As prepared for delivery
WASHINGTON – Thanks to the Brookings Institution for inviting me and to all of you for being here today.
In January of 2009, Neel Kashkari, who was then a Treasury Acting Assistant Secretary, spoke here at Brookings. He spent a few months as the first person in charge of implementing the Troubled Asset Relief Program – or "TARP."
His speech that day served as one of the first progress reports on the new program's implementation.
Back then, TARP was being created because the financial world was falling apart. Anyone who lost their job, their home, or their savings does not need a reminder that this was a terrible crisis. But the idea that our financial system almost collapsed – and what that would've meant to our modern economic way of life – is not so easy to comprehend.
It is no exaggeration to say that in September 2008, our nation was on the edge of falling into a second Great Depression. Several major financial institutions had already failed – including Bear Stearns, Indy Mac, and Washington Mutual bank. On September 15th, Lehman Brothers filed for bankruptcy.
The next day, a money market fund broke the buck, triggering the start of a run on money market funds generally. The day after that, AIG, one of the largest and most complex financial firms in the world, was on the verge of failure.
Confidence in the financial system was vanishing. Panic was spreading. The stock market dropped by more than 770 points in a single day. Every major financial institution was vulnerable. And the financial wildfire was quickly spreading far beyond Wall Street.
The credit markets that provide financing for credit cards, student loans, mortgage loans, auto loans, small business loans and other types of financing basically stopped functioning.
For the first time in generations, Americans were questioning the safety of their money in banks. For the first time in more than 80 years, a generalized run on the nation's banking system was a real possibility.
Only instead of people lining up to withdraw their money from their local bank like in that famous scene from It's a Wonderful Life with Jimmy Stewart, this time it would have happened practically all at once – and all at the speed of a mouse click.
The crisis was causing our economy to collapse. And by the time President Obama took office, we were losing almost 800,000 jobs a month. Between December 2007 and December 2008, household wealth fell by 17 percent – more than five times the decline in 1929.
In this time of great fear and uncertainty, the government had limited options. The Federal Reserve and Treasury were taking what actions they could under existing law, but they could not get ahead of the crisis nor contain the damage.
It was out of these extraordinary circumstances that TARP was born. TARP was a program that nobody in government ever wanted to do. Americans disliked it for good reason.
Indeed, polling data found that the word TARP was more unpopular than Guantanamo. And nobody ever wants to see TARP repeated. But it is a program that did its job. And it has worked faster, better, and cheaper than most people ever thought was possible.
This week marks the five year anniversary of the Emergency Economic Stabilization Act, which is the law that created TARP. And so it is a good time to review the record of TARP.
Even though the pain from this terrible recession is still with us in many ways, as a result of the actions taken through TARP and other measures, the impact of the financial crisis on families and communities was much less than it might have been. Our financial system did not collapse. The economy is growing again. And TARP is almost completely wound down.
Taxpayers have earned positive returns on their investments to stabilize banks and credit markets – and most remarkably -- on their investment in AIG. In fact, as unlikely as it would have sounded in the fall of 2008, we have now recovered more than we disbursed and taxpayers will likely earn a significant positive return from all the actions taken to combat the crisis.
In short, TARP is one of the most effective, yet least understood programs in government. So as we mark its five year anniversary, I'm here to explain exactly what TARP did and what I hope its legacy will be.
Treasury recently published a presentation on the financial crisis, the government's response, and the progress we've made over the past five years. I brought along a three slides from it for my remarks today. The full presentation is available on the treasury.gov website and we have hard copies available today.
RESTORING THE NATION'S FINANCIAL STABILITY
The first and most important measure of TARP's success is whether or not it helped to restore the financial stability of the nation. And simply put, TARP worked. This slide shows a few snapshots of the economy before, during, and after the crisis.
The most important fact about the government's response is that it acted with overwhelming force and speed to confront the crisis. The crisis was attacked on many fronts in order to address the many ways that American families and businesses depend on the financial system. It was done through programs that were creatively designed, decisively launched, and carefully managed. And as a result, we broke the back of the panic and stabilized the system. We have recovered from the financial crisis faster than other nations.
Of course, all of the credit for this doesn't go to TARP or Treasury alone. TARP was only one part of a coordinated federal response to the financial crisis.
