trending Market Intelligence /marketintelligence/en/news-insights/trending/tX4bGU4ZRahrDeBt6ob3VQ2 content
Log in to other products

Login to Market Intelligence Platform

 /


Looking for more?

Contact Us

Request a Demo

You're one step closer to unlocking our suite of comprehensive and robust tools.

Fill out the form so we can connect you to the right person.

  • First Name*
  • Last Name*
  • Business Email *
  • Phone *
  • Company Name *
  • City *
  • We generated a verification code for you

  • Enter verification Code here*

* Required

In This List

What hath TARP wrought?

Street Talk Episode 56 - Latest bank MOE shows even the strong need scale to thrive

South State CenterState MOE Shows Even The Strong Need Scale To Thrive

Talking Bank Stocks, Playing The M&A Trade With Longtime Investor

Report: Kashkari Says Fed In Holding Pattern But Rate Cut Still Possible


What hath TARP wrought?

Nancy Bush is a veteran bank analyst. The following does not constitute investment advice, and the views and opinions expressed in this piece are those of the author and do not necessarily represent the views of S&P Global Market Intelligence.

I'm finding that announcing my retirement a few weeks before the actual event is a bit of a tricky endeavor. It has been gratifying indeed to have received so many words of encouragement and kindness from readers of this blog, and I cannot thank you all enough for taking the time to send so many messages of congratulation and reminiscence. But after such a grand goodbye, I still have a few blogs yet to do and a few observations to impart, and creativity in this strange state of occupational limbo is in increasingly short supply. So my kind and patient editors at S&P Global (or SNL, as I will always know it) have suggested that I take a look back through the archives and revisit some blogs of prior years for an update.

One of the topics they suggested that might be ripe for a revisit was TARP — perhaps the most divisive regulatory action ever enacted upon the banking industry and one that continues to reverberate even a decade after its genesis. I heartily concurred with their suggestion, and I would say that the middle of a manic political season in which the left and right sides of the political spectrum are so starkly divided — especially on the issue of the value and the direction of the banking industry — is a great time to go back and look at what has essentially become the "mark of Cain" for American banks.

Yes, TARP is still with us — perhaps not actually but certainly psychologically — and the program continues to exert an outsized influence on the public perception of the large banks and how they survived the Great Meltdown of 2008. It might be helpful to remember what TARP, the Troubled Asset Relief Program, was actually meant to be, which was an effort to save and stabilize the banking system through the infusion of capital into the nation's banks (both large and small) for the purpose of increasing liquidity in mortgage-backed securities and for dealing with the avalanche of bad loans that would inevitably result from the housing meltdown.

The program was thrown together literally in a few days' time and morphed into several iterations as the meltdown progressed and the state of several of America's largest companies grew more dire. It became a program to prop up American industry generally — not just to instill confidence in the soundness of American banks — and I'm always amazed that somehow automaker General Motors Co. came to be regarded as a valid TARP recipient and somehow foundational to the American economy. (I'm sure the Michigan congressional delegation would be only too happy to educate me on the subject.)

In any case, the TARP bailout capacity was reduced from the initially envisioned $700 billion down to $475 billion by the Dodd-Frank legislation, and the full amount of disbursements (estimated to be around $426 billion) was recouped by the U.S. government with an additional $16 billion (or so) of interest on top of that. (Whether GM repaid its TARP funds is a matter of debate, but the answer seems to be "not really," due to the lessened value of the GM stock the Treasury took as collateral and eventually sold.) I don't think anyone would argue that TARP did not do what it was intended to do — which was to throw a firewall around the American banking system to prevent the conflagration in capital markets from spreading — but I'm also pretty sure that Hank Paulson and his cadre of Treasury elves did not foresee what the long-term impact of this program would be.

As a bank analyst, I have given up trying to talk to anybody — other than an economist or another bank analyst, that is — about what TARP really was. The received truth among the American public is simply that "the banks got billions of dollars to bail them out and people lost their homes anyway" or that "the banks were given billions of dollars and nobody failed and nobody was fired." This is one instance — or perhaps one of many at this point — where facts do not matter and where the banking industry will forever be tarred as a result. It's always amazing to me that Americans continue to do business with banks, and generally regard their own banks positively, while at the same time seeming to hold the banking industry (and its leaders) in such poor regard. (Wells Fargo has admittedly added to this issue in the intervening years, as have several prominent data breaches that occurred outside the banking industry.)

And when it comes to the demonic offspring of TARP — HAMP and HARP spring most readily to mind — it's hard to imagine any group of acronyms in the history of the American government that were more slapdash and patched together than those programs. It's amazing to me that any homes were saved in the chaos that ensued, and as I recall, the rules of HARP were changed several times and each time the banks were tasked with a whole new group of homeowners and a whole new regime of verification that added thousands of hours and millions of dollars to the resolution process. As an analyst trying to make sense of it all, at some point, I just threw in the towel on trying to formulate expense trends for the large banks on a quarterly basis and just went with the flow of ever-increasing personnel expense and inestimable legal accruals.

In my view, the biggest problem with TARP and the way that it was structured and administered was that it has made it extremely difficult for the government to step in and do any program that will be perceived as a bailout the next time around. While I readily accept that the banks were lax in their lending practices — as were the regulators in their examinations and the people who bought more home than they needed or could afford — the opprobrium that was heaped on the banks by politicians and regulators alike (the cheery Mr. Tarullo, especially) was aimed at one goal, and that was the breakup of the nation’s largest banks. That effort goes on in the presidential campaign now underway, and TARP remains a decade later one of the most potent tools for the candidacies of Elizabeth Warren and Bernie Sanders.

There is one place where the public and the Democrats get it right, and that is on the subject of large bank CEO pay. In 2009 — while the longer-term impacts of the meltdown were just beginning to be felt — Jamie Dimon received $1.3 million in cash compensation and another $16 million in stock (with restrictions and clawback provisions), while John Stumpf of Wells Fargo & Co. (yeah, that guy) was paid $21.3 million in total. Lloyd Blankfein of Goldman Sachs Group Inc. received a relatively paltry $9 million in total comp after receiving $64 million a couple of years earlier, and James Gorman of Morgan Stanley got $15 million in total compensation even as his company lost money.

The common thread here: All of these men were massively wealthy to begin with and could have shown true humility by taking much less in pay (like a symbolic $1) at a time when their shareholders had seen their dividends cut in half (or more) and their share prices were in the basement and would remain there for some time. And for that my feeling remains — a pox on all their houses. While it is nice to think that another TARP will never be necessary, that increased bank capital and lots of liquidity and living wills will make cataclysms in the banking industry obsolete, that is unlikely to be the case in the face of global financial chaos. And at that time, let’s hope that regulators and bankers alike can remember the lessons of 2008, and be a bit more humble as well as better prepared in their response.