Writes Richard Salsman on TARP After Three Years: It Made Things Worse, Not Better at Forbes:
The $700 billion “Troubled Asset Relief Program” (TARP) was enacted in Washington three years ago this week, and while most economists, policymakers and journalists still believe it made things better (“helping us avoid a second Great Depression,” they like to say), in fact it made things much worse – and today we’re still suffering from its bearish effects. As just one example, a similar scheme, modeled on TARP – the “European Financial Stability Facility” (EFSF) – is being adopted abroad, further undermining bank stocks.
Those who fail to grasp TARP’s true impact will find it difficult to comprehend the currently-bearish impact of the EFSF. The problem with most U.S. banks in 2008 was not that they were “under-capitalized” but that they held so many shaky (sub-prime) residential mortgage-backed securities (RMBS), assets which bank regulators insisted were some of the safest assets they could own, because they were “backed” by the taxpayer-backed mortgage GSEs (Fannie Mae and Freddie Mac) and thus required virtually no capital.
Instead of U.S. banks shedding bad assets, merging and raising private capital, TARP compelled them to take unwanted, high-cost capital injections with “strings attached” that became a noose around their necks.
The critics of bank bailouts are right to oppose bailouts per se,
but most of them ignore the irrefutable fact that in 2008-2009 most
U.S. banks were forced to take TARP funds, coerced into paying
above-market rates on preferred dividends, and compelled to run their
operations as Washington prefers (the source of the financial crisis in
the first place). Yes, most banks by now have repaid TARP funds, but the
Dodd-Frank “reform” bill (enacted July 2010) continues or intensifies
its evils while further institutionalizing government interference in
banking. Even though U.S. bank profits have rebounded in recent years,
bank stocks today remain 47% below where they traded when TARP was
enacted in October 2008, and 23% below where they traded when the
Dodd-Frank bill was enacted in July 2010. It is politically unsafe to
invest in the banks.
The majority of U.S. banks were perfectly healthy in 2008-2009 and
should have been left free of TARP. Instead they were exploited by
Washington – and unwittingly by U.S. taxpayers – not the other way