This response spanned both a Republican and a Democratic Administration. It involved several measures implemented by the Federal Reserve. And it involved many programs run by the Treasury and other federal agencies.
Here are some of the ways that TARP helped to restore the nation's financial stability.
First and foremost, it stabilized the banking system so money could start moving again throughout the economy. Five programs were launched under TARP to provide capital to banks of all sizes, including more than 650 small and community banks across the nation. That was important, because the purpose was not to save any individual bank but to protect the economy and financial system.
And the government did not give grants; it made investments, structured so that taxpayers would receive a return as the banks recovered.
You may recall that at the time, there were many who said we should nationalize the major banks. Others were calling for no action by the government with the hope that the problem would fix itself. President Obama chose a different path – and that was to get the banking system to raise private capital.
As part of this path, we required the big banks to go through stress tests to determine which ones needed more capital. The government was ready to provide additional capital, but the goal was to enable banks to attract private capital back and get the government out. And it worked.
Today, banks have far more capital. They rely less on short-term funding, which can evaporate in a crisis. And today we have almost completed our exit from these investments. At the peak of the crisis, the Treasury had almost $250 billion in investments in banks that held more than 98 percent of the assets of all banks in the country.
Today, we have collected all but $3 billion of that, and taxpayers have already earned more than $26 billion in additional income from their banking investments under TARP.
Our remaining investments are mostly in small banks which hold less than one percent of total banking assets in the system.
Credit Market Programs
The second way that TARP helped to restore America's financial stability is through three programs designed to restart our nation's secondary credit markets. When the Obama Administration took office, these markets, which provide financing for credit cards, auto loans, student loans, mortgage loans, small business loans, and other types of financing, had essentially frozen.
And so we launched a series of programs to restart the flow of credit. They had acronyms you may have heard of – such as PPIP and TALF. I will spare you the complicated structural details here, but the good news is that soon after these programs were implemented, the volume of activity in these markets increased, and spreads – which affect the borrowing costs for individuals and businesses – began to decline. That recovery continues today. While credit is still somewhat constrained, conditions are much better than before.
Today, all the credit market programs under TARP have been wound down and taxpayers have earned more than $4 billion in positive returns from them.
Another way that TARP helped was to restore the nation's financial stability. That's through the TARP and Federal Reserve investments in AIG.
Supporting AIG was one of the most difficult decisions made by the government. The outrage that it caused is understandable.
By September of 2008, AIG had grown to become the largest insurance company in the world. At its peak, it had more than $1 trillion in assets and provided insurance to 75 million individual and corporate customers in more than 130 countries. It also had a substantial presence in many critical financial markets, including municipal bonds.
Unfortunately, it used its strong credit rating, which was based on the strength of its insurance subsidiaries, to engage in some very risky derivatives transactions.
How AIG was able to do that, without any federal agency looking at the risk such activity posed, is a larger discussion and beyond the scope of my remarks today. But the simple fact is that in that atmosphere of fear and panic in mid September of 2008, the sudden collapse of AIG could have dramatically accelerated the speed and intensified the severity of the financial crisis.
The crisis would have likely spread to the entire insurance industry. The corporate and municipal bond markets and derivatives markets would have been destabilized even more. Investors would have likely pulled back further from funding major institutions for fear that any financial firm could collapse at any moment.
And that is why the government acted. It did not act simply to save AIG, or help financial institutions that dealt with AIG. It was because AIG's sudden collapse – at that time and in those circumstances – would have had catastrophic consequences for the nation.
Some of the support for AIG came from TARP. The rest came from the Federal Reserve. And of the total provided – a staggering $182 billion – all of it has been recovered, plus nearly $23 billion in positive returns for the taxpayer. Moreover, today, the government has powers it did not have before to prevent a financial firm that is not a bank from posing such catastrophic risks to our economy.
HELPING MAIN STREET
The actions we took under TARP were designed to protect the economy and keep credit flowing to consumers and businesses. Yet many have questioned whether TARP, and the crisis response generally, did enough to help Main Street. The evidence of its impact on Main Street is not always obvious to many Americans for two reasons.
First, the programs themselves invested in institutions and markets. They had complex details and went by odd acronyms. This made them seem remote from everyday lives. And after all, most Americans who've known economic hardship these past several years don't think about the collapse of Lehman Brothers when they think about the recession.
