Bank Bailout Report Card: What Are We Grading?
Earlier this week, I gave a presentation on Merrill Lynch, the differences between it and other investment banks, and why Bank of America’s (BAC) acquisition of the company in its dying days of September 2008 was not necessarily a bad idea. While a tough position to argue on its face, there are actually many reasons justifying such a deal – combining an unstable investment bank with a depository institution is effectively what the Federal Reserve did the next week in allowing Morgan Stanley (MS) and Goldman Sachs (GS) to become bank holding companies, for example. In the short-term, however, a world of rising credit losses will make any deal of that type look to be a poor move, however. Yet basing a decision purely on hindsight-rich outcome is analogous to saying an energy E&P company is poorly run if they start drilling new wells only to see crude prices fall.
Why do I say this? Perspectives can shift quickly, and create unfair comparisons when time horizons or end goals differ. With the bankruptcy filing of CIT Group (CIT), the government is opening itself to questions about the effectiveness of TARP, as the $2.3 billion preferred investment in CIT is in great jeopardy. The purpose of TARP, however, was not to maximize the government’s return on investment; it was to stabilize the financial system (using kind words) or save it from collapse (more bluntly) with a minimum of losses. TARP was a large check the government had to write to buy time, and it definitely succeeded in accomplishing that.
In the last month, I’ve been asked numerous times for thoughts on the financial crisis fallout, having had a year to reflect and see how things have played out. The simple fact that we’re having discussions about the banking system a year later means that TARP achieved its purpose, and the bankruptcy of a relatively smaller financing company like CIT Group doesn’t seem to change that. With the benefit of extra time to assess the choices of the Treasury Department, alternative solutions could surely have been devised that would have rewarded the U.S. government more – but again, that was not the purpose. Though I feel TARP was a good first step toward stemming the crisis of confidence that (rightly or wrongly) gripped the markets in the fall of 2008, the lack of follow-through to reforming the financial system and minimizing future systemic risks is a disappointment. That, however, is a knock against the politicalization of everything Wall Street that came afterwards, not TARP itself.
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