Wednesday, March 22, 2023
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Don’t Call it a Bailout

The country was on the verge of an economic meltdown. Those responsible for the threat were demanding ransom money from taxpayers to fix it, and Americans were angry – so much so that corporate executives were threatened with execution by tightening piano wire around their necks, an insurance industry leader testified before Congress.

Those were painful times, financially and politically, in 2008, when lawmakers were trying to save the country from financial collapse without alienating voters tired of seeing wealthy corporate executives bailed out with their tax money. And it’s an era the Biden administration very much does not want to repeat as President Joe Biden embarks on an expected run for reelection.

The collapse of three U.S. banks – and fears that more could follow, affecting the stock market, the consumer credit market and investors’ willingness to back new ventures – brought an immediate and aggressive reaction from the Biden administration.

Depositors were assured that all of their money in the shuttered banks would be guaranteed (even those with more than the statutory limit of $250,000), banking executives would be fired, investors would not get their money back, and the banks’ assets would be sold off to assure people’s bank accounts were made whole. Not a dime of “taxpayer money,” Biden assured Americans in remarks at the White House this week, would be used to fix the banks’ troubles.

On Thursday, 11 large U.S. banks announced they would pump $30 billion in deposits into First Republic Bank. The move, done after coordination with Biden administration officials, is meant to shore up the bank and reassure markets that the sector is stable.

Mostly, the White House has wanted to avoid the seven-letter word that is the new political four-letter word: bailout. For a president who casts himself as the champion of the middle class, appearing to come to the rescue of the wealthy could undermine his central campaign theme.

“There’s this issue of fairness, and people get angry. And you don’t want there to be a perception that someone is getting bailed out for bad behavior and is just going to do it again,” says economics professor Gerald Epstein, co-director of the Political Economy Research Institute at UMass Amherst. Still, “you can’t let the whole financial system collapse.”

Is it a bailout? It depends how one defines the word, experts say. Sure, depositors – even high-ticket ones – were held harmless. But bank management and the people who financed the bank were not reimbursed for their losses.

“Bailout is a term of art. It’s not a term of science. It’s tough to define,” says Brian Gardner, chief Washington policy strategist for Stifel, global wealth management and banking investment company.

“A reasonable person can make an argument that it’s a bailout of wealthy depositors. But the bank is not being bailed out – it closed. Shareholders are not being bailed out. They will lose everything,” he adds.

The money guaranteeing deposits comes from a kitty held by the Federal Deposit Insurance Corporation, a government entity. The fund is paid for by fees on banks, so is not strictly taxpayer money. But it’s also true that banks build the figures into their business models and may pass them along to consumers in the form of consumer banking fees, such as ATM charges.

Typically, the limit is $250,000 for the amount insured. In the case of Silicon Valley Bank, which is where many start-ups and tech firms held their money, the vast majority of depositors had a lot more than that in their accounts.

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But if those depositors weren’t covered, there would have been a ripple effect on the middle-class workers employed by the companies with accounts at SVB, notes bank bailout expert Morris Pearl, who was on the BlackRock team that the Federal Reserve, Treasury and FDIC hired to structure and assess the cost of the Citibank bailout in 2008.

“The people I’ve heard from were business owners with hundreds of millions of dollars in the bank. Those were people who had to make payroll,” and they would not have been able to do so if their deposits weren’t covered by FDIC, Pearl says.

Then there’s the question of blame and accountability. In 2008, the financial services industry was ready to implode largely because of its own bad decisions, including making risky subprime mortgage loans unlikely to ever be paid back.

Frantic federal lawmakers put together a bailout plan called the Troubled Asset Relief Program, which authorized the Treasury Department to buy toxic assets from companies. The firms could then buy safer assets so they could recover.

The whole episode deeply angered many Americans, who resented having their tax money used to bail out big-money companies that were suffering because of their own mistakes. Adding fuel to the fire was the fact that many executives not only stayed in their jobs but received millions of dollars in bonuses to steer their companies back into solvency. A low point – at least from a public relations standpoint – was when the chief executives of three major auto companies took separate, private planes to travel to Washington to plead with Congress for money.

But even as members of Congress slammed the business executives for poor decision-making, they also acknowledged that it could end up costing more if the companies were allowed to go under. If General Motors and Chrysler collapsed, for example, the Treasury would lose $39 billion to $105 billion in lost tax revenues – not accounting for the added expense of unemployment benefits, according to a study from the Center for Auto Research.

And since the government got stock in the troubled companies in exchange for the TARP assistance, the Treasury ended up with a $15.3 billion profit (although some companies, including the auto companies, resulted in a loss of money for the government).

In the case of the recent bank collapses, blame is more nuanced. SVB, for example, bought Treasury securities with depositors’ money – and those instruments ended up being worth less when the Fed raised interest rates. When people started getting nervous about the bank’s liquidity, they withdrew their money – leaving the bank even more exposed.

Some say there wasn’t enough regulation and that the 2018 weakening of the Dodd-Frank legislation meant to avoid bank failures needs to be fixed. Others say the regulators weren’t doing their jobs.

“You have a big network of organizations,” such as Treasury, the Federal Reserve and the FDIC, “that are responsible for this, letting the public know, letting investors know” what’s happening, says Kevin Bronner, a public service professor at the University at Albany and former financial analyst with the New York State Public Service Commission. “And it looks like there wasn’t much oversight.”

Still, that doesn’t excuse the bank itself for not seeing the risks, notes Angela Rowe, a retired banking compliance executive now running as a Democrat for the state Senate in Virginia. There may have been “gaps in oversight,” but “it doesn’t mean you can’t do it on your own,” she says. Banks surely knew, for example, that higher interest rates were coming and could have adjusted their strategy to accommodate that, analysts note.

There are fears that the banking collapses may not be contained, and more regional banks will follow. While the Biden administration is trying mightily to convince Americans this is not a repeat of 2008, a broader banking crisis ends up hurting people across the economic spectrum, experts say.

Even if the problem does not get too much worse, banks may tighten up credit out of an abundance of caution, Gardner says – meaning things like mortgages and auto loans might be harder to get.

“In any crisis, there are inequities. The financial system is inherently inequitable,” says Randell Leach, CEO of Beneficial State Bank, a West Coast institution that bills itself as an “ethical” banker.

“We’re not through this,” Leach warns. “There’s more that needs to be done, from a policy or legislative perspective” to keep both banks and consumers protected, he adds.

For Biden and other incumbents, the financial waters need to be calmed before 2024.

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