[penrod]

It is no surprise that Treasury made a profit on its investments in troubled companies, since the fact of investing in them effectively rigged the market in their favor: If the government declares that it will not allow a company to fail, the company’s borrowing costs are reduced and it now has a competitive advantage over companies that do not qualify for government intervention.

Of course the qualifications for this special treatment were: being very big, being politically well-connected, and having taken stupid risks. So every well-run, medium sized bank that didn’t have an army of lobbyists got screwed. And now we see that our favorites have prospered and declare “profit!” while ignoring the red ink for everyone else in the economy.

[rhino369]

It's not just that they boosted the credibility of the banks.

The "toxic assets" that TARP bought weren't as bad as people feared. But the market wasn't buying them because nobody knew their true value. Everyone lost faith in the ratings agencies so it was chaos.

Small banks benefited from this as well. It stabilized the market for mortgage securities, which small banks had large exposure to. It solved the liquidity crunch so the banks could stay open.

If the big banks fail, it would take the small ones with them. It would also take a lot of good businesses with it. The whole economy runs on lines of credit.

[adventured]

The market would have bought them, at one point or another, exactly because there was value there (either at the time or eventually that realization would have been made, just as it had been so many times throughout US history that didn't require a program like TARP).

That process would have bankrupted nearly every major bank. Buying the toxic assets was an extreme bailout for the banks, that were carrying trillions in liabilities that suddenly went under. Most of the majors were completely insolvent.

[remarkEon]

In principle I agree. It remains to be seen how much moral hazard this little excursion into the loan markets by the federal government creates.

One program that doesn't really get much attention in the media (maybe because it was more nuanced and complicated?) was the TALF program [1]. I did a summer internship in 2009 with the Federal Reserve Bank in New York and it really seemed like that program was their primary concern because it was much more directed at the private loan market with targeted loans at "normal" spreads (whatever that meant at the time...) To date, I guess, they've made ~$173m [2]. The design of TALF was wayyy different than TARP, both in scale and objective. At the time I was working on drilling down on the demographic data of who, exactly, was applying for TALF loans. Really interesting stuff.

Not sure we'll be able to actually understand the ramifications for a while.

[1] http://en.wikipedia.org/wiki/Term_Asset-Backed_Securities_Lo... [2] http://blogs.wsj.com/economics/2013/01/15/treasury-turns-173...

[lettergram]

Although I agree with you for the most part, companies such as Capital One or Discover who did not have intervention grew much faster and took much more of the market than other banks. Further, Ford did exceptionally well when the other automakers were having trouble and I was thoroughly impressed.

[seanmccann]

Discover got $1.2 billion. Capital one got $3.6 billion. Both are a small fraction of the $25 billion Wells Fargo and Citigroup got.

[nraynaud]

That's interesting, because there is a very fine line to walk between destroying the competition by distorting the market and deciding that the state shouldn't let a company die. At least the U.S. got out of all this pure capitalist makeup. We can now talk about what we allow in competitive markets.

[marincounty]

Yea, now we can't stomp around and espouse how Capitalism doesn't need government oversite--Period! Personally, there's a part of me that wanted the banks to fail; and see what arose from the ashes, but that's another story. (Some banks like Jamie Dimon's bank didn't need or want the money). I think what bothered me about the whole process is the economy is better for some people--people who have assets, or have skills that are currently in vogue. The average dude just getting by, and relying on interest from their cd(because they can't afford to speculate anywhere in life) was not given a party gift in this recovery. There were a lot of smaller banks who weren't in trouble. They weren't in trouble because they were located in the right communities, and were very consertative. Meaning they only lent to people with a lot of equity(sure bets), gave very little interest on any financial instrument, always charged fees for eveything, counted on the fact that a lot of people just drop their money in the bank and never touch it, but are Very nice, and remember your birthday--Hello Bank of Marin. I think Obama foresaw the future and figured the only lasting gift he could give to the middle class and the poor was access to the health care system--even though they (the Republicicans) insisted on bringing in private Insurance companies?

[adventured]

The US wasn't in purely capitalistic makeup to begin with. The US hasn't been a Capitalist country for a century. it hasn't even been a mixed economy for 40 or 50 years. America in 1890 was a Capitalist country.

The US is a hyper regulated, highly taxed welfare state. The US economy carries more regulations per capita than any other country on earth, and it passes more new regulations per year than anyone else.

You can't call a country in which the total government system extracts 40% of the economy - effectively a government system larger than the entire economy of Japan - a Capitalist country. It's not even close.

Nor can you call the world's largest welfare state, with the largest entitlement programs, a Capitalist country.

Where's the Capitalism? Capitalism requires, at a minimum, very low taxation, few economic regulations, strong protections on property rights, low friction for trade, and very little government intervention into the economy. The US has almost the opposite of that and has for a very long time.