President Barack Obama and Mitt Romney’s debate exchange over auto bailouts reignited a long- running dispute over whether the government’s financial-crisis rescue plan was a good deal for taxpayers. The answer: It depends.
There’s little doubt the government won’t recoup the full $417 billion spent on the program. Proponents reply that whatever the loss, it was worth it to pull the world’s largest economy back from the brink of collapse and prevent the disappearance of whole sectors, like domestic carmakers.
“We saved an auto industry that was on the brink of collapse,” Obama said in the Oct. 16 presidential debate at Hofstra University in Hempstead, New York. Republican challenger Romney wanted to put General Motors Co. (GM:US) and Chrysler Group LLC into bankruptcy “without providing them any way to stay open. And we would have lost a million jobs,” Obama said. Romney countered that bankruptcy was necessary “to get those companies back on their feet,” though at the time he opposed using taxpayer dollars.
Obama’s Treasury Department is seeking to wind down the Troubled Asset Relief Program that includes the auto bailouts, rescues for banks and insurer American International Group Inc. (AIG:US), and programs to stem home foreclosures. How much money the rescues end up costing taxpayers will depend largely on the government’s ability to sell its 32 percent stake in GM and 74 percent ownership of auto lender Ally Financial Inc. (ALLY:US)
The administration argues that its projected $63 billion loss was a small price to stabilize a $13.2 trillion economy. Critics in both political parties say the program was too generous to Wall Street and too weak to help the housing industry. The portion of TARP used to bail out banks has been profitable.
“The principal purpose of TARP was to save the financial system, especially the banking system, from a possible total meltdown,” Alan Blinder, a former Federal Reserve vice chairman who’s now a professor at Princeton University, said in an interview. “It can only be considered a resounding success.”
The rescues of GM, Chrysler and Ally cost taxpayers $79.7 billion, and $40.8 billion was returned. Taxpayers have invested $51 billion in GM and received $24 billion back.
“If that’s success, I’d hate to see what failure is,” Phillip Swagel, Treasury assistant secretary for economic policy under President George W. Bush, said of the auto bailouts.
Congress approved $700 billion for the financial rescue four years ago this month, and the bill was signed into law by Bush in the midst of a presidential election campaign that Obama won. That quarter, the economy was shrinking at an 8.9 percent annual rate, and 1.95 million jobs were lost.
Growth resumed in the third quarter of 2009, and unemployment last month fell to 7.8 percent, the lowest rate since Obama took office. The Standard & Poor’s 500 (SPX) Index has more than doubled since reaching a 12-year low on March 9, 2009.
Stocks were little changed as investors watched third- quarter corporate results. The S&P 500 was at 1,433.00 at 10:20 a.m. in New York.
In other reports today, Japan’s exports fell in September by the most since the aftermath of last year’s earthquake as a global slowdown, the yen’s strength and a dispute with China increase the odds of a contraction in the world’s third-largest economy.
The euro region’s combined debt burden surged last year to the highest since the start of the single currency, the European Union’s statistics office said today, as governments struggled to fill budget gaps and contain the fiscal crisis.
TARP, initially aimed at U.S. financial firms, was broadened to housing and autos as the crisis unfolded, though less than two-thirds of the $700 billion authorized by Congress was used. Bush first gave GM and Chrysler federal money, and the companies received additional help through managed bankruptcies under Obama’s administration.
Since then, the auto industry has rebounded. Dealers sold new cars and light trucks last month at an annualized rate of 14.9 million, according to researcher Autodata Corp. That’s the best pace since March 2008.
GM posted a record full-year net profit (GM:US) of $9.19 billion last year and regained its position as the world’s top-selling automaker from Toyota Motor Corp. (7203) Chief Executive Officer Dan Akerson has said GM’s troubles in Europe are pushing down its share price. The automaker has lost $16.8 billion in Europe since 1999.
Ed Whitacre, who was chosen by the White House as GM’s chairman in 2009 and left the job at the end of 2010, said in September that the bailouts saved millions of jobs and if the company had failed, other automakers and suppliers would have followed. In the fourth quarter of 2008, GM lost $9.6 billion.
Christy Romero, TARP’s special inspector general, told Congress in July that the Treasury would need to sell its remaining 500 million shares for about $52 to $54 apiece to recover all of its investment.
The stock is 25 percent below the $33 initial public offering price. People familiar with the matter have said the Treasury doesn’t want to sell at a price that low.