And secondly, we are still struggling with the damage from the crisis. Growth is too slow and unemployment is too high. And median family income has not increased in many years. We still have work to do to get to where we need to be, but I don't think that diminishes what TARP did.
The purpose of the actions taken under TARP was to make sure our financial system did not collapse. The financial system is the circulatory system for our nation's financial and economic health. The financial system enables people to have a checking account, get a credit card, receive their payroll deposits, buy a home, finance a college education, and save for retirement. It enables businesses to get financing so that they can grow and expand and hire more people. And without TARP and the government's other emergency measures, the pain experienced by Americans would have been far greater, recovery would have been far slower, and the ultimate cost to repair the damage would have been far higher.
We can never say with certainty what would have happened if the government had not acted. But economists can make estimates.
And one was a study by two economists, Mark Zandi, who is a former advisor to Senator John McCain, and Alan Blinder, who served in the Clinton Administration.
They said that without TARP and the other financial rescue measures taken by the government, unemployment would have likely topped 16 percent, we would have lost 8.5 million more jobs on top of the millions we had already lost. We would've had much higher deficits and the nation would have likely entered "a 1930s-like depression." While the damage from the recession was deep and the recovery has been slower than we would like, thankfully we've experienced nothing on the scale of what we saw in the 1930s.
I want to highlight two programs in particular that where the impact on everyday life is perhaps more obvious.
One was our action to help protect the broader economy by stabilizing the American auto industry.
The auto industry was in decline before the crisis. But the decline became a potential free fall. In 2008, the auto industry shed more than 400,000 jobs. By December, the situation was dire. With a deepening recession, credit markets frozen, and Americans unable to get car loans, auto sales were evaporating. And GM and Chrysler were quickly running out of cash.
With no options for private financing available, the government under TARP stepped in as a lender of last resort to prevent the collapse of GM and Chrysler and the devastating impact that would have had on our economy, which was already on the ropes.
The actions not only saved GM and Chrysler. They saved businesses up and down the auto industry supply chain, and even helped Ford, as its CEO has acknowledged. Some experts have estimated that as many as one million American jobs were saved as a result of the government's auto investments. Today the auto industry has come roaring back. GM, Chrysler, and Ford are all profitable. They are adding thousands of jobs, and selling more cars. And Treasury is exiting our remaining investments in auto companies under TARP.
Another way that TARP directly impacts middle class Americans is by helping people keep their homes. Not since the 1930s have we seen a housing crisis on this scale.
The housing crisis had many causes. Buying a home had always required responsibility on everyone's part. But in the years before the crisis, responsibility too often gave way to recklessness by lenders who sold loans to people who couldn't afford them and buyers who knew they couldn't afford them. We tried to help responsible homeowners, though it has been a far more complex challenge than anticipated.
Despite these challenges, as a result of TARP's housing programs, millions more families have avoided foreclosure than otherwise would have and many families are spending less each month on their mortgage payments. And the good news is that the housing market is recovering with home prices rising at their fastest pace in seven years.
EXPECTED COST OF TARP
Let me turn now to cost. The true cost of the financial crisis is not the fiscal cost of the programs.
The true cost is measured in the human suffering and economic damage it caused, which is huge. It is the jobs lost, the foreclosed homes, the college educations that cannot be financed, the retirements that must be postponed.
And the most important measure of success of programs like TARP is whether it was successful in stopping the crisis and containing this damage. As former Secretary Henry Paulson said in late 2008, the most important goal for TARP was "to stabilize a financial system that is integral to the everyday lives of all Americans." But the fiscal cost of TARP is nevertheless something in which a lot of people are interested. And the answer may surprise you.
Congress authorized up to $700 billion for TARP. That is still the number that most people associate with it. Today, many probably think that money went up in smoke, or was paid to big banks which paid it out in bonuses. And there were many predictions that most or all of the TARP funds would not be recovered, and the final cost of all the government interventions would run into the trillions of dollars.
Perhaps we should remember the advice of Yogi Berra, who famously said, "It's difficult to make predictions, especially about the future."
In reality, we disbursed about $420 billion—a huge amount, but not the $700 billion Congress authorized. This chart shows what we disbursed and what we've recovered. As I mentioned earlier, we have already recovered more from TARP for the taxpayers than has been disbursed if we include all of Treasury's profits from its investment in AIG.
