A Fighting Chance

but a pain-free bailout: Note that the “nostrings-attached” approach for the major bank bailout is in sharp contrast to how the auto companies were treated. After an initial infusion of cash in the fall of 2008, Ford was in relatively secure shape but Chrysler and GM asked for huge loans, arguing that they had no other access to cash, and without help they would be forced to shut down. Ultimately Treasury lent the money, but their bailout was accompanied by a Chapter 11 bankruptcy and most of the attendant features, including the requirement that shareholders be wiped out and creditors share some of the pain. See Martin Kady, “Dems Attach Strings to Auto Bailout,” Politico Live (blog), Politico, November 15, 2008. Both companies adopted new business plans, and their relatively new CEOs agreed to work for $1 a year. To help the companies survive, the unions agreed to modify their contracts and adjust their pension obligations. See also Sheryl Gay Stolberg and Bill Vlasic, “US Lays Down Terms for Auto Bailout,” New York Times, March 30, 2009.

for a long time: In fact, the price of Too Big to Fail is still weighing on our economy. Concentration in the banking industry was one of the principle problems cited at the time TARP was passed, and yet, the largest financial institutions are now 30 percent larger than they were before the financial crisis and the five biggest banks now hold more than half of all banking assets in the United States. This is based on our calculation of assets for the top four banks, which grew from a combined $6 trillion to $7.8 trillion between 2007 and 2013. Similarly, one report in 2012 showed that the top five banks are about twice as large as they had been a decade earlier relative to the economy. David Lynch, “Big Banks: Now Even Too Bigger to Fail,” Bloomberg Businessweek, April 19, 2012.

The continued faith in Too Big to Fail also gives large financial institutions access to cheaper capital, since investors believe the government would never let them fail. One estimate pointed to “a taxpayer subsidy of $83 billion a year. To put the figure in perspective, it’s tantamount to the government giving the banks about 3 cents of every tax dollar collected.… The top five banks—JPMorgan, Bank of America Corp., Citigroup Inc., Wells Fargo & Co., and Goldman Sachs Group Inc.… would just about break even in the absence of corporate welfare. In large part, the profits they report are essentially transfers from taxpayers to their shareholders.” “Why Should Taxpayers Give Big Banks $83 Billion a Year?” editorial, Bloomberg, February 20, 2013. See also COP report, January 2011.

actual policies were anemic: COP criticized Treasury’s foreclosure prevention policies as insufficient and ineffectual. COP noted that HAMP, Treasury’s signature foreclosure program, “ha[d] failed to make a significant dent in the number of foreclosures and [did] not appear likely to do so in the future.” COP report, December 2010, 133. COP viewed these failings as particularly significant in light of the relationship between housing, unemployment, and long-term economic growth. COP also found that HAMP “was not designed to address the root causes of the housing crisis” and that HAMP borrowers were “still paying 63 percent of pre-tax income towards debt” even after receiving a modification (236–38, 385). COP also noted that “to the extent that HAMP simply kicks the foreclosure can down the road, it ends up hurting all of the people who are desperate for the economy to start growing again so that their lives can return to normal.” COP report, December 2010, (450).

See also COP report, “Examining the Consequences of Mortgage Irregularities for Financial Stability and Foreclosure Mitigation,” November 16, 2010. See also COP report “Foreclosure Crisis: Working Toward a Solution,” March 6, 2009. See also COP report “Evaluating Progress on TARP Foreclosure Mitigation Programs,” April 14, 2010.

COP found that banks cut their lending to small businesses by more than 9 percent between 2008 and 2009, prompting many businesses to close their doors entirely. “Unable to find credit, many small businesses have had to shut their doors, and some of the survivors are still struggling to find adequate financing … it is not clear that [Treasury’s] programs [to boost small business lending] have had a noticeable effect on small business credit availability.” COP also criticized Treasury for failing “to target the smaller financial institutions that often serve small businesses.” COP report, May 2010, 2.