The Treasury Department TARP/Bailout plan has been an utter disaster. It has been mishandled from day one — poorly planned, poorly executed. Both Hank Paulson and Congress for passing such a shoddy piece of legislation should be ashamed of themselves for their horrific judgment and egregious failures.

It is hard to see a single thing that it has accomplished, other than giving away 100s of billions of dollars of taxpayer money. In return, the government has gotten . . . practically nothing.

No new lending, no new hiring, excess bonuses going to the creators of the mess, dividends going to the shareholders who bought these poorly managed companies. The current bailout will end up being the working definition of Moral Hazard for generations to come.

A smarter way to give away billions of dollars is to match private sector investments. Triage all the banks, put down the bad ones, and invest on the same terms as the private sector into the banks that can be saved. Warren Buffett put $5 billion into Goldman Sachs and got a good combination of warrants and yield. Why didn’t the taxpayer get the same terms?

If we had required private sector investment first (min investment, 100 million dollars), and then a 5X or even a 10X Uncle Sam match, we would have been much better off. Instead, firms like Citibank were rewarded for their reckless speculation and their gross incompetence.

Which is why this article in the Washington Post — Geithner Preparing Overhaul Of Bailout — is at least somewhat encouraging.

Confronted with intense skepticism on Capitol Hill over the $700 billion financial rescue program, Treasury Secretary nominee Timothy F. Geithner and President-elect Barack Obama’s economic team are urgently overhauling the embattled initiative and broadening its scope well beyond Wall Street, sources familiar with the discussions said.

Geithner has been working night and day on the eighth floor of the transition team office in downtown Washington with Lawrence H. Summers and other senior economic advisers to hash out a new approach that would expand the program’s aid to municipalities, small businesses, homeowners and other consumers. With lawmakers stewing over how Bush administration officials spent the first $350 billion, Geithner has little chance of winning congressional approval for the second half without retooling the program, the sources added.

That challenge is underscored by a report from a congressional oversight panel scheduled to be released today that hammers the outgoing Treasury Department for its handling of the financial rescue, including “what appear to be significant gaps in Treasury’s monitoring of the use of taxpayer money.” The report, moreover, faults the Treasury for failing to properly measure the success of the program or establish an overall strategy and skewers the department for not using any of the funds on foreclosure relief as Congress had directed.

Much of the work by Obama’s team has focused on establishing principles that would clearly define the program’s course and the conditions of government aid to financial firms.

I suspect there is a bit of revisionism in this narrative, giving Geithner some distance from the disastrous TARP plan. At the very least, the mere fact someone is thinking strategically, rather than reacting emotionally is a small step int he right direction.


Geithner Preparing Overhaul Of Bailout
Obama Team Broadens Scope to Secure Final $350 Billion for Rescue
David Cho
Washington Post, January 9, 2009; Page A01

Category: Bailouts, Credit, Really, really bad calls, Taxes and Policy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

23 Responses to “Time to Overhaul the Bailout Plan”

  1. awilensky says:

    The trials for getting through the process of applying for a 30-50K working capital loan from the SBA is akin to going through a rectal exam; infinitely more invasive and comprehensive than that of the TARP, which is billions.

    How messed up is that – a decent well run business can’t get a a few tens of K, while the worst and most egregious of banking offenders, some probably criminally negligent, get billions without even filing a business plan, and disburse the funds without having to account. We are such a messed up country,

  2. ottovbvs says:

    We’re talking about the Bush administration which is by definition incompetent so it’s hardly surprising they didn’t do the execution that well. Congress btw only voted the money which is their role, they are not the executive. I’m surprised that little distinction escaped you Barry particularly after you were actually in favor of voting the funds as was anyone who wasn’t completely off his rocker. There’s a slight hint of Lou Dobbsian logic here.

    All that said I don’t think the money spent so far, recognizing of course that it goes far beyond the 350 billion from TARP, has achieved nothing. Can anyone really claim that the banking system has not been stabilized. It may not have been stabilized in the most elegant manner but it has been stabilized and until that was done talking about economic stimulus packages or anything else was a waste of time. So no I don’t give Paulson a 10/10 but he’s definitely got a pass mark in my book. You know Barry we’re going to have to get beyond this Lou Dobbs stuff of focusing on trivia like bonuses which need to be dealt with but aren’t central. These are immensely complicated issues which are not really susceptible to cracker barrel philosophizing which you are mainly immune from so don’t disappoint me, you’re one of my heroes.

  3. Marcus Aurelius says:

    Unless they target (“target” in this case, meaning send free, taxable dollars) the consumer (lower 90%, or so, of income earners in the US), all efforts to revive the economy will come to naught (thought you could go all day without someone using the word “naught,” did you?).

