Bailout efforts often serve the twin purposes of stabilizing the financial system and
alleviating the adverse impacts on the real economy caused by the collapse of the lending market. Obviously there is some inherent tension between the two purposes—if the
financial system fails largely due to the failure of businesses in the real economy, as in the case of Japan, extending credit to these failed businesses would simply generate new bad debt. However, if the real economy could have maintained its good shape under
normal lending conditions and the crisis is caused by a failure within the financial system itself, as many consider to be the case in the recent crisis, a government bailout of the financial system should increase business lending, grow the real economy, boost the financial performance of the banks and in turn facilitate the government’s exit from its investments.
Although general lending conditions have significantly improved since the peak of the financial crisis in 2008, many blamed TARP for failing to revive the real economy. To start, critics of TARP often point to the flaw in CPP’s design. When the UK government made equity investments in RBS and Lloyds, there were explicit contractual requirements that they maintain their level of lending at pre-crisis levels.48 On the contrary, no similar requirement was imposed by US Treasury for CPP participants. To be fair, the FDIC has instructed the banks it regulates to monitor the use of TARP funds as well as the use of money raised with FDIC debt guarantees.49 In addition an interagency statement urges all banking organizations to make loans to creditworthy borrowers.50
Treasury was also faulted for failing to implement proper measures to monitor the
actual use of TARP funds, prompting the Congressional Oversight Panel to repeatedly ask Treasury where the money went.51 Treasury’s response was that money was fungible so it was impossible to correlate the TARP funds with specific uses of funds.52 As pointed out by the Panel, Treasury’s claims were challenged by a survey of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) demonstrating that banks could provide meaningful information on their use of TARP funds without much
difficulty.53 The Panel also pointed out that some banks voluntarily disclosed information on the use of their TARP funds in public filings.54 But all said, it is likely the low level of lending was dictated by low demand, not just low supply, due to the general economic stagnation brought on by the financial crisis.
I would conclude that despite the criticisms, which may be largely justified, under dire circumstances, like those that existed in October 2008, bailouts may be the only tenable solution. Simultaneous bail-ins of several large financial institutions, assuming such bail- ins would work perfectly, could still leave the financial system so weak that it could not finance the recovery of the real economy. In any event, the bailout option should exist if needed. A standing TARP’s design should benefit from a diagnosis of how the old TARP was found wanting and could be improved. We turn to that issue in the next chapter.
Notes
1. See Alex Pollock, TARP on a businesslike basis, Statement before the Congressional Oversight Panel of the Troubled Asset Program 6 (Nov. 19, 2009), available at
http://cybercemetery.unt.edu/archive/cop/20110401231809/http://cop.senate.gov/documents/testimony- 111909-pollock.pdf.
2. See Fed. Deposit Ins. Corp., Managing the crisis: The FDIC and RTC experience 558 (1998), available at http://www.fdic.gov/bank/historical/managing/history2-04.pdf.
3. See Timothy Curry and Lynn Shibut, The cost of the savings and loan crisis: Truth and consequences, 13 FDIC Banking Rev. 26, 33 (2000), available at
http://www.fdic.gov/bank/analytical/banking/2000dec/brv13n2_2.pdf.
4. See Timothy Massad, Report to Congressional Oversight Panel for Economic
Stabilization: Legal Analysis of the Investments by the US Department of the Treasury in Financial Institutions under the Troubled Asset Relief Program 2 (Jan. 27, 2009), available at
http://cybercemetery.unt.edu/archive/cop/20110402034824/http://cop.senate.gov/documents/cop- 020609-report-dpvaluation-legal.pdf.
5. Pub. L. 110–343, §134, 122 Stat. 3765, 3798.
6. See Office of Mgmt. and Budget, Fiscal Year 2014 Budget of the US Gov’t 18–19 (Apr.
10, 2013), available at
http://www.whitehouse.gov/sites/default/files/omb/budget/fy2014/assets/budget.pdf..
7. See Id.
8. See IMF, A fair and substantial contribution by the financial sector: Final Report for the G-20 (Jun. 2010), available at
http://www.imf.org/external/np/g20/pdf/062710b.pdf.
9. See Hal Scott, Financial crisis responsibility fee: Issues for policy makers (2010), available at
http://www.uschamber.com/sites/default/files/reports/FinancialCrisisResponsibilityFee2010.pdf 10. See Press Release, Eur. Comm’n, Financial transaction tax: Making the financial
sector pay its fair share (Sep. 28, 2011), available at http://europa.eu/rapid/pressReleasesAction.do?
reference=IP/11/1085&format=HTML&aged=0&language=EN&guiLanguage=en.