Moreover, when you look at the all of the government's financial stability programs as whole, taxpayers are likely to realize a significant gain.
A RECORD OF TRANSPARENCY
I also believe we have operated TARP with the highest standards of transparency and accountability.
We produce a wealth of reports on a yearly, monthly, and even a daily basis that provide the latest information on every aspect of TARP. Our website has a daily balance sheet of where the funds are and how much has been returned by program. Earlier this summer, we also launched a new tool on our website to enable people to not only track the flow of TARP funds over time but also see the events associated with each program. We have also been subject to oversight from four separate oversight entities.
TARP is by no means perfect, and people sometimes ask, what would you have done differently? I don't have the distance or objectivity to answer that question today, but I think that is an important discussion to have over time. I am sure there are things that with time one may conclude we could have done better, though I do believe that we got the big things right.
LEGACY OF TARP
So what will be the legacy of TARP? Or more appropriately, what should it be? The financial crisis caused massive damage and pain. Its effects were not fair, and the response required the government to do things that nobody liked. And today we have more to do to get our economy back to full strength.
Some would say that TARP caused moral hazard, that it caused or at least made worse the too big to fail problem. But I think that confuses what we had to do to respond to the crisis from what we must do to address the problems revealed by the crisis.
Think of it this way. If your neighbor's house is burning down in the middle of the night because he fell asleep smoking in bed, and the fire is threatening the whole neighborhood, do you want the fire department to put it out, or do you say, no, I'd rather let it burn so we teach everyone not to smoke in bed?
TARP was like the fire department, called to put out the fire. There is no question that anytime the government saves a private company with taxpayer dollars, we create a risk of moral hazard.
But one must stop and contain the panic first, and deal with the reform next. And that is what we are in the process of doing now.
The crisis made clear that our regulatory system was out of date. We did not identify risks building up in the system nor did we have the tools to deal with the crisis. That's why the Obama Administration took up the mantle of financial reform and fought to pass the Dodd-Frank Wall Street Reform and Consumer Protection Act and other measures.
The financial reforms now being implemented will:
- Give us better tools to monitor risk and wind down large financial firms whose failure could threaten the system;
- They will require the largest financial institutions to hold more capital and undergo regular stress tests to determine if they can weather severe economic conditions;
- They will bring more transparency to the derivatives market; and
- They will create stronger safeguards for consumers when it comes to financial products.
There is still more work to do. The system is safer and stronger today, but the job is not finished. And the crisis reminds us that the financial system is dynamic and is constantly changing. As sources of risk change, our regulation and oversight must keep pace.
Like the fire department that should not be blamed for the fact that people smoke in bed, I hope the legacy of TARP is thought of separately from the issues of how we regulate our financial system. And in that regard, let me conclude on this note.
One of the best books I read about the crisis was a book by John Kenneth Galbraith. He died in 2006, before the crisis, but he wrote a short book on the Great Depression called the Great Crash. There is much wisdom in that little book, and one of the things he says that stuck with me is that memory is better than law as protection against financial illusion or insanity.
I recall as a child hearing stories from my parents and grandparents about how hard life was during the Great Depression. Some of you probably heard similar stories, others may be too young. But the experience of growing up during the Great Depression shaped my parents' lives, their attitudes, and their values forever. When we think of the Great Depression today, images of bread lines, of tent cities for the homeless, come to mind.
We are fortunate that as bad as this crisis was, the worst did not happen. But that is all the more reason to remember how close we came, and how government's actions prevented disaster.
We live in a time when the public's confidence in government's ability to solve big challenges has never been lower. People rightly detest the partisanship and gridlock that has come to define this city.
Yet the great paradox of TARP is that while it was so unpopular, the program is perhaps the best recent example of effective, bipartisan government. The law was passed with bipartisan support, and the program was carried out quickly, boldly, and wisely, across both a Republican and Democratic Administration.
So as TARP moves into the history books, it's my hope that its greatest legacy will be this – that when the nation was confronted with an extraordinary challenge – in this case, the potential collapse of our entire financial system – government rose to the occasion.
And if we remember that lesson, perhaps we will be better able to confront the great challenges facing the nation in the years ahead.