    Our credit-based economy and it’s ugly little sister, debt, have been thoroughly discredited, and will be shunned by the consumer for years to come – there will be no borrowing of our own money, at a premium, from the banks. There will be no jobs created, no durable goods purchased, and no spending beyond our ability to pay cash (if there is cash to spend).

    The banker/government fascist alignment will fail when the taxpayer refuses or is unable to pay for the largess of these entities to one another. When this happens, we will see inflation that will make Zimbabwe’s current situation look stable.

  4. Marcus Aurelius says:


    Banking stabilized? Hardly. What’s up with Citi/Group/Bank? What happens when the next waves of bad debt (Alt-A, Option ARM, and commercial RE, for starters – and completely ignoring the big magilla, CC debt) comes home to roost?

    In any event, stable banks (“stable”, in this case, meaning those who haven’t been absorbed or gone out of business) aren’t worth a bucket of warm spit if their survival does not improve the economy as a whole. The “immensely complicated issues” you refer to – which I see as intentional complexity and entanglement – were brought into existence for one reason and one reason only: to obfuscate responsibility, and to thereby offer some protection from charges of fraud for those having unduly enriched themselves from said entanglement.

    None of the bonuses paid have been “trivial” by any definition of the word. Like ol’ Ben Franklin said: “Mind the pennies, and the Pounds will mind themselves.”

  5. DL says:

    “If we had required private sector investment first (min investment, 100 million dollars), and then a 5X or even a 10X Uncle Sam match, we would have been much better off”.

    It sounds like a good idea in principle. But that amount of leverage (more than 5:1) would distort the incentives.

    For example, investors could pony up the $100M under the condition that the $100M (and much more) be directed to some project that they specify. The government would then kick in $1 billion. The arrangement might be that the original investors would get half the $1 billion that the government has provided (or directed to some third party, to make it less obvious), and the bank would get the other half. So the involvement of the private sector isn’t necessarily an indication of their view of the bank’s value as an investment.

    This idea might work if the government put up an equal amount to the private sector, and no more.

    Better yet, just can the whole TARP. Bernanke is buying up all the bank assets anyway.

  6. godfreyparke says:

    From Greg Mankiw’s blog, a few months and a few hundred billion dollars ago.

    “Here is an idea that might deal with these problems: The government can stand ready to be a silent partner to future Warren Buffetts.

    “It could work as follows. Whenever any financial institution attracts new private capital in an arms-length transaction, it can access an equal amount of public capital. The taxpayer would get the same terms as the private investor. The only difference is that government’s shares would be nonvoting until the government sold the shares at a later date.”

    The government supplies the capital, but outsources that analysis to someone who none-the-less has skin in the game.

  7. says:

    Wall St to Paulson – $700million
    Paulson to Wall St – $350 billion
    Total Return – 50,000%

    (it’s a miracle that the entire $700B TARP has not gone through, making ROI 100,000%)

    Can you say “investment of the century?” or “can you top that, Buff?”

  8. roc says:


    I very much admire your work and have referred lots of people to this site – but I think your analysis here is lacking.

    1st – You pass judgement on the effectiveness of TARP without explaining what the program was supposed to achieve ( I haven’t heard anyone who could answer that so we can’t have a good fact-driven debate).

    2nd – When Buffett bought into Goldman and GE they were both in desperate need of cash because the commercial paper markets were frozen. I wonder if he could demand those terms now, especially since Goldman and GE have both become bank holding companies and have access to other funding and the ability to solicit deposits. Why would any bank accept those terms unless they were desperate (as a few of the largest ones were/are?

    3rd – as ottovbvs says above banks have been stabilized. Remember just a few months ago lots of people flippantly saying hundreds of banks would fail. Weren’t there about two dozen total for 2008? That’s worth something.

    4th – why do we keep hearing about the TARP money being wasted when, that money is loaned not gifted, and will be repaid. The taxpayers are making about 4.5% spread on that loan and in a preferred position. The bailouts of Bear, WaMu, Wachovia, Citi, etc. weren’t done with TARP funds but by other means – loan guaranties, tax breaks, etc.. That has little to do with giving stable banks a loan for more capital then collecting the interest regularly and holding a preferred creditor position and warrants. Shoot, if I had the money I’d be loaning it to banks with those terms. By the way, why don’t you emphasize that the rate goes to 9% in five years?