11. MEPs back financial transaction tax, EuroNews (May 23, 2012), available at http://www.euronews.com/2012/05/23/meps-back-financial-transaction-tax/.
12. EU approves financial transactions tax, Reuters (Jan. 22, 2013), available at http://www.cnbc.com/id/100395362.
13. Leigh Thomas, EU’s Moscovici sees financial transaction tax in place early 2017, Reuters (July 8, 2015), available at http://www.reuters.com/article/2015/07/08/eu-
tax-idUSL8N0ZO1YC20150708.
14. George Parker and Quentin Peel, Germany rebukes UK over Tobin tax opposition, Fin.
Times (Nov. 15, 2011).
15. Press Release, Eur. Comm’n, Financial transaction tax: Making the financial sector pay its fair share (Sep. 28, 2011), available at
http://europa.eu/rapid/pressReleasesAction.do?
reference=IP/11/1085&format=HTML&aged=0&language=EN&guiLanguage=en.
16. John Vella, Clemens Fuest, and Tim Schmidt-Eisenlohr, The EU Commission’s
proposal for a financial transactions tax 8–9 (Draft prepared for Brit. Tax Rev., Nov. 8, 2011), available at
http://www.sbs.ox.ac.uk/sites/default/files/Business_Taxation/Docs/Publications/Working_Papers/Series_11/WP1117.pdf 17. Id.
18. Jackie Calmes, Obama weighs tax on banks to cut deficit, NY Times (Jan. 11, 2010).
19. See Hal Scott, Financial crisis responsibility fee: Issues for policy makers 9 (2010), available at
http://www.uschamber.com/sites/default/files/reports/FinancialCrisisResponsibilityFee2010.pdf 20. See Alex Pollock, TARP on a businesslike basis, Statement before the Congressional
Oversight Panel of the Troubled Asset Program 7 (Nov. 19, 2009), available at
http://cybercemetery.unt.edu/archive/cop/20110401231809/http://cop.senate.gov/documents/testimony- 111909-pollock.pdf.
21. See Bo Lundgren, Testimony of Bo Lundgren, Director General, Swedish National Debt Office before the Congressional Oversight Panel (Mar. 19, 2009), available at
http://cybercemetery.unt.edu/archive/cop/20110401231927/http://cop.senate.gov/documents/testimony- 031909-lundgren.pdf.
22. See Hal S. Scott and Anna Gelpern, International Finance, Transactions, Policy, and Regulation, University Casebook Series 1, 476–478 (New York: Foundation Press, 20th ed. 2014).
23. Id. at 483–489.
24. See Cong. Oversight Panel, April Oversight report 56–59 (Apr. 7, 2009),
http://cybercemetery.unt.edu/archive/cop/20110401232137/http://cop.senate.gov/documents/cop- 040709-report.pdf.
25. Id.
26. See Japan lender Resona plans to repay public funds in 5 yrs, Reuters (May 8, 2013), available at http://www.reuters.com/article/2013/05/08/resona-funds-
idUSL3N0DP4VI20130508.
27. Resona says to repay $1.1 bln govt bailout after June meeting, Reuters (Feb. 27, 2015), available at http://www.reuters.com/article/2015/02/27/resona-bailout-
idUSL4N0W135520150227.
28. Hal S. Scott and Anna Gelpern, International Finance, Transactions, Policy, and Regulation, University Casebook Series 1, 500–502 (20th ed. 2014).
29. See Cong. Oversight Panel, April Oversight Report 11 (Apr. 7, 2009),
http://cybercemetery.unt.edu/archive/cop/20110401232137/http://cop.senate.gov/documents/cop- 040709-report.pdf.
30. See Charles Calomiris, Bank failures in theory and history: The Great Depression and other “contagious” events 3 (NBER, Working Paper 13597, Nov. 2007), available at http://www.nber.org/papers/w13597.
31. See Joseph Stiglitz, Witness testimony of Joseph Stiglitz, Congressional Oversight Panel Hearing on Impact of the TARP on Financial Stability 4 (Mar. 2011), available at
http://cybercemetery.unt.edu/archive/cop/20110401223036/http://cop.senate.gov/documents/testimony- 030411-stiglitz.pdf.
32. See Lawrence Summers, Beware moral hazard fundamentalists, Fin. Times (Sep. 23, 2007).
33. See, for example, Kenneth Ayotte and David Skeel, Bankrupcty or bailouts? 35 J. Corp.
Law 469, 486 (2010).
