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Home Publications Blogs Beat the Press Missing Facts from Andrew Sorkin's Discussion of Bailouts and Bonuses

Missing Facts from Andrew Sorkin's Discussion of Bailouts and Bonuses

Tuesday, 27 August 2013 04:51

Andrew Sorkin used his Dealbook column to tell readers that the 2008 bailout "worked." That is of course true if the definition of success is to keep the Wall Street banks in business and operating as they had prior to the crisis. It is far less apparent that the bailout worked from the standpoint of the economy as a whole.

The piece presents comments from then Treasury Secretary Henry Paulson expressing the concern that if bailout money had been tied to real conditions, such as a plan to break up the large banks and real restrictions on executive compensation, then the non-troubled banks would not have taken it. The obvious response would be "who cares?"

If a bank that wasn't troubled didn't take the bailout money, there is no obvious reason that should have bothered anyone. For some reason media outlets have not chosen to discuss the 180 degree shift in policy between the TARP bailout in the fall of 2008 and the stress tests in March of 2009. Under the TARP bailout, Paulson tried to conceal the condition of each bank insisting that all the large banks take bailout funds whether they needed them or not.

By contrast, the stress tests were ostensibly designed to expose the condition of each bank, showing the extent to which it was vulnerable as a result of the collapse of the housing bubble. If the stress tests were the right policy, then the TARP secrecy was the wrong policy.

It is also important to note that TARP was actually a small portion of a much larger bailout. The Fed made trillions of dollars of short-term loans available to banks at below market interest rates. The Federal Deposit Insurance Corporation also allowed for large amounts of long-term borrowing. In addition, the government's actions made the implicit "too big to fail" policy quite explicit. Investors came to accept that in the post-Lehman period the federal government would not allow another major bank to fail.

All of these forms of government assistance to the banks could have come with conditions. Most, if not all, of the major banks would have had little choice to accept them since the alternative would have been bankruptcy. Paulson and Democratic leadership in Congress decided not to impose any real conditions on access to bailout funds, a policy continued in the Obama presidency.

Comments (8)Add Comment
Keep Your Socialized Losses Off My Privatized Gains
written by Last Mover, August 27, 2013 6:28

Funny thing is, the Tehadists and other extremists from the political right actually agreed with Dean Baker. Those banks should have been allowed to fail.

Not that the Tehadists believed saving them would save the economy. They didn't. But neither did Dean Baker, who repeatly reminds everyone the financial collapse had nothing to do with following deep recession caused by the burst of the housing bubble. Two different things.

Imagine that. One of those unique moments in history when compromise between two political parties otherwise at each others throat could have put a huge dent in the financial sector's bread and butter of privatized gains and socialized losses.

But it was squandered. Because of the big banks. That's how all encompassingly powerful they are, towering over the political parties who act as their puppets at will with the slightest tug of the puppet strings.

Dean Baker? Who's he? No doubt another stupid liberal trying to regulate banks and lose even more jobs.
Former Treasury Secretary Paulson Has Never Heard of Congress Regulating?
written by Robert Salzberg, August 27, 2013 6:55
From Sorkin piece:

Paulson: “How do you ever implement restrictions like that on pay and do it in a way that included all the banks, and not just those that desperately needed the capital or were getting ready to fail? I don’t know.”

That's the real problem. The regulators in charge didn't know that they have the power to regulate the banks.

Seems like Secretary Paulson figured out pretty quick he could open up the Fed window to investment firms by calling them bank holding companies. Why should direct regulation by the Fed or Congress be so hard to fathom?
Easy on banks, tough on GM
written by tom, August 27, 2013 8:00
As most east coast writers, Sorkin wants to go easy on east coast based financial companies and get tough on midwest heartland industrial workers:

"G.M. doesn’t need life support. What it needs is Chapter 11. "

"Ms. O’Neill: [an assembler at G.M.’s plant in Lake Orion] your company is asking the taxpayers — many of whom don’t have health care coverage — to pay your salary and health insurance."

"The government also should consider using some of the money for the financial industry rescue not to save the companies, but to retrain employees in the Detroit area"

two faced
written by tom, August 27, 2013 8:06
More from Sorkin: no haircuts for AIG creditors: "As the rapid-fire crisis unfolded, says Sorkin, there was no time for a conversation about restructuring AIG’s deals so that its counterparties—including banks like Goldman Sachs—got haircuts. "


"Bankruptcy would give G.M. enormous leverage with its debt holders — and, perhaps more important, with the U.A.W." From the article linked in my last comment.
written by skeptonomist, August 27, 2013 9:07
The bonuses and pay in general is a subsidiary issue. The real question is, what will the response be next time? Will banks and insurance companies just be bailed out again? Congress basically just rubber-stamped what Paulson et al demanded, but probably will not be so compliant if asked for another bailout. Authorities will have more important things to worry about than preventing payment of bonuses. The bailout virtually guaranteed that there will be another collapse eventually, and there has been no planning for it by anyone that I can see.
bonuses are small potatoes
written by pete, August 27, 2013 9:44
The real issue was the little folks, the mortgage originators, who encouraged lying by home buyers. Their bonuses were most incentivized by lying...perhaps encouraged by regional managers, etc., and ultimately by somebody further up the food chain. Many more $$ in bonuses to the little people over the 10 year bubble than to Mozilla, Frank Raines, etc. Lonely voices like the socialist Bernie Sanders and libertarian Ron Paul argued against the lack regulations of the GSEs, and worries about Fed policies of private gain and social risk, but to no avail. Dems and Reps were complicit and should be thrown out in favor of an Occupy/Libertarian anti Wall Street coallition.
written by fuller schmidt, August 27, 2013 5:58
Thanks for spelling that out so clearly.
written by Chris Tobe, August 27, 2013 8:35
I call for a pension bailout for Illinois and Kentucky in my new book Kentucky Fried Pensions. If Wall Street can be bailed out why not states.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.