I put Middle Earth Journal in hiatus in May of 2008 and moved to Newshoggers.
I temporarily reopened Middle Earth Journal when Newshoggers shut it's doors but I was invited to Participate at The Moderate Voice so Middle Earth Journal is once again in hiatus.

Thursday, September 20, 2012

Kabuki TARP

Sheila Bair confirms what many of us thought all along - TARP was not necessary and was little more than a political Kabuki Dance.

The fact remained that with the exception of Citi, the commercial banks' capital levels seemed to be adequate. The investment banks were in trouble, but Merrill had arranged to sell itself to BofA, and Goldman and Morgan had been able to raise new capital from private sources, with the capacity, I believed, to raise more if necessary. Without government aid, some of them might have had to forgo bonuses and take losses for several quarters, but still, it seemed to me that they were strong enough to bumble through. Citi probably did need that kind of massive government assistance (indeed, it would need two more bailouts later on), but there was the rub. How much of the decision-making was being driven through the prism of the special needs of that one, politically connected institution? Were we throwing trillions of dollars at all the banks to camouflage its problems? Were the others really in danger of failing? Or were we just softening the damage to their bottom lines through cheap capital and debt guarantees?
Like so many other things that go down in Washington TARP was nothing more than politicians and technocrats trying to look like they were doing something.  If the banks collapsed they would get the blame. And there was this:
Thain, whose bank was desperate for capital, was worried about restrictions on executive compensation. I couldn't believe it. Where were the guy's priorities?
Thain was head of Merrill Lynch which was at the edge of the cliff and about to fall.

Bair concludes with this:
The system did not fall apart, so at least we were successful in that, but at what cost? We used up resources and political capital that could have been spent on other programs to help more Main Street Americans. And then there was the horrible reputational damage to the financial industry itself. It worked, but could it have been handled differently? That is the question that plagues me to this day.
Of course the real danger is the Too Big To Fail institutions are even bigger and still gambling.

1 comment:

  1. When I was working in CitiGroup Chuck Prince was earning more by lunchtime on his first day than I received in a year. Then he got canned with a $68Million handout (along with other perks) and his net result was a $10Billion loss. Dysfunctional? Yes. Still the paradigm for these companies? Yes.


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