Home » Business » Biz Commentary
Lessons from US bailouts, through the rearview mirror
By Deborah Solomon and Paula Dwyer |
January 8, 2013, Tuesday
|
Print Edition
Print Edition
US Treasury Secretary Tim Geithner is calling it a day. So is Treasury's Troubled Asset Relief Program, the US$418 billion effort to rescue banks, automakers and other companies during the financial crisis. In announcing its intention to complete the sale of the remaining shares it owned in General Motors, American International Group and 218 smaller banks, the US Treasury is essentially ending a controversial bailout that kept the financial system from collapse at a cost far less than many imagined in the darkest days of 2008.
Most banks are healthy again, backed by billions more in capital. Yet for all its success, TARP was by no means perfect. It was too generous to the companies it aided. It exacerbated the problem of moral hazard. And it did too little to help people weather the housing meltdown at the root of the financial crisis.
TARP's main purpose was to stabilize the financial system by injecting capital into more than 700 banks and other companies whose collapse had the potential to wreak havoc on the US economy. In return, the US received preferred shares, debt and warrants in the institutions. Most of these have been redeemed or repaid. It's worth pointing out, though, that Treasury's returns could have been greater. The department dictated almost identical terms for all institutions in its main capital program, regardless of health or taxpayer risk. The rationale was that labeling a bank as weak could trigger a run, yet the financial markets clearly knew which companies were on stronger footing.
The result was that healthy institutions, including Goldman Sachs Group and JPMorgan Chase paid Treasury a 5 percent annual dividend on their preferred shares, the same rate as weaker institutions. Five percent was probably too low: Billionaire investor Warren Buffett squeezed a 10 percent coupon out of Goldman Sachs when he agreed to invest US$5 billion during the crisis, a move that netted the Berkshire Hathaway chairman a $3.7 billion profit. Treasury's US$10 billion Goldman investment generated about US$1.1 billion.
Then there's the question of moral hazard. By ensuring that creditors, along with depositors, were paid in full, the US fueled the market's expectation of future government interventions.
The Dodd-Frank financial law tried to counteract this impression by banning taxpayer-funded bailouts and creating a system to wind down failing firms. Wall Street doesn't believe it: Too-big-to-fail banks can still borrow more cheaply than smaller banks. Economists at the New York Federal Reserve also found that banks made dodgier loans as a result of getting government support.
Yes, TARP should be cut some slack. It was an emergency rescue plan cobbled together at a time of panic. But its weaknesses offer valuable lessons for lawmakers and regulators, who are grappling with what, if anything, to do about moral hazard and too-big-to-fail banks.
A few approaches come to mind: asking the largest banks to hold more capital, restricting the amount of proprietary trading they can do and capping the size of their non-deposit liabilities.
Future rescues should also provide more help to distressed homeowners, with more emphasis on reducing mortgage principal and less on lowering monthly payments.
Deborah Solomon and Paula Dwyer are editors with Bloomberg View. The opinions expressed here are their own.
Most banks are healthy again, backed by billions more in capital. Yet for all its success, TARP was by no means perfect. It was too generous to the companies it aided. It exacerbated the problem of moral hazard. And it did too little to help people weather the housing meltdown at the root of the financial crisis.
TARP's main purpose was to stabilize the financial system by injecting capital into more than 700 banks and other companies whose collapse had the potential to wreak havoc on the US economy. In return, the US received preferred shares, debt and warrants in the institutions. Most of these have been redeemed or repaid. It's worth pointing out, though, that Treasury's returns could have been greater. The department dictated almost identical terms for all institutions in its main capital program, regardless of health or taxpayer risk. The rationale was that labeling a bank as weak could trigger a run, yet the financial markets clearly knew which companies were on stronger footing.
The result was that healthy institutions, including Goldman Sachs Group and JPMorgan Chase paid Treasury a 5 percent annual dividend on their preferred shares, the same rate as weaker institutions. Five percent was probably too low: Billionaire investor Warren Buffett squeezed a 10 percent coupon out of Goldman Sachs when he agreed to invest US$5 billion during the crisis, a move that netted the Berkshire Hathaway chairman a $3.7 billion profit. Treasury's US$10 billion Goldman investment generated about US$1.1 billion.
Then there's the question of moral hazard. By ensuring that creditors, along with depositors, were paid in full, the US fueled the market's expectation of future government interventions.
The Dodd-Frank financial law tried to counteract this impression by banning taxpayer-funded bailouts and creating a system to wind down failing firms. Wall Street doesn't believe it: Too-big-to-fail banks can still borrow more cheaply than smaller banks. Economists at the New York Federal Reserve also found that banks made dodgier loans as a result of getting government support.
Yes, TARP should be cut some slack. It was an emergency rescue plan cobbled together at a time of panic. But its weaknesses offer valuable lessons for lawmakers and regulators, who are grappling with what, if anything, to do about moral hazard and too-big-to-fail banks.
A few approaches come to mind: asking the largest banks to hold more capital, restricting the amount of proprietary trading they can do and capping the size of their non-deposit liabilities.
Future rescues should also provide more help to distressed homeowners, with more emphasis on reducing mortgage principal and less on lowering monthly payments.
Deborah Solomon and Paula Dwyer are editors with Bloomberg View. The opinions expressed here are their own.
- About Us
- |
- Terms of Use
- |
-
RSS - |
- Privacy Policy
- |
- Contact Us
- |
- Shanghai Call Center: 962288
- |
- Tip-off hotline: 52920043
- 沪ICP证：沪ICP备05050403号-1
- |
- 互联网新闻信息服务许可证：31120180004
- |
- 网络视听许可证：0909346
- |
- 广播电视节目制作许可证：沪字第354号
- |
- 增值电信业务经营许可证：沪B2-20120012
Copyright © 1999- Shanghai Daily. All rights reserved.Preferably viewed with Internet Explorer 8 or newer browsers.
