Barney Frank was right

On Tuesday the U.S. Senate voted to proceed with a bill that will loosen banking regulations enacted after the 2008 financial crisis; removing requirements for so-called “stress tests” for all but the largest (less than a dozen) banks.

With that in mind it seems like a good time for me to recommend the book “Stress Test: Reflections on Financial Crises” by former Treasury Secretary Tim Geithner; and to check in on what former Congressman Barney Frank predicted would become the; “…most successful wildly unpopular thing the federal government has ever done”.

Frank was referring to the Troubled Asset Relief Program (TARP) and its companion bailout of the lenders Fannie Mae and Freddie Mac; legislation that Geithner discusses in great detail in his book.

Initiated at the end of the George W. Bush administration and largely implemented in the first year or two of the Obama administration these massive infusions of federal credit stabilized the undercapitalized U.S. and world financial markets and (many believe) not only prevented a global depression but became the cornerstone in the foundation for the steady (albeit slow) economic recovery that continues to this day.

However, these massive “bailouts” of banks and financial institutions were wildly unpopular with many voters at the time and helped (along with Obamacare) to spawn the Tea Party movement and accelerate the political realignments that underpin at least some of the country’s current polarization and might, arguably, have contributed to the election of Donald Trump.

Oddly for something so big and important and divisive; we don’t hear much anymore about TARP and its companion effort to save Fannie and Freddie.

So, roughly a decade after it began, I thought it would be a good idea to check in on this “massive government bailout” to see how it’s doing?

The short answer I would say is, pretty darn well. In fact, what started out as a government giveaway has turned out to be – believe it or not – a pretty significant money maker for the federal government!

That’s right, TARP and Fannie and Freddie have all turned a profit. And they continue making money for the government every month and appear destined to continue to do so indefinitely.

ProPublica, the non-profit consortium of investigative journalists, maintains and regularly updates a fabulous website that tracks all of the outflows and inflows of funds through the 2008 Emergency Economic Stabilization Act (aka TARP) and the 2008 Housing and Economic Recovery Act that, essentially, nationalized Fannie and Freddie.

Here’s the link to the website: https://projects.propublica.org/bailout/main/summary

I encourage readers to spend some time perusing this site for yourself, but here’s my summary of some of the highlights you’ll find there:

• The government essentially nationalized Fannie & Freddie by investing $187 billion into the two lending programs to keep them afloat during the financial crisis. As of February that investment has produced $271 billion in dividends for a profit of $84 billion.
• TARP was initially authorized to spend $700 billion on a variety of loans and bailouts but there was so much blowback that Congress lowered the amount to $475 billion.
• 975 entities received TARP money in some form (loans, investments, etc.) totaling $439 billion. Of that, $390 billion has been repaid.
• About 150 of those TARP distributions will not be repaid, were not intended to be repaid and/or have resulted in an unrecoverable loss. By far the largest of these losses comes from the investment in General Motors which got more than $50 billion, paid back less than $39 billion and generated about $700,000 in dividends for a net loss of more than $11 billion.
• However, through interest payments and some sales of equity, the government has so far received more than $52 billion in return on its investments and more than 600 of the entities that received TARP money are now returning a profit.
• Bottom line for all of the "bailout" programs combined; $626 billion went out the door and (so far) $713 billion has come in for a net profit of $87 billion.