The Treasury Department announced yesterday that it was selling off its last stake in Citigroup and that it would make (note, make, not lose) about $12.5 billion on the $45 billion investment it made in Citigroup at the height of the financial crisis in 2008. That’s about an 11% annual return on the taxpayers’ money.
I mention this because, among my many faults, I like to say, “I told you so.”
Back on September 26, 2008, when Congress was considering what is now known as the Troubled Asset Relief Program (TARP), I argued in this space that the principled, economically conservative position was to support, not oppose, the plan. I argued, in short, that the conservative position is not that government should never intervene in markets but that it should not intervene when it is economically inefficient to do so. This, of course, is most of the time, but there are exceptions, including when government overcomes a collective action problem to quell a market panic, and since TARP would do just that, government intervention was warranted, even on conservative principles. I stand by that argument. As Warren Buffett recently wrote in an op-ed in The New York Times, “Just as there is a fog of war, there is a fog of panic—and overall, [the government’s] actions were remarkable effective.”
I also argued that TARP would likely make money, not lose money, by buying the various kinds of mortgage-backed securities for which the market had then frozen. Technically, that point is moot, since TARP became a program of equity investments in banks, not an asset-purchase program, but the Federal Reserve, via its MBS Purchase Program has bought about $1.25 trillion worth of mortgage-backed securities, and, so far, it has made money, not lost it, on those transactions. Furthermore, as the government’s return on its Citigroup investment shows, even the converted version of TARP has turned out pretty well. The investments in the large banks that TARP was primarily designed to save have earned money for the taxpayers, and even taking account of investments that the government made in other financial firms (many of which, I admit, were not warranted), the final cost of TARP to the taxpayers will likely be about $25 billion, only a tiny fraction of the $700 billion invested.
January 27th, 2011 | 3:37 pm
“Furthermore, as the government’s return on its Citigroup investment shows, even the converted version of TARP has turned out pretty well.”
Are you kidding me?! Saying that is like saying that because one of my stocks provided a solid return, my whole portfolio is profitable. You can’t know that until you look at the entirety of the portfolio.
I purchased Citigroup stock not too far from the date the Treasury did. I’ve lost money (to the tune of $6 per share) on it. My portfolio on the whole, however, has made over $1500 since the original purchases.
Your enthusiasm for TARP is wholly unwarranted, and in light of your last comment about the “final
cost to taxpayers…(being) $25 billion”, seems to me to be incredibly irrational. Just because we may ONLY lose 25 rather than 700 billion is nothing to be proud about. That’s still $25 billion lost!
In the private sector, people would lose jobs and be sued (or possibly imprisoned) for such incompetence. That we lack that sort of accountability in the public sphere is precisely the problem.
January 27th, 2011 | 5:13 pm
In the private sector, people would lose jobs and be sued (or possibly imprisoned) for such incompetence.
I dunno; it seems to me that the last two or three decades have shown that people at the top (especially CEOs) get rewarded regardless of whether they are incompetent. Even when they are “penalized”, it usually turns out to be with a severance package that even the most competent ordinary worker can only dream of.
It’s the rest of us below that level who get penalized for poor performance.
January 27th, 2011 | 5:20 pm
Artaban seriously misses my point.
Government spending is justified when it is efficient, i.e., when government can do something more efficiently than the private sector can. The primary thing the government did in TARP was stop a market panic, which is a collective action problem that the market cannot overcome because of high transactions costs. The costs of that problem, in the form of collapsing finanical institutions and attendant externalities, would certainly have exceeded the full $700 billion price tag of TARP. Hence, TARP was an efficient move at that price. That the price turns out to be just $25 billion (and may be less, since the estimates have consistently been revised downward) makes a TARP a bargain.
January 27th, 2011 | 7:30 pm
Robert,
Totally agree. I am politically conservative and in favor limited government, but that does not mean a weak and ineffective government. In this case, the government certainly helped create the bubble that almost sank the financial sector, but this act turned our much better than I had expected or even hoped for.
January 28th, 2011 | 9:09 am
Great to see this balanced attitude towards government and economic policy in the conservative blogosphere!
