“An unprecedented look inside one of the most powerful, secretive institutions in the country. The NY Federal Reserve is supposed to monitor big banks and prevent another financial crisis. But when Carmen Segarra was hired, what she witnessed inside the Fed was so alarming that she bought a tiny recorder, and started secretly taping.” – ProPublica Article
As the credit crisis unfolded in 2008, the United States Congress passed a bill that allowed the Treasury to spend $700 billion in an attempt to stabilize the crumbling markets. This bill is officially known as the Troubled Asset Relief Program (TARP), but referred to by many as the Bank Bailout. Former Treasury Secretary Henry Paulson used the first round of stimulus funding as a capital injection, in which, “nine of the largest banks were given $25 billion apiece” (NYT). As portrayed by movies, such as HBO’s “Too Big To Fail”, the government then used its power to persuade the strongest banks to buy stock in the failing banks, or essentially buy out its failing competition to calm the markets.
On February 25, 2009, President Obama’s administration conducted stress tests on the countries largest financial institutions to see if they could weather the storm. All of the banks passed, but these tests indicated that some larger institutions needed more capital, leading to more investments being raised. As quickly as the money was lent out, the banks repaid their debts. Big names like American Express, JP Morgan Chase, and Goldman Sachs all repaid TARP funds, with interest, in 2009 (NYT).
So, was this really a bank bailout? The government ultimately profited off of the investment made from coercing many of the largest banking institutions to borrow money that they may, or may not have needed. The current Treasury Secretary, Timothy Geithner, stated that, “the banks had repaid 75 percent of the bailout money received…Financial institutions owe the government $18 billion, while AIG still needs to repay $50 billion” (Huffington Post). The Treasury Department also estimates that the, “$245 billion that bought shares in banks will generate a profit of about $20 billion” (USA Today). Based on the overriding message portrayed by mainstream media, one would think the Government saved these heartless, risk-loving commercial banks. For many of the smaller institutions that received TARP funding, the government in fact did steady the markets. But, for a lot of the largest institutions, the ones portrayed negatively, the message is not as clear.
Credit markets are a necessary component of a modern financial system, without which the global economy ceases to exist. How can banking, an extremely necessary service that every American depends upon, be shaded in such a dark light? Some believe that the media has used the term bailout negatively in a way that diverts accountability away from the real issue, consumer behavior, and relinquishes all liability to the largest banks. Others believe that the government has abused its powers, and helped the banks grow even larger.
There has been a lot of mystery around the government involvement with private financial institutions. Bloomberg recently wrote in their January Markets report that, “The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates” (Ivry). As the financial crisis unfolded, banking and government leaders could not predict the future and wanted to prepare for the worst, spurring the creation of TARP. As the events unfolded and markets stabilized, institutions which “received” funding repaid their debts, and both the government and larger banks profited greatly from these transactions, not bailout.
As more information is released from the financial crisis, about the private deals between commercial banks and the government, we will see more accusations made and new media headlines written. Old terms will be forgotten, new terms will be created, but most will remember TARP as the US Bank Bailout.