“There’s political pressure not to want to lock in a loss, but there’s no guarantee what direction the stock is going to go,” said Neel Kashkari, TARP’s first administrator and now a managing director at Pacific Investment Management Co. in Newport Beach, California.
When it comes to large financial firms, even TARP critics say the bailouts have been a success.
Taxpayers have earned $22 billion on $245 billion invested in more than 700 banks ranging from Citigroup Inc. (C:US) to small lenders. The Treasury is trying to sell its stakes in some of the 291 banks that haven’t repaid the money, such as NewBridge Bancorp of Greensboro, North Carolina.
The U.S. recovered its full $182.3 billion commitment to New York-based insurer AIG with a profit after Treasury’s latest stock sale in September. The $15.1 billion return includes results from the Fed portion of the rescue, such as a credit line and the purchase of mortgage-linked securities.
“Taking action to stabilize AIG during the financial crisis was something the government should never have had to do, but we had no better option at the time to protect the American economy,” Treasury Secretary Timothy F. Geithner said in a statement in September.
Geithner, who was president of the Federal Reserve Bank of New York at the time the bailouts began, has said he plans to leave the Treasury by the end of Obama’s current term.
Among TARP’s critics was Elizabeth Warren, formerly the head of a congressional panel overseeing the program and now a Democratic candidate for the U.S. Senate from Massachusetts.
The bailouts created a “moral hazard” by letting large banks think they are “too big to fail,” Warren’s panel said in a July 2010 paper. TARP “worked really well for the Wall Street banks, but it didn’t work well for the rest of the banks in the system,” she told Bloomberg Television that same month.
U.S. banks have recovered much of the ground lost during the crisis.
The combined $63 billion in profit reported by the six biggest lenders over the four quarters through June is more than they earned in any calendar year since the peak in 2006.
All told, banks have posted 12 consecutive quarterly increases in net income through the first half of 2012, according to the Federal Deposit Insurance Corp.’s midyear tally, the most recent available. Only 11 percent of the lenders were unprofitable, down from 16 percent a year earlier. Lending remained slow, with total loans and leases increasing just 1.4 percent, the FDIC reported.
Andrew Lo, a finance professor at the Massachusetts Institute of Technology’s Sloan School of Management, said he wants economists to conduct cost-benefit studies to determine whether TARP is a success.
“Was it the best possible use of that money?” Lo said. “What would have been the likely impact of giving, say, $40 billion to the manufacturing industry or to the pharmaceutical industry? We don’t know the answer yet.”
Outside of TARP, taxpayers have also invested $187.5 billion in Fannie Mae and Freddie Mac and received dividends of $50.4 billion. The Obama administration wants to overhaul the housing-finance system and wind down Fannie and Freddie, which pool home loans for sale to investors and guarantee interest and principal payments. The firms have operated under U.S. conservatorship since 2008.
The Obama administration’s use of TARP funds to help homeowners, an effort that’s not designed to produce a return on investment, has generated the most criticism.
The Treasury has used $5.54 billion of the $45.6 billion set aside to combat the housing crisis. The administration said in February 2009 that it wanted to help as many as 3 million to 4 million homeowners through a plan to avert foreclosures, the Home Affordable Modification Program. The plan has helped about 1 million.
Neil Barofsky, TARP’s special inspector general from 2008 to 2011, called the housing program “disastrous” in his book “Bailout.” He said the Treasury should have done more to get banks to reduce principal payments for homeowners.
Spending on a “massive scale” would have been required to help homeowners “in a meaningful way,” said Stephen Myrow, a Treasury official in the Bush administration who worked on TARP under then-Treasury Secretary Henry Paulson.
Even with the housing setbacks, Timothy Massad, Treasury assistant secretary for financial stability, and TARP’s other implementers under both Bush and Obama aren’t waiting to declare the bailout program a victory.
“Because we acted with speed and force to put out the financial fire, we were able to stabilize an economy in freefall more quickly and at a lower cost than many had expected,” Massad said.
Alex Pollock, a fellow at the American Enterprise Institute in Washington, isn’t impressed. He says the program should have earned a return because the government bought assets cheaply.
“If you did it right, it should make money, because you’re going in at the bottom, a panic bottom,” said Pollock, former president of the Federal Home Loan Bank of Chicago.
Kashkari, one of the Paulson Treasury’s central figures who helped plan TARP during the depths of the crisis, said the program is misunderstood as a bailout of Wall Street, when it was really aimed at Main Street.
“We did this because American blue-chip industrial companies were calling us saying that they were not going to be able to fund themselves, they were not going to be able to make payroll,” he said. “It was done to support the economy for everyone.”
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