January 28th, 2011 | 10:56 am
“Your enthusiasm for TARP is wholly unwarranted, and in light of your last comment about the “final
cost to taxpayers…(being) $25 billion”, seems to me to be incredibly irrational. Just because we may ONLY lose 25 rather than 700 billion is nothing to be proud about. That’s still $25 billion lost! ”
Actually if you back out the GM bailout you get a TARP that was a net profit to the taxpayers (and even then that ‘loss’ isn’t for sure and real until the gov’t sells off its last share of GM). But this misses the point. The purpose of TARP was to stop a financial and economic collapse, not ‘turn a profit’. I wouldn’t think it would be a good idea if, say, the gov’t let Warren Buffet trade with a few hundred billion dollars even if such a policy generated large profits for the taxpayers. But the fact that TARP did either break almost even or turn a slight profit does indicate that one of its major criticisms was wrong. That criticism was that the market was behaving efficiently and wisely. At the time I recall hearing some of its critics say things like “if you think these assets are undervalued why don’t you just go borrow a few hundred billion and buy them”. Well if the markets really were efficient all the TARP assets would have been crap and the fund would have lost a lot. It didn’t.
Steve
“In this case, the government certainly helped create the bubble that almost sank the financial sector, but this act turned our much better than I had expected or even hoped for.”
There’s quite a bit of uncertainly to that certainty.
January 28th, 2011 | 12:38 pm
Unfortunately, Mr. Miller’s judgment is not correct because the scope of his considerations are not broad enough. It is true that making $11 billion on their “investment” into Citigroup is better than a loss (leaving aside the lie sold to the American people that the program would purchase Troubled Assets rather than being an general equity investment).
However, the revenues Citigroup has paid back to the government are only possible due to the past and continuing subsidies the federal government is providing financial institutions. The funds paid to the federal government certainly did not come from the mortgage-back securities coming to maturity or being sold, since many of the mortgages underlying such securities are in litigation or otherwise in question, foreclosures are and will continue to be at unusually high levels, and the property values are continuing to deflate from their bubble peaks. We certainly cannot responsibly make judgments about the value of such securities at this point in time, since they are largely still up in the air, and since the earliest selling will, of course, tend to involve the healthier and most profitable securities, leaving the worst ones still held at values dubiously accounted for due to easing of accounting standards.
The funds paid back to the federal government came from other heavily subsidized financial activities, as others have been documenting for years:
It is grossly misleading to portray this single instance which seems, in isolation, to vindicate your support of the TARP, while ignoring the massive, unparalleled subsidies the financial industry is enjoying. It is like praising a robber for returning $100 of stolen money while ignoring the fact that he got that $100 while ripping off another store to the tune of thousands of dollars.
The real cost of these subsidies is seen (and will continue to be seen as the consequences will play out over the next few years and beyond) in the expanded deficits and growing debt of the Federal government and continuing unemployment due to mis-allocated (through subsidies) investment. That’s how they are funding the “growth” and “profits” of the financial industry and the larger economy. And these are unjust costs that will be paid off by the generation in power, but by their unfortunate heirs.
What’s done is done. What is currently inexcusable is the continuing consolidation and growing concentration of banking power in the biggest financial institutions. That is frankly disgusting, as they are reaping private profits at the expense of the public purse. And it is setting up the country for another bail-out. It is both just and prudent to break apart the largest financial institutions into no longer Too Big To Fail (and Exist) entities.
Though I agreed TARP could be theoretically justified on economically conservative grounds, as I economic conservative I opposed TARP on prudential grounds, understanding that whatever worthy goals might be attained in theory, the dynamics of power in place between the Federal government and Big Banks would obfuscate the concrete activities that matter and that the parties in power would prove incapable of achieving long-lasting financial stability. The growing multinational financial plutocracy, financed here by US debt to foreign nations, means that opposition to the TARP rescue plan, which did not have a path to breaking up TBTF entities, was in fact the correct and most economically efficient position in the long-term–though not in the short-term.
