[penrod]

It is no surprise that Treasury made a profit on its investments in troubled companies, since the fact of investing in them effectively rigged the market in their favor: If the government declares that it will not allow a company to fail, the company’s borrowing costs are reduced and it now has a competitive advantage over companies that do not qualify for government intervention.

Of course the qualifications for this special treatment were: being very big, being politically well-connected, and having taken stupid risks. So every well-run, medium sized bank that didn’t have an army of lobbyists got screwed. And now we see that our favorites have prospered and declare “profit!” while ignoring the red ink for everyone else in the economy.

[rhino369]

It's not just that they boosted the credibility of the banks.

The "toxic assets" that TARP bought weren't as bad as people feared. But the market wasn't buying them because nobody knew their true value. Everyone lost faith in the ratings agencies so it was chaos.

Small banks benefited from this as well. It stabilized the market for mortgage securities, which small banks had large exposure to. It solved the liquidity crunch so the banks could stay open.

If the big banks fail, it would take the small ones with them. It would also take a lot of good businesses with it. The whole economy runs on lines of credit.

[adventured]

The market would have bought them, at one point or another, exactly because there was value there (either at the time or eventually that realization would have been made, just as it had been so many times throughout US history that didn't require a program like TARP).

That process would have bankrupted nearly every major bank. Buying the toxic assets was an extreme bailout for the banks, that were carrying trillions in liabilities that suddenly went under. Most of the majors were completely insolvent.

[autokad]

I'm sorry but you are wrong. The market wasn't buying anything, period. Trying to fall back on the 'as it had been so many times throughout US History' is also wrong, as History, specifically the great depression, has shown us: no. At that time, there were no willing buyers (of toxic assets or banks otherwise), and if things progressed there would be no willing buyers.

Tarp both directly and indirectly included the autos. Directly, because the auto bailout was funded under tarp, and indirectly because the way cars are sold - through loans, was about to be a broken process. if you remember, companies were no longer processing orders of auto parts companies unless they were paying in cash, for fear they might go under. The same situation happened in the banks. if the autos had gone, just that alone would have added another 2 million to unemployment in a month. Ford, the healthiest of the autos would have gone under too - as the companies that made GM and Christler's parts also made theirs. This alone would have destroyed the world economy for decades, let alone the financials all going kaput all at once.

there were aspects of TARP that could have been implemented better, such as stipulations on c suite bonnuses, but overall TARP was needed or else we would be in a really bad place right now.

[adventured]

No, I'm correct. The market always buys value, and historically always has. The sole question is price.

There were in fact willing buyers after the great depression. You're admitting I'm right by pointing out the great depression: all of those assets were eventually purchased by the market, that's a tremendous example of what I'm talking about. The only thing you can say is: it took too long, but that's merely an opinion. Besides, the government not only caused the great depression, but then made it much worse. I'd argue the market would have corrected dramatically faster had the government & Fed not screwed things up so massively.

The problem in this case was the market price would have bankrupted the banks that were sitting on worthless loans. And the price deterioration in the housing market from the sinking toxic assets would have wiped out trillions in wealth for the middle class.

[polarix]

You may have ended your counterfactual story too soon. It's hardly a triviality that it would have destroyed trillions of perceived middle class wealth. Such a perceptual shift changes the characteristics of consumer demand in a way that would have massive worldwide impact. Not only would American businesses have suffered (many fatally), and dramatically reduced investment, but American debt-financed consumer demand is one of our biggest exports, and would have precipitated even more disastrous global readjustments. This is the kind of thing that causes loss of life (through revolutions and wars, if not simple starvation) in poorer countries and regions.

[tptacek]

Something market something something irrational longer something solvent.

[syllogism]

> No, I'm correct. The market always buys value, and historically always has. The sole question is price.

https://en.wikipedia.org/wiki/Keynesian_beauty_contest

https://en.wikipedia.org/wiki/Pluralistic_ignorance

The market can't buy value if everyone believes everyone else believes that the value isn't there. (Actually you can go any number of layers of belief; what you need is shared knowledge, in the sense logicians use the term.)

Everyone in the market is trying to guess what everyone else in the market will do, who are also trying to guess what the market is doing. Once you crash, you don't just need sentiment-of-value to improve, or even sentiment-of-sentiment-of-value. You need sentiment-of-sentiment-of-sentiment...etc.