34. Hibah Yousuf, S&P downgrades 15 banks, CNN (Nov. 30, 2011).
35. Moody’s, Moody’s downgrades Citigroup Inc to P-2; Citibank Prime-1 affirmed; all long-term senior ratings confirmed (Sept. 21, 2011), available at
http://www.moodys.com/research/Moodys-downgrades-Citigroup-Inc-to-P-2- Citibank-Prime-1--PR_226520; Moody’s, Moody’s downgrades Wells Fargo &
Company rating (Sept. 21, 2011), available at
http://www.moodys.com/research/Moodys-downgrades-Wells-Fargo-Company-rating- sr-to-A2-P--PR_226518; Moody’s, Moody’s downgrades Bank of America Corp. to
Baa1/P-2; Bank of America N.A. to A2, P-1 Affirmed (Sept. 21, 2011), available at http://www.moodys.com/research/Moodys-downgrades-Bank-of-America-Corp-to- Baa1P-2-Bank--PR_226511.
36. Id.
37. Moody’s, Moody’s downgrades firms with global capital markets operations (Jun. 21, 2012), available at http://www.moodys.com/research/Moodys-downgrades-firms- with-global-capital-markets-operations--PR_248989.
38. Moody’s, Moody’s Concludes Review of Eight Large US Banks (Nov. 14, 2013), available at http://www.moodys.com/research/Moodys-concludes-review-of-eight-
large-US-banks--PR_286790.
39. Laura Marcinek, Moody’s lowers ratings of four US banks after review, Bloomberg (Nov. 15, 2013).
40. See Antonio Bernardo, Eric Talley, and Ivo Welch, A model of optimal government bailouts 4–5 (May 2011), available at
http://www.law.berkeley.edu/files/bclbe/Model_of_Optimal_Bailouts_0503.pdf.
41. Charles Goodhart and Emilios Avgouleas, Critical reflections on bank bail-ins (2015), available at http://www.bis.org/bcbs/events/bartnf/avgouleasgoodhart.pdf.
42. Id.
43. See Joseph Stiglitz, Witness testimony of Joseph Stiglitz, Congressional Oversight Panel Hearing on Impact of the TARP on Financial Stability 3 (Mar. 2011), available at
http://cybercemetery.unt.edu/archive/cop/20110401223036/http://cop.senate.gov/documents/testimony- 030411-stiglitz.pdf.
44. See Charles Calomiris, Bank failures in theory and history: The Great Depression and other “contagious” events 5 (NBER, Working Paper 13597, Nov. 2007), available at http://www.nber.org/papers/w13597.
45. See Simon Johnson, Testimony submitted to the Congressional Oversight Panel 3 (Nov. 2009), available at
http://cybercemetery.unt.edu/archive/cop/20110401231809/http://cop.senate.gov/documents/testimony- 111909-johnson.pdf.
46. See Charles Calomiris, Bank failures in theory and history: The Great Depression and other “contagious” events 16 (NBER, Working Paper 13597, Nov. 2007), available at http://www.nber.org/papers/w13597.
47. See Simon Johnson, Testimony submitted to the Congressional Oversight Panel 6 (Nov. 2009), available
athttp://cybercemetery.unt.edu/archive/cop/20110401231809/http://cop.senate.gov/documents/testimony- 111909-johnson.pdf.
48. See, for example, Royal Bank of Scotland Group plc, Capital raising (Oct. 13, 2008), available at http://www.investors.rbs.com/~/media/Files/R/RBS-IR/corporate- actions/placing-and-open-offer-october-2008/rbs-news-2008-10-13-general- announcements.pdf.
49. Fed. Deposit Ins. Corp., Financial Institution Letters, Monitoring the Use of Funding from Federal Financial Stability and Guaranty Programs, FIL-1–2009 (Jan. 12, 2009), available at http://www.fdic.gov/news/news/financial/2009/fil09001.html.
50. Press Release, Bd. of Governors of the Fed. Reserve Sys., Federal Deposit Ins.
Corporation, OCC and Office of Thrift Supervision, Interagency Statement on meeting
the needs of creditworthy borrowers (Nov. 12, 2008), available at
http://www.federalreserve.gov/newsevents/press/bcreg/20081112a.htm.
51. See Cong. Oversight Panel, December Oversight report 114 (Dec. 2009), available at
http://cybercemetery.unt.edu/archive/cop/20110401233008/http://cop.senate.gov/documents/cop- 120909-report.pdf.
52. Id. at 109.
53. Id.
54. Id. at 110–11.
24 Specific Criticisms of TARP
There have been several criticisms of TARP laying the basis for possible improvements that could be made if such a program were adopted in the future. The major criticisms are (1) too favorable terms for recipients, (2) too much or too little interference in recipient operations, and (3) lack of enforcement of the terms of support.