aloud about possible terms and refusing to accept immediate payment. Insist on retaining the warrants, which give the government the right to buy stock in those banks in the future at a set price. Force the healthiest banks to wheedle, bargain, beg, and eventually buy back those warrants. They will desperately want to do this, because the idea of the federal government holding warrants which it could exercise at any time based on political considerations scares the bejesus out of bankers. Gather up a few billion from the eight strongest banks.
Then, sit back and wait for this New York Times story to run:
Nearly a year after the federal rescue of the nation's biggest banks, taxpayers have begun seeing profits from the hundreds of billions of dollars in aid that many critics thought might never be seen again.
The profits, collected from eight of the biggest banks that have fully repaid their obligations to the government, come to about $4 billion, or the equivalent of about 15 percent annually, according to calculations compiled for The New York Times.
Look, there's even a cheerful graph.
All the bars go up! Almost all the numbers have plusses next to them! We're rich!
The funny part, of course, is the bizarre definition of profit, in which only those holdings that have already made money are included in the calculation. By this calculation, every 401(k) in America has done extremely well in the past year.
While the Times story has a tone of happy surprise—"Hey neat. Where did all this money come from?"—at first glance, this Newsweek story appears to be indulging in a little revisionist history. According to this version of events, TARP was never really a bailout at all, but "a series of very expensive investments in blue-chip companies."
In fact, Newsweek isn't wrong about this account of the government's justification for TARP. This was precisely the story that TARP administrators used in April to rationalize their slow and subjective decision-making about whether to allow banks to promptly repay loans and buy back warrants. The competing narrative threads about TARP—"It's a bailout! No, it's an investment"—were built into the program from the get-go. But when banks came clamoring to the steps of the Treasury Department with cash in hand sooner than expected, decisions had to be made. Should the government try to extract more money from banks, despite the fact that the banking industry was still far from healthy, by insisting on enforcing the terms of the original contract? Or should it let banks go on break-even terms, and just be happy to get out alive?
Unlike the "Great taste! Less filling!" debate, both sides can't win in the end. The best they can hope for is an attempt at the kind of face-saving compromise we find ourselves contemplating in this week's headlines. Treasury gets to throw up a quick "Mission Accomplished" banner (Thought of the day: Geithner in a flight suit) and then hope no one notices when we recommit taxpayer dollars for the long slog, since many banks have no ability to repay now and very little hope for the future.
The Newsweek story has a "to be sure" passage (as does the Times piece): "We can't extrapolate the early returns to the broader pool, due to what economists call adverse selection. In English, it means the healthiest banks fled like thieves…once they could raise private capital, leaving behind the weaker institutions." And even if all the banks repaid the TARP loans in full, plus a little more—which is about as likely as Tim Geithner ever donning a flight suit for a press conference—the bailout overall would still be a massive money hole.
Katherine Mangu-Ward is a senior editor at Reason magazine.