So, you can get grid-lock. Which is why you need the government to step in.

[bko]

I think the Keynesian beauty contest is less relevant for structured products. If others don't share the same view of the underlying collateral you may not be able to sell them in the near future. But if the collateral performance meets your more optimistic viewpoint, you will be compensated and eventually the bond will be paid off. The securities aren't like equities with some some arbitrary value associated with them that can only be captured through sale to another party (excluding dividends, buyouts, etc).

There were probably a lot of structural issues that prevented many of the large players to purchases these assets though (mostly liquidity). This is probably the justification the Federal Reserve used to purchase said assets.

[remarkEon]

In principle I agree. It remains to be seen how much moral hazard this little excursion into the loan markets by the federal government creates.

One program that doesn't really get much attention in the media (maybe because it was more nuanced and complicated?) was the TALF program [1]. I did a summer internship in 2009 with the Federal Reserve Bank in New York and it really seemed like that program was their primary concern because it was much more directed at the private loan market with targeted loans at "normal" spreads (whatever that meant at the time...) To date, I guess, they've made ~$173m [2]. The design of TALF was wayyy different than TARP, both in scale and objective. At the time I was working on drilling down on the demographic data of who, exactly, was applying for TALF loans. Really interesting stuff.

Not sure we'll be able to actually understand the ramifications for a while.

[1] http://en.wikipedia.org/wiki/Term_Asset-Backed_Securities_Lo... [2] http://blogs.wsj.com/economics/2013/01/15/treasury-turns-173...

[lettergram]

Although I agree with you for the most part, companies such as Capital One or Discover who did not have intervention grew much faster and took much more of the market than other banks. Further, Ford did exceptionally well when the other automakers were having trouble and I was thoroughly impressed.

[seanmccann]

Discover got $1.2 billion. Capital one got $3.6 billion. Both are a small fraction of the $25 billion Wells Fargo and Citigroup got.

[spuiszis]

What's important is the amount of money relative to the size of the institution. Discover and Capital One were a faction of the size of WF + Citi. In 2008, WF had $1.2 Trillion in assets[1], Discover has $78bn today (had trouble hunting down the '08 #).

[1]https://www08.wellsfargomedia.com/downloads/pdf/invest_relat...

[nraynaud]

That's interesting, because there is a very fine line to walk between destroying the competition by distorting the market and deciding that the state shouldn't let a company die. At least the U.S. got out of all this pure capitalist makeup. We can now talk about what we allow in competitive markets.

[marincounty]

Yea, now we can't stomp around and espouse how Capitalism doesn't need government oversite--Period! Personally, there's a part of me that wanted the banks to fail; and see what arose from the ashes, but that's another story. (Some banks like Jamie Dimon's bank didn't need or want the money). I think what bothered me about the whole process is the economy is better for some people--people who have assets, or have skills that are currently in vogue. The average dude just getting by, and relying on interest from their cd(because they can't afford to speculate anywhere in life) was not given a party gift in this recovery. There were a lot of smaller banks who weren't in trouble. They weren't in trouble because they were located in the right communities, and were very consertative. Meaning they only lent to people with a lot of equity(sure bets), gave very little interest on any financial instrument, always charged fees for eveything, counted on the fact that a lot of people just drop their money in the bank and never touch it, but are Very nice, and remember your birthday--Hello Bank of Marin. I think Obama foresaw the future and figured the only lasting gift he could give to the middle class and the poor was access to the health care system--even though they (the Republicicans) insisted on bringing in private Insurance companies?

[TheOtherHobbes]

Bank failures are endemic, regular, and predictable. 2008 was a slightly warped replay of many earlier events. (Who remembers Savings and Loan in the 80s?)

It would have been possible to restore confidence in other ways. Traditionally, good assets are collected into good banks, and bad assets are dumped into bad banks. The bad banks get thrown under a bus, and the good banks get full government backing until trust is restored. It's a tried and tested formula that has worked in other countries.

What TARP didn't solve was the endemic corruption and criminality that caused 2008. (Remember how some banks launched foreclosure farms that rubber-stamped property seizures - and sometimes stole property that didn't even have an outstanding loan?)

