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Isaac: Geithner's TARP Myths

Secretary of the Treasury Timothy Geithner attacks in the Washington Post what he considers “myths” about the Troubled Asset Relief Program (TARP). Mr. Geithner’s five mythsare that TARP: 1) cost taxpayers hundreds of billions of dollars, 2) benefited Wall Street to the exclusion of Main Street, 3) left our financial system in weakened condition, 4) increased concentration in the financial system, and 5) served as the centerpiece of the Obama Administration’s strategy to control the economy.

The fact that Mr. Geithner takes time from his busy schedule to defend a program that has expired, speaks volumes about the damage TARP is inflicting on politicians associated with it. It’s also telling that, even as Mr. Geithner defends TARP, he blames the program on the Bush Administration and claims that he and the Obama Administration inherited it.

Mr. Geithner reports that TARP will likely cost taxpayers less than $50 billion. Even assuming his estimate is correct, Mr. Geithner ignores the enormous cost of all of the other programs put into place to supplement TARP and the $150 billion of pork added to procure passage of the TARP bill. He also ignores that TARP – as proposed by then Secretary of the Treasury Henry Paulson, supported by the Federal Reserve (including Mr. Geithner), and passed by Congress – called for the purchase of $700 billion of “toxic assets” from Wall Street firms. That program clearly would have cost taxpayers hundreds of billions of dollars.

Timothy Geithner
Source: Pete Souza
Timothy Geithner

Two weeks after TARP was enacted, Paulson abandoned the toxic asset plan and announced that the money would instead be used to shore up bank capital.

I argued against TARP (“A Better Way to Aid Banks,” Washington Post, September 27, 2008) in part because I believed capital infusions would better support new lending. Moreover, I believed capital infusions would be far less costly to taxpayers.

However, TARP was not needed for capital infusions because the FDIC had existing authority to provide capital to banks. An FDIC administered capital infusion program would have been superior to the highly politicized program Treasury developed.

Treasury made two egregious mistakes implementing the capital program and many smaller ones. The first was ordering CitiGroup, JPMorgan Chase, Wells Fargo, Goldman Sachs, Bank of America, Bank of New York/Mellon, Merrill Lynch, Morgan Stanley and State Street to accept $125 billion of taxpayer money that most did not need or want.

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The second was Mr. Geithner’s announcement in February 2009 that 19 large banks would undergo “stress tests” to determine their viability. Bank regulators were appalled.

Just as things were beginning to stabilize for banks, the Treasury announcement destabilized the system. The Dow Jones Industrial Average tumbled from 8,200 to about 6,500 during the next thirty days. The KBW Bank Stock Index plummeted by nearly 50 percent.

Forced to do damage control, the government finally declared that none of the 19 large banks would be allowed to fail no matter what the stress test results. This declaration neutered the stress tests and restored confidence, but at great cost to community banks deemed too small to save.

The FDIC through its special guarantees of bank debt and the Federal Reserve through its creative and ambitious liquidity programs thawed frozen financial markets. TARP was not needed for them to do what they did.

The selling of TARP was highly destructive to public confidence. Our political leaders were in the media continuously using highly inflammatory terms like “financial Armageddon” to describe the conditions we were facing. TARP created a political firestorm that will have serious negative consequences for our financial system and economy for years to come.

Proponents warned that if Congress rejected TARP, the Dow would drop by 1,000 points. Once the bill passed, the Dow plunged from 10,831 to 8,175 from October 1 to October 27, 2008. It continued its downward spiral to a low of 6,547 in March 2009. It’s difficult to imagine how rejection of TARP could have produced worse results.

"The fact that Mr. Geithner takes time from his busy schedule to defend a program that has expired, speaks volumes about the damage TARP is inflicting on politicians associated with it." -Chairman, LECG , William Issac

It’s true that TARP was conceived and promoted by the Bush Administration. But Mr. Geithner cannot gloss over that TARP (and its misuse to bail out the auto companies) was backed overwhelmingly by the leadership of both parties, including then Senator Obama.

Objectively, TARP did nothing to stabilize the financial system that could not have been done without it. The negative aspects of TARP far outweigh any possible benefit.

Thanks to TARP and an ineffectual financial reform bill, we are left with a financial system in which the five largest banks control over 50 percent of our banking system and remain too big to fail. No major cause of the crisis has been remedied, and a fragmented and highly politicized regulatory system remains in place cobbled together with bailing wire. Those are facts, not myths.

Mr. Isaac, former Chairman of the Federal Deposit Insurance Corporation, is Chairman of LECG Global Financial Services and Fifth Third Bancorp and is author of Senseless Panic: How Washington Failed America. The views he expressed are his own. Visit www.williamisaac.com