    Barry, why don’t you write an article or post someone else’s talking about the difference between bank capital and deposits. Show how that capital can be levered to make 8 or 9x loans? IMHO part of the reason for TARP to banks was to give banks capital to expand and replace some of the non-bank (leasing, syndicated, etc.) credit that is do difficult to get right now. Banks can only expand as a multiple of capital and except for TARP capital is almost impossible to get right now. (maybe the Bank of Buffett, but those guys are loan sharks and will take your soul) If those non-bank lenders don’t come back soon the lack of total credit – not just banks – adds to the deflationary spiral.

    The problem for banks (by now you may have figured out I’m a bank insider) is going to be finding enough loans to make that meet credit standards. You have been ahead of the curve in pointing out that we have worldwide deflation. The comments from awilensky above are true. It has become much harder to get loans. But how do you blame the bank when the real estate offered up as collateral is worth less than before and all cash flows have to be scrutinized because of the obvious recession (which many of your authors suggest will last at least another year)? Banks WANT to make loans and need to make loans but the weaker borrowers are looking even worse while the strong borrowers are reducing debt to get in better position. When banks make loans and they go bad the loss comes out of their own pocket, not the TARP money. So a bank will be just as cautious as before in approving new loans. When they have lost all their own equity then the TARP money will be affected. By then the regulators would have closed them anyway.

    So… back to the beginning… until someone explains exactly what TARP for banks was supposed to do, you can’t tell whether it worked.

    Thanks for creating and administering a great site.

  9. KidDynamite says:

    @Roc –
    I think it’s very important to realize the truth behind “the banks have been stabilized.” The banks have been stabilized by the impression that the government will be there to backstop them, and will not let the big boys fail. Contrast this to “the banks have adequately shored up their capital bases” – which is blatantly FALSE. The banks have still not written their bad assets to market, and all of them would be insolvent if they did.

    The reason we’ve avoided all out panic and a run on all the banks is not because the banks now have healthy balance sheets – it’s because the govt’ has convinced the public that they (the gov’t) will be there as a backstop if anything catastrophic occurs.

    And I like the point you touched on about how the problem is not a lack of capital, it’s a lack of qualified borrowers! This still seems to be escaping the Gov’t – who just stands there screaming “WHY WON”T YOU LEND DAMNIT!??!?!” – the point is that lending standards are back – and unless we abandon them again, borrowing must be MASSIVELY reigned in. It’s like the GMAC story from two weeks ago – they said they had to lower their credit score minimum well into subprime territory in order to match borrower demand with their newly supplied (by the gov’t) lending capacity.

    One thing I’m surprised you missed, as a bank insider – is that when you give a bad bank capital, it does NOT get levered 8-9 times – it just goes to offset losses that haven’t been taken yet. That’s another problem we’re having now – and why barry’s suggestion (made by many others as well) to let the bad banks die is necessary.

  10. VoiceFromTheWilderness says:

    I personally very much appreciate your reality, fact- based approach. I am in fact endlessly appreciative of your insight and effort. That said mabye one thought:

    Before you decide if ‘strategy’ is better than emotion, best to know what the goal of the strategy is. It is not at all clear, to this observer, that the prior plan was ‘emotional’. The alternative analysis is that what extravagantly strategic, extremely calculating, and tremendously effective at achieving the actual aims that the strategy was dedicated to. Hank Paulson does not strike me as either overly emotional, or a doe-eyed deer in headlights. He strikes me as an extremely able operator with, to steal a phrase, a laser like precision focus on his goals and objectives. The modern age is typified by, more than anything, a gap between words and deeds, and an overt and well known focus on manipulating perception at the expense of…

    facts and reality.

  11. wally says:

    But what’s the surprise here? It was open public knowledge – right out there every day in front of the whole world – that Congress was stampeded into this bill, that the bill changed from hour to hour and that it never had a clear purpose, definition or structure. There was extreme public opposition to the bill. The objections were clearly and repeated stated in exact detail in blog after blog and in letter after letter to Congressional members. When Congress approved this each member knew perfectly well they had defied the public will because the ‘insiders’ knew better than the public. It was a deliberately betrayal by Congress of the American public in favor of vested interests.
    This was all known then and is all known now. We have a government that in two decades has never once resisted having the run put on them by special interests who yelled “fire!”

  12. 10 cc says:

    So congress is “stewing” over the $350B, huh? Concerned for the taxpayers are they?

    Anyone see the Moyers segment last night about how the Senate managed to subvert the so-called “Earmark Reform” legislation?

    Maybe it’s just a case of professional jealousy in that Paulson is getting away with an even bigger theft then they are.

