WEBVTT 00:00:00.000 --> 00:00:01.620 You know, usually when you think about plumbing, 00:00:02.000 --> 00:00:05.980 there is a certain predictable logic to it, like 00:00:05.980 --> 00:00:08.660 water flows in, water flows out. Right, exactly. 00:00:08.720 --> 00:00:11.240 It makes sense. Yeah. And if there's a clog somewhere 00:00:11.240 --> 00:00:13.859 in your house, you just find it, you snake it, 00:00:13.880 --> 00:00:16.100 and the system works again. It's physical, it's 00:00:16.100 --> 00:00:18.460 visible, and you can fix it. It basically obeys 00:00:18.460 --> 00:00:20.260 the laws of physics. Yeah. I mean, you locate 00:00:20.260 --> 00:00:22.780 the blockage, you remove the obstruction, and 00:00:22.780 --> 00:00:25.660 then the pressure in the pipes normalizes almost 00:00:25.660 --> 00:00:28.449 instantly. But then you look at the global financial 00:00:28.449 --> 00:00:32.130 system in the fall of 2008 and suddenly the water 00:00:32.130 --> 00:00:34.530 just completely stopped flowing. It just froze. 00:00:34.950 --> 00:00:37.170 Right. The pipes were entirely blocked, but nobody 00:00:37.170 --> 00:00:40.090 could actually see the clog. Nobody knew exactly 00:00:40.090 --> 00:00:42.229 where the blockage was located. And worse, nobody 00:00:42.229 --> 00:00:44.789 really knew how to fix it without, you know, 00:00:45.049 --> 00:00:47.049 ripping up the entire foundation of the global 00:00:47.049 --> 00:00:49.869 economy. Which is terrifying when you think about 00:00:49.869 --> 00:00:53.369 it. Absolutely. So welcome to the deep dive. 00:00:53.630 --> 00:00:57.340 Today we have a massive dense, incredibly detailed 00:00:57.340 --> 00:00:59.679 Wikipedia article in front of us covering the 00:00:59.679 --> 00:01:02.619 troubled asset relief program. You probably know 00:01:02.619 --> 00:01:06.180 it simply as TARP. And our mission today is to 00:01:06.180 --> 00:01:09.879 cut through all of that really dense 2008 financial 00:01:09.879 --> 00:01:12.500 jargon. We want to figure out exactly what the 00:01:12.500 --> 00:01:16.060 U .S. government did with hundreds of billions 00:01:16.060 --> 00:01:18.319 of taxpayer dollars. Yeah, and whether it actually 00:01:18.319 --> 00:01:21.390 worked. Exactly. Did it work? And what does it 00:01:21.390 --> 00:01:24.150 really mean for your understanding of how the 00:01:24.150 --> 00:01:26.349 modern global economy is basically held together 00:01:26.349 --> 00:01:29.230 in times of absolute crisis? Okay, let's unpack 00:01:29.230 --> 00:01:31.329 this because before we can look at where the 00:01:31.329 --> 00:01:33.269 money went and the immense controversies that 00:01:33.269 --> 00:01:35.510 followed, we really have to establish what this 00:01:35.510 --> 00:01:37.349 money was actually supposed to do when it was 00:01:37.349 --> 00:01:39.409 signed into law. Right, the original intent. 00:01:39.819 --> 00:01:42.019 We're talking about the Emergency Economic Stabilization 00:01:42.019 --> 00:01:44.859 Act of 2008, which was signed by President George 00:01:44.859 --> 00:01:47.620 W. Bush in response to the whole subprime mortgage 00:01:47.620 --> 00:01:50.379 crisis. And originally, this legislation authorized 00:01:50.379 --> 00:01:54.989 a staggering $700 billion. $700 billion. Yeah, 00:01:55.090 --> 00:01:56.930 though it is worth noting that the Dodd -Frank 00:01:56.930 --> 00:01:59.349 Act later reduced that authorization down to 00:01:59.349 --> 00:02:03.549 about $475 billion. But still, at the time, in 00:02:03.549 --> 00:02:06.349 the heat of that 2008 panic, the sheer scale 00:02:06.349 --> 00:02:09.090 of the proposal was completely unprecedented. 00:02:09.610 --> 00:02:11.789 I mean, the government had never attempted an 00:02:11.789 --> 00:02:14.310 intervention of this magnitude before. And the 00:02:14.310 --> 00:02:16.389 original goal was right there in the name, right? 