February 13, 2012

Declaring Financial System Safe Requires Serious Assumptions

Hester Peirce

Former Senior Research Fellow
Summary

The big financial institutions that make up the Financial Services Roundtable demand returns commensurate with the risks they take with their money, so they ought to understand why taxpayers don’t believe they earned a reasonable rate of return on their TARP investments.

The Financial Services Roundtable recently issued a white paper entitled “Financial Services: Safer & Stronger in 2012.”  As the title suggests, the Financial Services Roundtable, which represents the largest companies in the financial services industry, believes that we have put the financial crisis behind us and bank bailouts are a thing of the past.  The paper makes some puzzling assumptions to reach these conclusions.

The paper explains that, because “banks are strong and healthy” now, “fewer banks are in a position to need government support.”  However, it seems quite likely that banks will be found to “need government support” as long as the government is offering the support.  After all, when the bank bailout program was put in place during the crisis, the Treasury Department told the public that it was intended only for healthy banks. 

The Financial Services Roundtable white paper did not mention that, as of the beginning of 2012, there were still over 450 banks that had not paid back their bailout money.  Nearly 200 banks have missed interest and dividend payments.  The white paper also omitted the fact that 137 of the banks that have paid back their Troubled Asset Relief Program (TARP) bailout money have done so with money from the Small Business Lending Fund, another taxpayer-funded program.

The paper points to Treasury’s expectation that it will earn $21.7 billion on the $245 billion bank portion of TARP.  (Treasury estimates losses of $70 billion on TARP as a whole.)  While it is true that the big losses under TARP are not expected to come from the bank portions of the program, it is important to remember that taxpayers were forced to give money to banks under TARP at a time when it was very hard for banks to attract private capital.  The big financial institutions that make up the Financial Services Roundtable demand returns commensurate with the risks they take with their money, so they ought to understand why taxpayers don’t believe they earned a reasonable rate of return on their TARP investments.