Voters vitriolic as bailout scheme hailed a success

UNITED STATES:Commended by economists, the Troubled Asset Relief Programme remains deeply unpopular among the US public, writes NIALL STANAGEin New York

THE UNITED States’ bank bailout programme will officially come to an end on Monday but its fate is a lesson in the gulf that can sometimes develop between reality and perception.

The Troubled Asset Relief Programme, better known as Tarp, is now viewed as a success by most economic experts – at least in terms of achieving its primary objective of preventing an implosion of the financial system. Estimates of its overall cost to US taxpayers have been shrinking for some time.

Despite this, however, Tarp remains enormously unpopular with the public, who see it as an unwarranted favour to the people they hold culpable for causing the Great Recession in the first place.

Numerous politicians who voted in favour of setting up Tarp in late 2008 face tough re-election battles next month; some have already had career-ending verdicts rendered upon them by the voters.

Defenders of Tarp say it is important to remember just how grave the overall situation looked when the legislation was drawn up. Lehman Brothers had already failed. Only the federal government’s intervention had staved off the collapse of the giant insurer AIG. Credit markets were freezing.

Ben Bernanke, the head of the Federal Reserve, and Hank Paulson, then-US treasury secretary, were the prime movers behind the push for Tarp. Even in those extraordinary times, though, politicians saw the downside to supporting the bailout, which came with an overall price-tag of $700 billion (€513 billion).

When the legislation first came before the House of Representatives, it went down to a shock defeat. When the outcome of the vote became known, the Dow Jones Index went into a tailspin, losing almost 800 points.

The Dow’s collapse led the same politicians to find themselves “looking over the abyss”, as Rahm Emanuel, then a Democratic congressman and now President Barack Obama’s chief of staff, told the Wall Street Journal at the time. A modified version of the legislation was passed later the same week.

Further evidence of the chaotic nature of the time came in the very different way the programme was implemented from that originally planned. As its name suggests, it was originally designed as a measure through which the government would buy troubled assets from banks, thus cleaning up their balance sheets.

It soon became obvious, however, that the whole process of the government gauging what assets to buy and how much to pay for them would be too labyrinthine and slow-moving.

Instead, money was simply shovelled to banks to shore up their liquidity and head off the rising mood of global panic. The nine biggest banks to avail of the programme received $25 billion (€18 billion) each. In total, almost $400 billion (€293 billion) was disbursed.

In January 2009, as the Obama administration took office, Fortune magazine was confidently predicting that the overall cost of the bank bailout was “likely to be much higher than $700 billion”. Figures as high as $4 trillion were bandied about.

None of the gloomiest predictions came true. The US treasury, which had once estimated the net cost at well over $300 billion, later slashed its projection to $105 billion (€77 billion). The nonpartisan congressional budget office has released an even lower estimate: $66 billion (€48 billion).

Obama’s treasury secretary Tim Geithner recently asserted that the US would “largely get the taxpayers’ money back” from the programme.

There seems to have been two main factors behind the containment of costs. First, the money came with strings attached – most famously, limits on how much institutions that had received Tarp funds could pay their 25 best-remunerated employees. Second, the programme became so politically toxic that merely being in receipt of funds became a public relations liability.

Both of those factors combined to accelerate the payback process once the worst of the crisis was believed to have passed. Repayments began in June 2009, when 10 institutions announced plans to pay back a total of $68.3 billion. Today, about $200 billion of the loans has been repaid.

Steven Davidoff, a professor at the University of Connecticut who specialises in corporate governance issues, recently wrote in the New York Times: "If it is viewed as it was meant to be – a programme to stall a financial panic and prevent a financial collapse – Tarp was a true success."

But, sceptics might ask, if Tarp is so great, why is it so unpopular?

Part of the problem is that some secondary benefits that were supposed to flow from it have not materialised. Among the major claims made on Tarp’s behalf were that it would greatly ease the flow of credit to US consumers and that it would also lessen the tide of foreclosures in the housing market. Credit however remains very tight for most Americans and foreclosures continue unabated.

The banks themselves have often displayed a tin ear. In November 2009, after Goldman Sachs chief executive Lloyd Blankfein, whose personal remuneration had topped $50 million in 2006 and 2007, described himself as a mere banker “doing God’s work”.

Nine months previously, AIG, which had received massive assistance through Tarp and other government aid, announced it would pay bonuses totalling $100 million to top employees.

Tarp has also become bound together in the public mind with other issues, including the $787 billion stimulus package passed in the early days of the Obama administration. Together, these have fuelled public concern about government spending running out of control.

Bob Bennett, a Republican senator from Utah, was defeated in his bid for re-election earlier this year, after intra-party opponents labelled him “Bailout Bob” because of his support for Tarp. “People would walk by my booth [at a party convention] and say ‘Tarp, Tarp, Tarp, Tarp!’” he told the New York Times in July. “But when you tried to talk to them about it, they did not know any of the details.”

The president himself supported Tarp even though it was passed under his predecessor. He has striven, with limited success, to walk a fine line in defending the programme while empathising with public anger.

Early this year, Obama said it was “helpful” that he could point out to voters that the Tarp money was being paid back, but, he added, “it doesn’t eliminate the sense that their voices aren’t heard and that institutions are betraying them”.