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Did We Need TARP?

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Granted hindsight is 20/20, but a recent look at TARP may show that it was unnecessary. Additionally, if we do not review government programs like these, more taxpayer money may be wasted in future recessions.

If the banking system was so fragile, how was the government able to extract $21 billion in capital from the industry as profits?

Did the change in FASB rules affect the payback of TARP? No banks paid TARP back before the rule change regarding mark to market. However, after the rule changes, banks lined up to report the paying back of TARP? Wells Fargo alone made several billion dollars.

Had FASB rule changes been made before TARP, would we have needed TARP?
 

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Granted hindsight is 20/20, but a recent look at TARP may show that it was unnecessary. Additionally, if we do not review government programs like these, more taxpayer money may be wasted in future recessions.

If the banking system was so fragile, how was the government able to extract $21 billion in capital from the industry as profits?

Did the change in FASB rules affect the payback of TARP? No banks paid TARP back before the rule change regarding mark to market. However, after the rule changes, banks lined up to report the paying back of TARP? Wells Fargo alone made several billion dollars.

Had FASB rule changes been made before TARP, would we have needed TARP?


i think we did (my bank did)........and i don't really think the fasb change made a difference. after all, that's just the bank's valuation of their assets, and investors cetainly understand that it's pretty subjective.
 

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Granted hindsight is 20/20, but a recent look at TARP may show that it was unnecessary. Additionally, if we do not review government programs like these, more taxpayer money may be wasted in future recessions.

If the banking system was so fragile, how was the government able to extract $21 billion in capital from the industry as profits?

Did the change in FASB rules affect the payback of TARP? No banks paid TARP back before the rule change regarding mark to market. However, after the rule changes, banks lined up to report the paying back of TARP? Wells Fargo alone made several billion dollars.

Had FASB rule changes been made before TARP, would we have needed TARP?

At the time TARP was provided, there was a full-fledged panic underway. Even if some banks were sound--and they were--the fear had grown so widespread that all banks and financial institutions were literally viewed as unsafe. Confidence in the nation's financial system was disintegrating. Even reputable companies with financial units e.g., General Electric, encountered funding difficulties as trust evaporated and fear increased.

Under such circumstances, even a sound bank could have gotten caught in a run that made its failure a self-fulfilling phenomenon: Panicky depositors would withdraw funds --> its capital cushion would erode --> Seeing the capital cushion eroding, more depositors would withdraw funds and so on. Ultimately, the self-reinforcing cycle would deplete the bank's capital and cash positions precipitating the institution's failure.
 
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@liblady: I understand if you cannot tell me what bank you work for, but is it a small/regional bank or large bank?

@donsutherland: The FASB changes did the same thing in terms of confidence. Why do people assume that fear in an economy can only be answered with money? Was TARP really the only solution to stop a run on the banks?
 

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@donsutherland: The FASB changes did the same thing in terms of confidence. Why do people assume that fear in an economy can only be answered with money? Was TARP really the only solution to stop a run on the banks?

FASB modified the application of mark-to-market accounting on April 3, 2009. By then, the panic was already over. In fact, the S&P 500 had closed at 834.38 on 4/2. That was just over 23% above its closing low of March 9, 2009 (676.53).

Unfortunately, during financial panics, liquidity dries up. Financial strains can become so great that liquidity crisis can be transformed into solvency ones. Hence, sizable and rapid injections of liquidity are key to stemming financial panics.

Needless to say, robust regulations including aggressive capital requirements, accounting rules, etc., should be in place to reduce the risk of such panics in the first place. But that's a different matter.
 

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Had FASB rule changes been made before TARP, would we have needed TARP?

of course we would have. how else would we have established a precedent for having the government sieze and then run individual businesses within an industry?



oh. wait. you meant economically?

no - the moral hazard is real. it is a nonentity only to those who have nothing to hazard in the first place.
 

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No, we didn't need TARP.

The fact that the banks were able to rapidly repay TARP is an indicator that there was no real crises to begin with, or at least not to the extent that they would have all failed at one time. It was an accounting snafu just as much as it was anything else. Accounting procedures have nothing to do with profit or loss or even short term or long term viability.

In the years before the crises, mortgages were selling at crazy prices (that could never be economically justified). Bankers wanted their P&L's to show as much profit as possible because they could then justify their huge salaries along with huge bonuses, and at the same time drive up the price of the companies stock. So bankers used the stupid mark to market accounting rule to over value any mortgages that they held, which had the result of temporarily creating huge paper profits. The bankers then looted the company financially by taking huge salaries and bonuses justifying it by claiming that they had made the company so much money. The profits were vapor, they never truly existed. But the money that the bankers took out of the company was very real.

When the value of those mortgages drifted downward, that was reflected in the P&L of the banks. Suddenly, it looked as though they were loosing money like crazy. In reality, much of money that they were loosing were the same "profits" that never truly existed to begin with. True profits and true losses only exist when a financial transaction is consummated. That's the reason why you don't have to pay income tax on the "profit" that you make each year from your house going up in value or from your stock holdings going up in value. Banks have their own special set of accounting rules, very different than the real life rules that individuals have to obey.