January 28th, 2011 | 3:40 pm
Robert, I’m not sold that your ‘endzone dance’ is entirely in order here. I’m almost sure that sophisticated investors expected virtually all of the debt instruments to continue to make coupon payments and hold their intrinsic value – even as liquidity became a serious issue. This meant that there were some serious bargains to be had in the market, and the American people, with their proxies at the Fed and Treasury, were the only ones with the cash (???) to buy! (Our investment managers at the Treasury might have at least bought debt, and not equity!). As it turns out, we ended up using our cash in the least efficient manner – loans, grants and posted collateral (in exchange for stock)
Here are three things that happened in the ‘fog of panic’ that might not be quite so constructive.
(1) Private businesses were treated inconsistently. You cite Citibank as a success – Hank Greenberg argued persuasively, in my opinion, that AIG should have been given the same treatment. Who decided? Why was Merril spun off to BofA, and Bear and Lehman left to die. Why did Goldman always seem to come up roses? Federal ‘guarantees’ are a more efficient form of support than laying out cash (no?).
(2) ‘A good crisis is a terrible thing to waste.’ In my opinion, the government upped the drama like a teenage schoolgirl and helped create a narrative that intervention should be amped up at all levels (cash for clunkers?). We now spend, at the federal level, about 60% more than we collect.
(3) Asset prices are still searching for a bottom. Markets have a way of inflicting pain quickly and then reorganizing. Government intervention has prevented markets from finding a low point, from which investment can eventually flow back in.
Thre was a lot going on here, both domestically and internationally, but on balance TARP, the specific legislation passed, was at best a D/D+. Maybe this trumps the possible ‘F’ that we might have gotten without the intervention. I’m not going to argue that intervention is never a good idea, but this legislation left too much power in the hands of public servants, was enforced unevenly, and did some serious collateral damage, much of which we’ll be feeling for years to come.
January 28th, 2011 | 4:24 pm
Robert,
I agree with your general premise that, “Government spending is justified when it is efficient, i.e., when government can do something more efficiently than the private sector can.”
However, I would still assert the particular case (Citigroup) you are making hardly proves said point, for several of the reasons Albert cogently cites.
One of the financial podcasts to which I listen recently commented on Citigroup’s “earnings”, essentially making the case that it is still too early to claim we’re out of the woods regarding a possible Citigroup collapse. I want to say it was the Harvard Business school, but will try and get citation for you when I get home.
Like an earthquake, we’re still feeling aftershocks in the financial markets. And just like aftershocks, some of those yet to come could possibly be worse than the original event.
Several reputable economists and financiers are fearful all that TARP achieved was to delay the inevitable, or even worse, exacerbate the length or depth of a recession/depression.
David Smick, (The World is Curved: Hidden Dangers to the Global Economy, 2009) certainly makes such a case. He says the Fed established a dangerous precedent when it essentially guaranteed the irresponsible financial behavior of many of the aforementioned companies. Bailouts like TARP, rather than eliminate the risk-taking behavior that caused the problem, short-circuited the pain that teaches people and companies to be fiscally responsible.
I am reminded of two of the ironclad rules of history:
1) The law of unintended consequences; however well intentioned and planned, human actions tend to yield disruptive, unintended effects.
2) And that the solution to the problem of one age often becomes the problem of the next.
Respectfully, Robert, only further time (a decade or two) will tell the truth of TARP.
January 28th, 2011 | 9:07 pm
I kindly suggest that several commenters here, and Mr. Miller, are merely applauding the end of Scene 1, Act 1, and have yet to view the completed production.
Today’s financial picture is an artificial construct, held together with bailing wire and duct tape, and likely bound for collapse or further disaster. I’m speaking, of course, of the financial conspiracy of today’s mortgage holders who are holding huge portfolios of defaulted loans off the market to artificially bloat their alleged net worth and at the same time create a false sense of where the housing market is.
That industry “overseers” permit this to continue unabated is chicanery at best, and probably criminally complicit in high crimes and misdemeanors at worst. None of us might like where the housing market really is, today, but keeping it artificially supported in this manner y is simply delaying the inevitable, in my view.
January 30th, 2011 | 11:51 am
Where do the gigantic loses at Fannie and Freddie fit into this?
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