00:02:16.770 --> 00:02:19.629 The Troubled Asset Relief Program. Exactly. The 00:02:19.629 --> 00:02:22.849 government wanted to purchase troubled or toxic 00:02:23.080 --> 00:02:26.599 assets, specifically things like collateralized 00:02:26.599 --> 00:02:30.080 debt obligations or CDOs that were originated 00:02:30.080 --> 00:02:33.479 on or before March 14th, 2008. Which was the 00:02:33.479 --> 00:02:35.419 date of the Bear Stearns bailout, right? Right, 00:02:35.479 --> 00:02:37.840 exactly. Let's pause for a second because we 00:02:37.840 --> 00:02:40.520 hear the term toxic asset thrown around all the 00:02:40.520 --> 00:02:42.659 time. But for someone listening who, you know, 00:02:42.800 --> 00:02:45.699 doesn't work on Wall Street, what exactly was 00:02:45.699 --> 00:02:49.539 a CDO in this context and why did it become toxic? 00:02:49.849 --> 00:02:52.150 Well, a collateralized debt obligation was essentially 00:02:52.150 --> 00:02:54.849 a giant blender full of mortgages. Wall Street 00:02:54.849 --> 00:02:56.969 would take thousands of individual home loans, 00:02:57.629 --> 00:02:59.469 blend them all together into a single financial 00:02:59.469 --> 00:03:02.090 product, and then sell slices of that product 00:03:02.090 --> 00:03:04.050 to investors around the world. OK, so it's a 00:03:04.050 --> 00:03:06.050 bunch of mortgages mashed together. Right. But 00:03:06.050 --> 00:03:08.930 the problem was that by 2008, many of the mortgages 00:03:08.930 --> 00:03:10.870 in those blenders were subprime, meaning they 00:03:10.870 --> 00:03:13.949 were given to borrowers who were highly likely 00:03:13.949 --> 00:03:16.759 to default. So when housing prices started dropping, 00:03:16.939 --> 00:03:19.120 people stopped paying their mortgages, and the 00:03:19.120 --> 00:03:22.159 value of these giant blended products completely 00:03:22.159 --> 00:03:25.319 collapsed. Wow. But the working hypothesis at 00:03:25.319 --> 00:03:27.000 the Treasury at the time was that these assets 00:03:27.000 --> 00:03:29.340 were being oversold because everyone was just 00:03:29.340 --> 00:03:31.919 in a state of sheer panic, right? Yeah, the reality, 00:03:32.159 --> 00:03:34.280 at least according to our sources, was that only 00:03:34.280 --> 00:03:36.759 a small percentage of all mortgages were actually 00:03:36.759 --> 00:03:40.650 in default. However, the prices of these assets 00:03:40.650 --> 00:03:43.629 were falling as if the default rate was massively 00:03:43.629 --> 00:03:46.430 higher. So the fear was basically spreading faster 00:03:46.430 --> 00:03:48.969 than the actual foreclosures. Exactly. The market 00:03:48.969 --> 00:03:52.150 had completely lost its ability to rationally 00:03:52.150 --> 00:03:55.030 value these really complex securities. Nobody 00:03:55.030 --> 00:03:57.210 knew exactly how many bad mortgages were hidden 00:03:57.210 --> 00:04:00.569 inside any given CDO. So dyers simply went on 00:04:00.569 --> 00:04:02.509 strike. They just stopped buying. Completely. 00:04:02.770 --> 00:04:05.069 So the value of these assets on the bank's balance 00:04:05.069 --> 00:04:07.599 sheets plummeted to near zero simply because 00:04:07.599 --> 00:04:10.210 there were no buyers. So going back to our house 00:04:10.210 --> 00:04:12.090 analogy, instead of thinking about the government 00:04:12.090 --> 00:04:14.610 buying a clog and just pulling it out, think 00:04:14.610 --> 00:04:16.930 of it like this. The government was acting like 00:04:16.930 --> 00:04:20.509 a massive, deep -pocketed municipality. I like 00:04:20.509 --> 00:04:23.250 that. Yeah, because the banks couldn't flow cash, 00:04:23.370 --> 00:04:26.189 meaning they couldn't lend money to consumers 00:04:26.189 --> 00:04:29.189 or businesses or even each other because their 00:04:29.189 --> 00:04:31.610 pipes were severely damaged and just stuffed 00:04:31.610 --> 00:04:33.870 with these bad mortgages. Right. So the government 00:04:33.870 --> 00:04:36.870 was trying to step in, buy those damaged pipes 00:04:36.870 --> 00:04:39.959 themselves, and rep— place them with brand new 00:04:39.959 --> 00:04:43.360 clean pipes made of pure cash just so the lending 00:04:43.360 --> 00:04:45.319 could flow again. What's fascinating here is 00:04:45.319 --> 00:04:48.180 how they actually plan to do that. The Treasury 00:04:48.180 --> 00:04:51.610 faced this incredibly difficult issue. How do 00:04:51.610 --> 00:04:53.750 you price something that nobody wants to buy? 00:04:53.889 --> 00:04:56.910 Yeah, how do you price extremely complex unwieldy 00:04:56.910 --> 00:04:59.410 instruments when a market basically no longer 00:04:59.410 --> 00:05:02.189 exists? Exactly. Because if you pay too much, 00:05:02.410 --> 00:05:04.509 the taxpayers get completely ripped off. But 00:05:04.509 --> 00:05:07.129 if you pay too little, the banks are forced to 00:05:07.129 --> 00:05:09.410 lock in massive losses and you don't actually 00:05:09.410 --> 00:05:11.189 help them stabilize their balance sheets. So 00:05:11.189 --> 00:05:13.230 the Treasury intended to use what's called a 00:05:13.230 --> 00:05:15.230 reverse auction. I want to make sure we really 00:05:15.230 --> 00:05:17.529 understand this mechanism because in a normal 00:05:17.529 --> 00:05:20.110 auction, you have one item and a bunch of buyers. 00:05:20.079 --> 00:05:23.319 bidding the price up. How does a reverse auction 00:05:23.319 --> 00:05:26.399 work here? Theoretically, a reverse auction uses 00:05:26.399 --> 00:05:28.720 market mechanisms to drive the price down to 00:05:28.720 --> 00:05:31.620 a fair level. In this scenario, you have one 00:05:31.620 --> 00:05:35.139 buyer, the US government, and a bunch of sellers, 00:05:35.660 --> 00:05:37.759 which are the banks holding these toxic assets. 00:05:37.839 --> 00:05:40.500 Okay. And the banks desperately need to get these 00:05:40.500 --> 00:05:43.100 assets off their books and get cash in return. 00:05:43.470 --> 00:05:46.449 So the government asks the banks to submit offers 00:05:46.449 --> 00:05:49.029 for the price they're willing to accept. Ah, 00:05:49.250 --> 00:05:51.610 so the competitive bidding process forces the 00:05:51.610 --> 00:05:54.350 banks to underbid each other just to guarantee 00:05:54.350 --> 00:05:56.449 they get chosen by the Treasury. Right, and the 00:05:56.449 --> 00:05:58.649 government buys the assets from the lowest bidders 00:05:58.649 --> 00:06:01.240 first. I mean, it sounds incredibly elegant in 00:06:01.240 --> 00:06:03.420 theory. The government runs an auction. The banks 00:06:03.420 --> 00:06:05.819 compete to sell their bad assets at a discount. 00:06:06.300 --> 00:06:08.379 The damaged pipes get removed from the system. 00:06:08.759 --> 00:06:10.720 And eventually the government might even sell 00:06:10.720 --> 00:06:13.540 those previously toxic assets back into a recovered 00:06:13.540 --> 00:06:15.600 market for a profit. Yeah, that was the idea 00:06:15.600 --> 00:06:17.300 that was pitched to Congress and the public. 00:06:17.699 --> 00:06:20.680 But very quickly, harsh mathematical reality 00:06:20.680 --> 00:06:23.439 set in, which forced a complete abandonment of 00:06:23.439 --> 00:06:26.610 the core premise of TARP. Yeah, the US government 00:06:26.610 --> 00:06:28.870 quickly realized that buying up damaged pipes 00:06:28.870 --> 00:06:32.069 one by one using reverse auctions was mathematically 00:06:32.069 --> 00:06:35.529 difficult and, more importantly, just way too 00:06:35.529 --> 00:06:38.329 slow to stop a cascading global collapse. They 00:06:38.329 --> 00:06:41.129 needed a new plan immediately. And ironically, 00:06:41.350 --> 00:06:43.370 looking at our sources, this new plan came from 00:06:43.370 --> 00:06:46.170 across the pond. The