Last week, the Treasury Department announced that the final major investment in a bank from the Troubled Asset Relief Program had been repaid and that the government had made a total profit of $30.7 billion on the program. Of course, this story did not appear in any of the major media, and 99% of the media and the public probably still believe the government lost hundreds of billions of dollars on “bailed out” banks.
This incredible twisting of the facts, as well as the resulting loss of confidence in banks, caused tremendous harm to our economy and especially to the thousands of banks that had nothing to do with creating the financial crisis. My purpose here is not to relitigate whether Tarp was the right approach, but rather to point out the massive and disastrous communication failure related to Tarp on the part of government leaders — including members of Congress — and, of course, the media.
After offering up an unworkable program to buy troubled loans (hence the name: the Troubled Asset Relief Program), the government, led by Treasury and the Federal Reserve, without warning called in the leaders of nine of our largest banks in October of 2008 and basically ordered them to take capital injections. Immediately thereafter, the regulators called bank CEOs across the country and “requested” that they too take such injections. The CEOs were told that the purpose was to create a firewall against panic and also that their banks would be better positioned to buy any banks that were in trouble.
Uniformly, these CEOs responded that their banks were very well capitalized, doing fine and did not need nor want money from the government. At the time, over 95% of banks in the country were indeed well capitalized. Of course a “request” from a bank’s regulator is not really just a request, and so many banks took the money, often believing it was their patriotic duty to do so.
Incredibly, there was no communication plan at the highest levels of government to explain this massive new program. Our leaders were at best naive about how this was going to play out. Predictably, within a few weeks, a firestorm erupted about billions of dollars being spent to “bail out” banks, with few strings attached. In response, officials at Treasury and the Fed created a new story line that the money was to increase lending, leading to congressional and media demands for banks to prove where exactly the increased lending was — an impossible task in the face of cratering loan demand. Quickly, bankers were vilified, new restrictions were unilaterally applied to Tarp banks and the avalanche of new regulations that ultimately peaked with the Dodd-Frank Act began.
The American Bankers Association tried — but was largely unsuccessful, I am afraid — to get the truth out against this tidal wave. We went on every TV program and talked to every reporter we could, wrote op-eds and white papers, and talked to members of Congress and the regulators. I wrote the strongest letter of my career to then-Treasury Secretary Henry Paulson, pointing out the damage that was being done by the failure to forcefully counter this false narrative.
We argued that banks were not the cause of the crisis; that banks did not ask for the Tarp investments and in fact were pressured to take them; that (although there were a few possible exceptions among the big banks) all the banks that took the money were, by the express requirements of Tarp, healthy banks — i.e., they did not need a bailout; and that banks wanted to lend but that loan demand was clearly down.
On November 8, 2008, at the height of the Tarp firestorm, I testified for the ABA before the House Financial Services Committee and made those points. Furthermore, while commentators routinely now say that no one could have predicted that there would be a profit for the government on the bank investments in Tarp, we did exactly that. Despite the dangers of doing so, we thought it was necessary to try to change the widely held and mistaken belief that this was a bailout. Our prediction, for which we laid out our analysis, was a $40 billion to $45 billion profit. That seems pretty close to the $30.7 billion actually reported. But actually it was even closer. We naturally used the program’s own metrics for when banks would pay back the investments, but many banks paid them back much faster, in the vain hope of getting away from the “bailout” stigma, resulting in much less interest being received by the government.
So we have been proven right. But that is of no help to the thousands of banks that suffered, and are still suffering, from the grossly unfair rollout and communication of Tarp.