  13. TheReformedBroker says:

    at least this money kept the bonuses coming for the bankers…the last thing they want is for the cost of living to come down in NYC

    they should’ve mailed the tax payers a ballot so we could elect which institution gets what part of our dollars proportionately

  14. TLO says:

    Hank Paulson is at best an inept fool, who cowed a bigger bunch of fools to give him $700B to do as he pleased. If people think he’s a smart strategist with clear goals and objectives, then he’d be a lying, cheating scumbag who cheated taxpayers of $700B. Either way, that TARP money is now lining the pockets and vaults of the incompetent and unconscionable CEOs of these institutions that were a factor in this fiasco as well as the shareholders of these institutions.

    Congress didn’t do their due diligence and got scared into passing legislation by Paulson and Bernanke’s words of doom. Yet, they were still able to take their time and add an additional hundred pages of legislation to it. Of course, with all the work they put in trying to add legislation to help their “constituents” they failed to look at the big picture. Tax exemption for makers of children’s wooden arrows?! What does that have to do with making sure the TARP funds are used in an effective manner? It sure doesn’t provide oversight to where the money goes.

  15. Gabriel says:

    Interesting article from our friends of the Austrian School of Thought.
    Great Credit-Crunch Hoax of 2008

    Probably the most important measure of credit-market conditions is the amount of commercial-bank credit outstanding. These figures show that although the middle part of 2008 does stand out in the long view, it does so not by virtue of credit’s frightening contraction, but only by virtue of its hitting a six-month plateau from April through September.

    At no time during that interval, however, did the amount of commercial-bank credit outstanding fall below the amount outstanding at the beginning of the year. In short, credit was actually ample, indeed, at an all-time high; it simply stopped growing as usual for six months, stuck at about $9.4 trillion, while one Wall Street wizard after another told NPR that “no money is moving, the credit market is completely shut down” or some such cock-and-bull story.

    After the six-month pause, commercial-bank credit zipped upward again, so that by the end of the year, the amount outstanding stood more than 8 percent higher than it had a year earlier. Some credit crunch! Année terrible, indeed.

    But don’t write off this silly little hoax too fast, because, however baseless it might have been in economic reality, it was manifestly good enough for government work. And that work has now placed US taxpayers on the hook for trillions of dollars of additional Treasury commitments and put all holders of US dollars and other dollar-denominated assets at risk of tremendous losses of their money’s purchasing power.

  16. Ken says:

    TheReformedBroker wrote: “at least this money kept the bonuses coming for the bankers…the last thing they want is for the cost of living to come down in NYC”

    I had a sudden vision of NYC falling apart like Detroit did after auto manufacturing left.

  17. Paul Jones says:

    The “Bailout” worked as designed: Peter was robbed to pay Paul. Now, are you Peter? Or Paul?

  18. “I had a sudden vision of NYC falling apart like Detroit did after auto manufacturing left.”


    I can, only, guess that you’re saying you’ve been there..

    LSS: NYC is crumbling, physically, as we speak, and has been ‘falling apart’ for, over, half a Century..

    Your Orbit may perturb..

  19. dunnage says:

    How about to hell with Reform?

    How about to hell with infrastructure and energy?

    How about to hell with tax cuts?

    And try Stimulus now. Give a ton of cold cash to every single person in the country.
    The Japanese gave stimulus money to foreign residents. Why? They are not into ethics, they are into a damn stimulus.

    Then do middle class tax cuts, infrastructure, energy. Oh, and reform — Uh, huh.

  20. ottovbvs says:

    roc Says:

    January 10th, 2009 at 12:38 pm

    BR does run a great site. I check it most days but I’m afraid he’s veering off into Lou Dobbs land with this one. Of course you then get a Greek Chorus of confused bumper sticker logic from some but that’s life. I think we basically agree that TARP while not perfect has achieved what it set out to do.

  21. TheReformedBroker says:

    ottovbvs:TARP while not perfect has achieved what it set out to do

    so I guess it set out to be a “woodchipper” to feed other peoples money into

  22. Brad says:

    ottovbvs, if you think TARP was a success, I would invite you to go now to your neighbor and ask him to pay your debt obligations for the next 10 years. In exchange for 4.5 interest for the next 10 years, pay your debt obligations and their own. And then look him in the eye and determine if this fits your definition of “success.” If it does, then I would agree with you. TARP has been wonderfully successful.

    I know it is troubling for bank insiders to formulate defense of capitalist ideas and legal precedence in this country, defend such things to colleagues in house or in public forums. If you cannot first formulate good defense of capitalism, I doubt genuinely you can be very persuasive in your defense of troubled asset relief programs and their foreign initiatives. You might as well star in a commercial about how you are counting clouds or butterflies with your 8 year old daughter (which I think better represents the attitude of most bankers who have seized assets of others in the 20 to 40 years prior to October 2008).

    merrily merrily merrily merrily ……………

  23. Patrick Neid says:

    Humpy Dumpy sends his regards to all the interventionists.