original plan was entirely 00:06:46.170 --> 00:06:48.769 scratched when UK Prime Minister Gordon Brown 00:06:48.769 --> 00:06:50.769 came to the White House for an international 00:06:50.769 --> 00:06:52.910 summit. Right, because the UK had just announced 00:06:52.910 --> 00:06:56.029 their own bank rescue package. And instead of 00:06:56.029 --> 00:06:58.810 trying to painstakingly evaluate and buy up toxic 00:06:58.810 --> 00:07:01.759 assets one by one, Their model was just brute 00:07:01.759 --> 00:07:04.540 force. Which was what? Inject capital directly 00:07:04.540 --> 00:07:07.079 into the banks by purchasing preferred stock. 00:07:07.199 --> 00:07:09.540 So the US looks at this UK model and completely 00:07:09.540 --> 00:07:13.060 pivots. On October 14th, 2008, the US announced 00:07:13.060 --> 00:07:15.420 a two hundred and fifty billion dollar capital 00:07:15.420 --> 00:07:18.000 purchase program. They basically decided to use 00:07:18.000 --> 00:07:20.939 that first massive chunk of the tarp money to 00:07:20.939 --> 00:07:23.420 buy stakes in a wide variety of banks. It was 00:07:23.420 --> 00:07:25.480 a massive shift. Wait, I have to push back here. 00:07:25.860 --> 00:07:28.199 The entire legislation was sold to the public 00:07:28.199 --> 00:07:31.660 as the troubled asset. relief program. So the 00:07:31.660 --> 00:07:34.060 government largely stopped buying trouble assets 00:07:34.060 --> 00:07:36.279 and effectively started buying parts of the banks 00:07:36.279 --> 00:07:40.139 themselves. Yes. It was a fundamental shift in 00:07:40.139 --> 00:07:42.800 strategy and there were a few critical reasons 00:07:42.800 --> 00:07:45.959 why this pivot was necessary to directly support 00:07:45.959 --> 00:07:49.310 bank solvency. Okay. First, as we discussed, 00:07:49.810 --> 00:07:52.189 pricing those toxic assets was just too hard 00:07:52.189 --> 00:07:55.110 and too slow. Taking weeks to run reverse auctions 00:07:55.110 --> 00:07:57.310 wasn't going to work when banks were literally 00:07:57.310 --> 00:07:59.569 on the brink of failing overnight. Right. That 00:07:59.569 --> 00:08:02.029 makes sense. But there was another highly technical 00:08:02.029 --> 00:08:04.290 problem that banking analysts like Meredith Whitney 00:08:04.290 --> 00:08:06.449 and other economists pointed out at the time 00:08:06.449 --> 00:08:09.110 relating to stock volatility. Wait, if you take 00:08:09.110 --> 00:08:11.970 the bad assets away from a struggling bank, shouldn't 00:08:11.970 --> 00:08:13.949 the bank's stock go up? Why wouldn't they want 00:08:13.949 --> 00:08:16.149 that? You would think so, but distressed banks 00:08:16.149 --> 00:08:19.110 operate under very strange mathematical conditions. 00:08:19.790 --> 00:08:22.269 When a bank is teetering on the edge of bankruptcy, 00:08:23.089 --> 00:08:25.110 its equity is essentially acting like a lottery 00:08:25.110 --> 00:08:27.709 ticket. A lottery ticket. Yet in financial terms, 00:08:27.850 --> 00:08:30.519 it behaves like a call option. For a lottery 00:08:30.519 --> 00:08:32.639 ticket to have a chance of paying out a massive 00:08:32.639 --> 00:08:35.860 return, it needs wild swings in the market. It 00:08:35.860 --> 00:08:38.259 needs massive volatility. Oh, I see. So taking 00:08:38.259 --> 00:08:40.799 away the toxic assets actually stabilizes the 00:08:40.799 --> 00:08:43.480 bank. Exactly. It lowers the volatility. And 00:08:43.480 --> 00:08:46.840 in the complex world of distressed banking, lowering 00:08:46.840 --> 00:08:49.480 that volatility perversely lowers the speculative 00:08:49.480 --> 00:08:53.539 value of the stock. Wow. Therefore, these distressed 00:08:53.539 --> 00:08:56.179 banks would never willingly sell their toxic 00:08:56.179 --> 00:08:59.179 assets at fair market prices because simply removing 00:08:59.179 --> 00:09:01.740 the risk would destroy their