Someone alluded to the claim that the financial stability of the banks improved when the mark to mark accounting rule was modified. Once again, their financial stability did not change, only stupid accounting rules changed. Changing that rule did in no way effect the TRUE long term or short term profitability of the bank. Ones financial position never truly changes just because one alters their accounting procedure. I would think that after the mark to market rule changed, that banks were likely to have been required to go back a number of years and restate their P&Ls. If they did (I have no idea if they did or not), they would have had to reduce their stated profits during years that they showed huge (false) profits - but at that point it was too late for investors in the banks, you cant make after the fact trading decisions, and the bankers had already looted the vaults.

Mark to mark accounting was just a really bad idea. That one little rule is what motivated bankers to make loans that they KNEW were bad loans, and the corruption created by mark to market accounting is probably 95% the cause of our banking "crises". If bankers did what they did without mark to market accounting being required, many of them would be in jail today. Unfortunately since mark to market was required, we can not prosecute banking executives for the crimes they willingly and knowingly committed.

Now back to TARP. If we had modified the mark to market accounting rule earlier, we would have had no need for TARP. The reality is that we had no need for TARP anyway, banks still had money to pay employees, and banks still had money to cover checks. the only potential problem would have been a possible 1929 style "run" on the banks, but the FDIC has procedures in place to reduce the likelihood of such and procedures to handle it if it did happen. Most people's money was fully insured by the FDIC, even if the bank did not have enough cash to deal with the run, the banks would have just taken a "banking holiday" while the FDIC prepared to step in and liquidate bank holdings to reimburse depositors.

What's the worst thing that could have happened if a few of the banks eventually folded? Other banks or private investors would have purchased their holdings. There would have still been plenty of banks in business that would love to have the publics business. Truthfully, the worst thing that would have happened is a few of our financial elite would have been out of a job. But then again, would that have been a bad thing? They are the ones who created the mess to begin with, so they should have been the ones to have lost their jobs. Our government created TARP to save the arses of elite corrupt bankers.

No, TARP was not justified.
 
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We needed very little of TARP, as most of TARP funds did not address the true crisis in America at that point. It essentially eliminated private sector moral hazards and gave them a huge cushion to fall on. Basically, it was like giving a hungry, screaming fat kid a banana split instead of a diet pill.

If I thought even a shred of TARP was actually designed to curb unemployment and shift private sector expansion in the process, I would've been all for it. Too bad it wasn't. It was a socialist manuever to seize a horse with a broken leg, break another of its legs, and sign it up for the Kentucky Derby.
 

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@liblady: I understand if you cannot tell me what bank you work for, but is it a small/regional bank or large bank?

@donsutherland: The FASB changes did the same thing in terms of confidence. Why do people assume that fear in an economy can only be answered with money? Was TARP really the only solution to stop a run on the banks?

super regional.....top 50 in assets.
 

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We needed very little of TARP, as most of TARP funds did not address the true crisis in America at that point. It essentially eliminated private sector moral hazards and gave them a huge cushion to fall on. Basically, it was like giving a hungry, screaming fat kid a banana split instead of a diet pill.

If I thought even a shred of TARP was actually designed to curb unemployment and shift private sector expansion in the process, I would've been all for it. Too bad it wasn't. It was a socialist manuever to seize a horse with a broken leg, break another of its legs, and sign it up for the Kentucky Derby.

totally off-base. do you understand exactly what tarp is?
 

Gipper

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No, I have no idea what TARP is. Paying attention to the news and that BA in economics is all for show.
 
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I do see the necessity of the smaller banks taking TARP, but we are talking about 10% of TARP.

The other 90% that went to the big banks ended up being paid back shortly after the FASB rules were implemented.

Let's think about this from a finance aspect. From the time TARP was issued until the time TARP was paid back, what were the earnings of the banks?
 

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I do see the necessity of the smaller banks taking TARP, but we are talking about 10% of TARP.

The other 90% that went to the big banks ended up being paid back shortly after the FASB rules were implemented.

Let's think about this from a finance aspect. From the time TARP was issued until the time TARP was paid back, what were the earnings of the banks?

I really don't think that the banks have a clue what there true earnings are. Accounting proceedures for banks are so convoluted, and then when they made changes to the proceedures, further screwing up any chance of having a truely accurate accounting statement, who knows what they really made.

The local bank that I use was shut down on Fri nite. For the past couple of years they reported that they lost about $44 million each year. The two years before that they reported huge profits. You can bet that they manipulated the accounting to show the huge profits in '06 and '07 (as per mark to market rules), the executives paid themselves big bonuses and likely bragged about how smart they were. Now those false profits have turned to false losses, the executives have lost their jobs, but they knew or should have known that false profits in one accounting period will lead to false losses in another - the executives really don't care, they got THEIR money. Now that the value of the shares in the company is zero, the stockholders have been screwed - by the exact same people that they rewarded with bonuses and pats on the back just a few years ago. I actually went by my bank this morning to make a deposit (it is now being ran by a different bank), it was amazingly quite. I thought that there would be many people there closing down their accounts, the teller told me that is what she expected also, but it didn't happen.

