The financial crisis as moneymaker
Dan Gross pointed it out Friday, and the NYT joins in today: The government's Troubled Asset Relief Program is starting to look like a moneymaker—or at least no longer like a giant hole into which money is poured. Meanwhile, the FT reports that the Federal Reserve has made a $14 billion profit on its various crisis-fighting loan programs. This is great! Let's a have a financial crisis every year!
Actually no, let's not. The other costs of the crisis—lost tax revenues, recession-fighting stimulus measures, etc.—will far outweigh any gains made on TARP or on Fed loans. And it's still far from certain that TARP will end up in the black (the GM and Chrysler loans in particular still look quite risky). But the increasing likelihood that it won't be a big drain on the government's purse is an interesting and politically significant development.
It shouldn't be all that surprising, mind you. By pouring money into the financial system when private investors would not, Washington was making an investment that was likely to pay off. It was doing what a good value investor would, buying into banks when banks were cheap (yes, it probably could have bought even cheaper if Treasury had tried to drive harder bargains with the banks, but that's another story). The only scenario in which this investment would turn into a bust was a continuing collapse of the financial system—but by backstopping Citi and AIG the government had made clear that it would do all in its power to avert such a collapse.
With financial collapse averted, TARP is destined to be at worst a modest money-loser. Its real costs are harder-to-measure things like mixed-up incentives in the financial business and a reduced impetus toward financial reform. Then again, its real benefits are hard to measure too: How much worse would the recession have been without a financial-industry bailout in autumn 2008? You tell me.
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[...] Justin Fox at Time [...]
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[...] Curious Capitalist blogger Justin Fox takes a more balanced approach to the situation, noting if TARP becomes a moneymaker, there are other [...]
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Without a 2008 intervention, the economy would be the equivalent of a 10-foot jon boat sitting in the middle of the Gulf while watching Hurricane Katrina come ashore.
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"It was doing what a good value investor would, buying into banks when banks were cheap."
There was that possibility, just as infrastructure is cheaper now, but I recommended not saying that in a response to a post in the NY Times in Dec. by Andrew Samwick:
"It sounds like he's making my value investor point about TARP: Since we're in a downturn, we can save a bunch of cash on infrastructure, which we need to do in any case. This would have, just like seeing the buying of toxic assets at low prices as government sponsored value investing, the effect of making government appear to be welcoming a recession, especially if you're also going to use the opportunity to skewer organized labor."
Now, saying that it might end up looking like value investing strikes me as a good thing. Then, I thought that painting a rosy scenario of any kind was a bad idea. We needed to let everyone know up front that we could lose a lot of money. We still might, but it might end up better than I thought. I like being wrong in such cases.
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After reading several articles. I still have to wonder, has anyone paid attention to where the under line cause of this disaster is? Not sure if you follow the FBI press report. However, it's a great source for finding out how our economy fell so far from grace. I'll quote a statement from the FBI's Assistant Director for the Criminal Division who testified in 2004 before the House Financial Services Sub-Committee: “If fraudulent practices become systemic within the mortgage industry and mortgage fraud is allowed to become unrestrained, it will ultimately place financial institutions at risk and have adverse effects on the stock market”. Doesn't he sound like he was on to something back then?He also noted that the FBI supported new approaches to address mortgage fraud and its effects on the U.S. financial system, to include: 1) "a mechanism to require the mortgage industry to report fraudulent activity." You mean there's mortgage fraud in our financial system? He also asked a question; "But what is mortgage fraud? Although there is no specific statute that defines mortgage fraud, each mortgage fraud scheme contains some type of material misstatement, Misrepresentation or omission relied upon by an Underwriter or Lender to fund, purchase or insure a loan. Many of the Fraud for Profit schemes rely on “industry insiders, who override lender controls". The FBI defines industry insiders as appraisers, accountan ts, attorneys, real estate brokers, Mortgage Underwriters and processors, settlement/title company employees, Mortgage Brokers, Loan Originators, and other mortgage professionals engaged in the mortgage industry. Are we being told that our mortgage professionals are involved in fraudulent activity? You see, the issue not how long will it take our economy to recover? Nor is it the suffering of us as individuals and families? The issue is and has been from day one, Brokers and Lenders solicited and deceived under-qualified home owner's into participating in a purported “worry free” and hands-off bank fraud system of falsifying income/asset information on a mortgage loan application involving the refinancing of their home. This makes it appear that the under-qualified homeowner could afford the mortgage and guaranty- teeing the loan, commissions and yield spread for the mortgage professionals. Once the proceeds from the refinance were depleted (due to home improvements, paying off debt or supplementing their income to make the mortgage), the under-qualified home owner's defaulted, thereby forcing the Lenders to foreclose. At this point Lender's were reluctant to modify due to the fact that the under-qualified home owner's didn't qualify in the beginning. And there's no commissions and yield spread for the mortgage professionals. So why would the Lenders go through that again, for free? Ultimately, these fraudulent schemes caused incalculable harm to many investors and the home owner's. Like the FBI's Assistant Director for the Criminal 20 Division stated: If these fraudulent practices would not have been allowed to become systemic and unrestrained within the mortgage industry, it would not had ultimately place financial institutions at risk and nor would it have had such an adverse effect on the stock market. So hear in lies the core cause of our dilemma. We have to make the mortgage professional re-write those bogus loans that the under-qualified home owner's could not afford. And use the true income and assets of the home owner's so that the new mortgage would be one they can afford. This also puts spending power back into the home owner's control. Because now they have money to spend! Spending money creates a need for jobs! Jobs produce taxes! Taxes keep our state and city workers employed! You get the picture. And last but not least, it gives you a chance to write about how to put things back in motion!!! The mortgage professionals have tricked us again. They say they don't really know how this all happened? It happened so fast! Til it was too late. We have to be smarter than the thives!
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[...] Submit a Comment • Trackback (0) • Related Topics: bailoutsregulation Yesterday, when I pointed to the signs that the Troubled Asset Relief Program could actually turn out to be a money-ma..., I left Fannie Mae and Freddie Mac out of the discussion. Their rescue wasn't part of TARP, for one [...]
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[...] mais ampla. Por outro lado, há sinais positivos emergindo dos Estados Unidos como, por exemplo, o resultado financeiro favorável que o governo americano está apurando no TARP (programa de ajuda aos bancos). A retomada ainda não é coisa certa e muito vai depender da [...]
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[...] The financial crisis as moneymaker [Justin Fox - The Curious Capitalist] [...]
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[...] pouring money into the financial system when private investors would not, the US Government was doing what a good value investor would. It will be no surprise if it makes money out of it, but don't forget the real costs of the [...]
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[...] comes as we've been getting mostly good news about the money Treasury extended to banks last fall. Even Fannie Mae and Freddie Mac might, if we [...]
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