A Fighting Chance

Reports vary: Neil Barofsky, Special Inspector General of TARP, noted: “TARP has become a program in which taxpayers are not being told what most of the TARP recipients are doing with the money, have still not been told how much their substantial investments are worth, and will not be told the full details of how their money is being invested.” Brady Dennis, “Lawmakers Rebuke Treasury Department Over TARP Spending,” Washington Post, July 21, 2009. One regional bank executive said to the press: “Make more loans? We’re not going to change our business model or our credit policies to accommodate the needs of the public sector as they see it to have us make more loans.… We see TARP as an insurance policy. That when all this stuff is finally over, no matter how bad it gets, we’re going to be one of the remaining banks.” Another regional bank executive said the Treasury money “really doesn’t change our perspective about doing things.… Adding $400 million in capital gives us a chance to really have a totally fortressed balance sheet in case things get a lot worse than we think. And if they don’t, we may end up just paying it back a little bit earlier.” Mike McIntire, “Bailout Is a Windfall to Banks, if Not to Borrowers,” New York Times, January 17, 2009.

or make other acquisitions: In the initial days of the bailout, Secretary Paulson urged TARP recipients to lend the new money out. But at the same time, he noted that “some banks may use the capital they receive through the Treasury program to buy weaker banks and that this could benefit the financial system.” Luke Mullins, “Bailout Merger No. 1: PNC and National City,” US News and World Report, October 24, 2008. By January 2009, at least seven banks that had received TARP money had since bought other companies. Mike McIntire, “Bailout Is a Windfall to Banks.”

got even more aggressive in their efforts to foreclose on home mortgages: “One reason foreclosures are so rampant is that banks and their advocates in Washington have delayed, diluted, and obstructed attempts to address the problem. Industry lobbyists are still at it today, working overtime to whittle down legislation backed by President Obama that would give bankruptcy courts the authority to shrink mortgage debt.” Brian Grow, Keith Epstein, and Robert Berner, “How Banks Are Worsening the Foreclosure Crisis,” Bloomberg Businessweek, February 11, 2009. See also Don Lee, “Home Foreclosures Expected to Surge in Coming Months: Moratoriums from Banks, Government to Expire, Setting Off New Wave of Default Actions,” Chicago Tribune, July 6, 2009.

many more were drowning: By April 2009, forty-seven small and medium-sized banks had already failed. “Tracking the Nation’s Bank Failures,” Wall Street Journal (last update June 17, 2011) at http://graphicsweb.wsj.com/documents/Failed-US-Banks.html. The number would grow substantially.

small business customers went down, too: According to the Business Journals of US Census Bureau data, more than 170,000 small businesses closed in the United States between 2008 and 2010. See Bonnie Kavoussi, “Recession Killed 170,000 Small Businesses Between 2008 and 2010: Report,” Huffington Post, July 25, 2012.

stress test remained top secret: The COP report, “Stress Testing and Shoring Up Bank Capital,” June 9, 2009, notes that COP had engaged two internationally renowned experts in risk analysis, Professor Eric Talley and Professor Johan Walden, to review the stress test methodology.

These experts “noted that there remain unanswered questions about the details of the stress tests. Without this information, it is not possible for anyone to replicate the tests to determine how robust they are or to vary the assumptions to see whether different projections might yield very different results. There are key questions surrounding how the calculations were tailored for each institution and questions about the quality of the self-reported data.” Also, “The Panel recommends that the Federal Reserve Board release more information on the results of the tests, including results under the baseline scenario” (2–3).

risk for insolvency: On Charlie Rose, Secretary Geithner said, “I think the results will be, on balance, reassuring. None of these 19 banks are at risk for insolvency.” See Jim Puzzanghera and E. Scott Reckard, “Big Banks’ ‘Stress Test’ Results to Be Reassuring, Geithner Says,” Los Angeles Times, May 7, 2009. Note that the results of the stress tests revealed that ten out of nineteen banks tested needed to raise a total of $74.6 billion in new capital. David Ellis, “Stress Tests: Banks Need $75 Billion,” CNNMoney, May 8, 2009. Many have excoriated the “stress tests.” As one commentator put it, the tests were “about as intimidating as a 1040-EZ tax form.” Frank Partnoy, “Geithner’s Stress Test Sham,” Daily Beast, May 7, 2009.