Unfortunately the corruption goes all the way to the Fed and the Congress, so a full restoration of Glass-Steagall, and jail time for the main perps, was never going to happen.

A few billion in 'profit' sounds like a lot, but it's a drop in the ocean compared to the incredible destruction and loss of economic potential caused by the persistent fraud, aversion to adult supervision, and deep-seated social irresponsibility endemic at all levels of the financial industries.

[adventured]

The US wasn't in purely capitalistic makeup to begin with. The US hasn't been a Capitalist country for a century. it hasn't even been a mixed economy for 40 or 50 years. America in 1890 was a Capitalist country.

The US is a hyper regulated, highly taxed welfare state. The US economy carries more regulations per capita than any other country on earth, and it passes more new regulations per year than anyone else.

You can't call a country in which the total government system extracts 40% of the economy - effectively a government system larger than the entire economy of Japan - a Capitalist country. It's not even close.

Nor can you call the world's largest welfare state, with the largest entitlement programs, a Capitalist country.

Where's the Capitalism? Capitalism requires, at a minimum, very low taxation, few economic regulations, strong protections on property rights, low friction for trade, and very little government intervention into the economy. The US has almost the opposite of that and has for a very long time.

[nkoren]

> Capitalism requires, at a minimum, very low taxation, few economic regulations, strong protections on property rights, low friction for trade, and very little government intervention into the economy. The US has almost the opposite of that and has for a very long time.

Ahem. Your lack of perspective is painful. May I recommend [1], which ranks countries by both tax burden and government spending as a percentage of GDP. The US is in 60th place in terms of relative tax burden, and 46th place in terms of relative GDP expenditure. Of particular note: please look at the countries ranked below the US in either measure, and tell me which of those both fit your definition of "capitalism" and are places you'd actually want to live.

You can only say that US is "a hyper regulated, highly taxed welfare state" if your baseline of comparison is some wholly delusional Libertarian-land. No such place exists. In the real world of developed nations, keeping civilisation functioning requires both taxation and spending. By that measure, the US is relatively lowly-taxed, and miserably ineffectual at delivering a welfare state.

1: http://en.wikipedia.org/wiki/Government_spending#As_a_percen...

[murbard2]

People have different definitions of what capitalism is, but they all share one characteristic: it's an absolute description, not one that depends on your policies relative to other countries.

Pointing out that the US has a more capitalistic economic than other countries currently enjoy is largely irrelevant in deciding whether or not it can be called capitalistic.

[adventured]

My perspective is right in fact.

Libertarian land doesn't exist? You're openly admitting I'm right that the US isn't a highly Capitalist nation, and you're attempting to mock me for being right, hilariously. The US a century ago was a very low regulation, very low taxation, very high Capitalism country. Hong Kong at times has also come very close to qualifying for libertarian land.

As I noted the government's take of the economy is ~40%. That alone automatically disqualifies the US as a Capitalist nation. You can't have a government system that large and still pretend the US is a low regulation, low tax, small government, Capitalist system.

The countries you're comparing the US to, proves my point further: the US is under no circumstances a capitalist country. It's not even close. Comparing the US to middling, poorly run welfare states (the vast majority of all countries), is exactly what I'm talking about.

I never said the US had the worst tax burden. I never said the US government system extracted the highest % of GDP. I said the US was blatantly not a Capitalist country because of how large those figures are. I'm right, all those other countries you're comparing the US to are not highly Capitalist countries either.

Show me the tax burden as a % of GDP for the US in 1890 or 1910, or the government expenditures as a % of GDP for the same era. And I'll show you a Capitalist system.

You want an example of a low figure country I'd like to live in? Sure, Singapore, from your wiki list: 13% tax burden of GDP, and 17% govt expenditures of GDP. No coincidence they've enjoyed one of the greatest booms in world history.

[woah]

Man, you really live up to the negative libertarian stereotypes

[adventured]

@woah

I've been nothing but nice here, and I've been mocked, derided, and called names for it. For debating something as simple and non-emotional as economics, and I supposedly live up to some negative stereotype.

1) I'm not a libertarian.

2) I didn't argue anything inflammatory or negative. I've said nothing mean, at all. I said a highly capitalist country can't have high taxation, a large government, and high regulations. I'm absolutely correct about that. By definition, that cannot be a very capitalist nation.