“The implication may seem to be that any company in America can receive a government backstop, so long as its collapse would cost enough jobs or deal enough economic damage.”
—Congressional Oversight Panel report, March 16, 2011
With the submission of its final report on the misnamed Troubled Asset Relief Program (TARP) and the Congressional Oversight Panel’s statutory expiration, Democrats are likely to conclude this chapter in the nation’s financial history a success in light of the Congressional Budget Office’s estimate of a final taxpayer loss around $25 billion—a small number relative to the current talk of $1.6 trillion deficits and a $14 trillion debt. Yet this figure results from an estimate of expected returns on capital investments in certain financial institutions and does not account for the broader economic damage of market expectations of future bailouts. As the COP has repeatedly stated, “TARP’s cost cannot be measured merely in dollars.”
Even in the improbable event that all TARP funds are recovered, costs will be borne by taxpayers in the years to come due to the federal government’s demonstration that some firms are “too big to fail” and the economic favoritism that implies. TARP compromised capitalism’s mechanism for market discipline, which will not be restored until fiscal and regulatory policies affirm that the freedom to succeed must include the freedom to fail.
Long Live Moral Hazard
Increased concentration=increasingly concentrated risk: A recent study by Bloomberg Government confirms that the threat posed by large financial institutions persists and may have worsened since 2008. The study found that the banking sector grew seven times faster than the economy overall since the beginning of the financial crisis and that the top 10 banks in the U.S. now hold 77 percent of all U.S. bank assets. While this concentration is due in part to a longer term trend of consolidation in the industry through mergers and acquisitions, Democrats’ Dodd-Frank Wall Street Deform law does not reverse this trend. In fact, as the Bloomberg study points out, there will be a 40 percent increase in the number of institutions considered “systemically significant” by 2025 under the current law. Dodd-Frank designates firms with assets of $50 billion or more as “systemically significant.” Currently, 35 companies hold that distinction.
Bail me out once, shame on me…: Citigroup Chairman Richard Parsons admitted in a recent CNBC interview that Citigroup would likely need to be bailed out by the government if another major financial crisis occurred. Parsons was careful to term Citi too “interwoven” to fail, avoiding the politically-charged “too big to fail” though the semantic distinction is lost on taxpayers who are tired of government bailouts. The fact remains that Citi and other major financial institutions are still operating under the assumption that the government will come to their aid if financial distress threatens. This moral hazard is detrimental to the long-term stability of the financial industry, which fundamentally undermines our potential for economic prosperity. Democrats’ Dodd-Frank law failed to address this risk and instead only added multiple layers of additional, cost-raising regulations.
Uncle Sam, big banks’ BFF: The COP report stated, “Credit rating agencies continue to adjust the credit ratings of very large banks to reflect their implicit government guarantee.” This is due to Federal Reserve and Treasury Department actions directed at the 19 largest banks during the late 2008-early 2009 crisis. Panel members noted in a recent op-ed in the Wall Street Journal, “[T]hese large banks can borrow much more cheaply than their small-enough-to-fail competitors, which will lead to less competition, a more concentrated financial sector, and higher prices paid by consumers.” Recognizing this dangerous dynamic, Thomas Hoenig, President of the Federal Reserve Bank of Kansas City, rightly concludes that these banks are now “too big to succeed.” In a December 2010 New York Times op-ed, Mr. Hoenig advocated reducing or removing the implicit government subsidy to restore competitive balance to our system, noting “history suggests that financial strength follows economic strength.” The Obama administration and many at the Fed remain in denial of this fact.