Profitability of a company really has nothing to do with accounting. I can manipulate the accounting of my businesses to show a loss or to show a significant profit. But just because I manipulated our accounting does not mean that I increased or decreased our true profitability.
 
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liblady

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No, I have no idea what TARP is. Paying attention to the news and that BA in economics is all for show.

sorry.......tarp was essential for my bank, and i don't understand your "moral hazard" statement.
 

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We needed very little of TARP, as most of TARP funds did not address the true crisis in America at that point. It essentially eliminated private sector moral hazards and gave them a huge cushion to fall on. Basically, it was like giving a hungry, screaming fat kid a banana split instead of a diet pill.

I agree with this.

If I thought even a shred of TARP was actually designed to curb unemployment and shift private sector expansion in the process, I would've been all for it. Too bad it wasn't. It was a socialist manuever to seize a horse with a broken leg, break another of its legs, and sign it up for the Kentucky Derby.

*edit - duh - misread your statement.*
Yeah, the point was to stabilize the bank-system which was top heavy with stupidity and foul oversight. . . because of complications - two are the application of market-to-market and the result of the canceled/overridden Glass-Steagle act . . . overriding that act was like using twine instead of handcuffs.
 
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sorry.......tarp was essential for my bank, and i don't understand your "moral hazard" statement.

But was it essential to our overall economy that "your" bank remain in business operated by the same executives that looted it's vaults and ran it into the ground? If your bank had been allowed to fail (like mine), the accounts would have been transfered to other banks, and possibly the locations would have remained open (just like at "my" failed bank), although ownership would have changed, to the customers there would likely have been no difference.

If a few banks, or even a whole lot of them, would have gone under, what difference would that had made in our lives or to our economy? On one block in my town there are 7 different banks in a row, we could probably suffice just fine with just a couple or three banks on that block. Banks are banks, there is not really a wide variety of differentiation between them. The products that they offer are essentially generic. It's not like they have have different "styles" like in resturants.

Besides, why was "your" bank any more deserving than my printing company or the dry cleaner up the street? Fair is fair, if we are going to bail out one industry, we have to bail 'em all out. Rewarding failure is the last thing that we need.
 
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Kushinator

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We needed very little of TARP, as most of TARP funds did not address the true crisis in America at that point. It essentially eliminated private sector moral hazards and gave them a huge cushion to fall on. Basically, it was like giving a hungry, screaming fat kid a banana split instead of a diet pill.


TARP was successful in its intent; lowering LIBOR there in by helping to reduce credit spreads (see TED spread). You cannot deny this.

800px-Ted-Spread.png


If I thought even a shred of TARP was actually designed to curb unemployment and shift private sector expansion in the process, I would've been all for it. Too bad it wasn't. It was a socialist manuever to seize a horse with a broken leg, break another of its legs, and sign it up for the Kentucky Derby.

A socialist maneuver?
 
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TARP was successful in its intent; lowering LIBOR there in by helping to reduce credit spreads (see TED spread). You cannot deny this.

800px-Ted-Spread.png




A socialist maneuver?

Was it a sucess though if increased lending was not a result?
 

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Nevermind that debt-issues were at the core of the problem. . . . I thought that trying to encourage lend/spend was beyond stupid.
 

Kushinator

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Was it a sucess though if increased lending was not a result?

Even if lending remained constant, it would be a success. Remember, the majority of business operations are funded via short term credit. If credit was allowed to become even more scarce, it would put unbelievable pressure on labor markets. This happened to me in December 2010; i had to begin to sell my assets to make payroll (even though it was available the day before via my business line of credit payroll account).

TARP was a psychological success.
 

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Nevermind that debt-issues were at the core of the problem. . . . I thought that trying to encourage lend/spend was beyond stupid.

the money supply dried up, of course the banks needed to lend, how else would business operate?
 

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Was it a sucess though if increased lending was not a result?

It stopped the run on the banks. In my view this was the key benefit. No bank regardless of how well run can survive a run.
 

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I, overall, don't approve of how banks actually function - more so as "borrowers of your money, until you need it . . . " thing. If this wasn't how banks used people's money then they could indeed survive a run.

I, also, don't approve of keeping crap companies afloat which can't run theirselves without borrowing money - a good business is a self sufficient business which braves the storm and comes out just fine.

Overall - I don't like our country's overall appreciation of being *in debt* and I don't feel it should be supported or encouraged.

*waaah* I don't like how our economy functions.
 

Kushinator

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I, overall, don't approve of how banks actually function - more so as "borrowers of your money, until you need it . . . " thing. If this wasn't how banks used people's money then they could indeed survive a run.

I, also, don't approve of keeping crap companies afloat which can't run theirselves without borrowing money - a good business is a self sufficient business which braves the storm and comes out just fine.

Overall - I don't like our country's overall appreciation of being *in debt* and I don't feel it should be supported or encouraged.

*waaah* I don't like how our economy functions.

Given your likes/dislikes, i can say you would "like" to see the US a poor nation.
 
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