stock value. They 00:09:01.740 --> 00:09:04.500 would only sell at wildly inflated prices. So 00:09:04.500 --> 00:09:06.580 the banks wouldn't sell the bad assets unless 00:09:06.580 --> 00:09:09.220 the government massively overpaid because just 00:09:09.220 --> 00:09:11.360 taking the bad stuff away would ironically hurt 00:09:11.360 --> 00:09:14.259 the bank stock. That is absolutely wild. It is. 00:09:14.659 --> 00:09:16.960 And beyond that twisted math, there was a pressing 00:09:16.960 --> 00:09:19.879 psychological issue driving the pivot. Overnight 00:09:19.879 --> 00:09:22.159 lending between banks had come to a relative 00:09:22.159 --> 00:09:24.519 halt. Which is how banks survive day to day, 00:09:24.700 --> 00:09:27.429 right? Right. Banks rely on short term loans 00:09:27.429 --> 00:09:29.570 from each other to function on a daily basis, 00:09:29.929 --> 00:09:32.129 but they simply did not trust each other anymore. 00:09:32.509 --> 00:09:34.629 If a bank doesn't know what kind of toxic waste 00:09:34.629 --> 00:09:36.490 is hiding on the balance sheet of the bank next 00:09:36.490 --> 00:09:39.970 door, they just won't lend to them. So buying 00:09:39.970 --> 00:09:43.629 equity like injecting cold hard cash directly 00:09:43.629 --> 00:09:45.830 into these institutions by purchasing preferred 00:09:45.830 --> 00:09:49.649 stock was seen as the fastest possible way to 00:09:49.649 --> 00:09:52.210 inject trust back into the system. Precisely. 00:09:52.730 --> 00:09:55.929 Let's clarify preferred stock for a second. The 00:09:55.929 --> 00:09:58.250 government isn't just like going on a trading 00:09:58.250 --> 00:10:00.129 app and buying regular shares like an everyday 00:10:00.129 --> 00:10:02.470 investor, right? No, not at all. Preferred stock 00:10:02.470 --> 00:10:04.950 is essentially a VIP status for an investor. 00:10:05.669 --> 00:10:07.610 It means that the government gets priority when 00:10:07.610 --> 00:10:10.090 it comes to being paid dividends. OK, so they're 00:10:10.090 --> 00:10:12.370 first in line. Yeah. If the bank goes bankrupt 00:10:12.370 --> 00:10:15.009 and its assets are liquidated, the holders of 00:10:15.009 --> 00:10:17.029 preferred stock get paid back for the regular 00:10:17.029 --> 00:10:19.730 common shareholders. It was a mechanism designed 00:10:19.730 --> 00:10:21.809 to protect the taxpayers' massive investment. 00:10:21.960 --> 00:10:23.840 Here's where it gets really interesting for you 00:10:23.840 --> 00:10:26.179 listening. Because if the government is suddenly 00:10:26.179 --> 00:10:29.480 using taxpayer money to buy up VIP pieces of 00:10:29.480 --> 00:10:32.399 private banks, you have to wonder what protections 00:10:32.399 --> 00:10:35.000 the taxpayers actually got in return for this 00:10:35.000 --> 00:10:37.399 massive intervention. Right. Because without 00:10:37.399 --> 00:10:39.980 context, it sounds like we just handed Wall Street 00:10:39.980 --> 00:10:43.179 a blank check to survive a disaster of their 00:10:43.179 --> 00:10:45.360 own making. And it certainly felt that way to 00:10:45.360 --> 00:10:48.080 a very angry public. But the Emergency Economic 00:10:48.080 --> 00:10:51.700 Stabilization Act did have specific strings attached 00:10:51.700 --> 00:10:53.740 to protect the government's investment. Let's 00:10:53.740 --> 00:10:56.320 walk through them. First, there were equity warrants. 00:10:56.820 --> 00:10:59.419 If a financial institution sold assets or equity 00:10:59.419 --> 00:11:02.100 to TARP, they had to issue equity warrants to 00:11:02.100 --> 00:11:04.519 the Treasury. Right, which basically gave the 00:11:04.519 --> 00:11:06.299 government the right to purchase shares in these 00:11:06.299 --> 00:11:09.399 companies at a specific locked in price in the 00:11:09.399 --> 00:11:11.200 future. I like to think of the government here 00:11:11.200 --> 00:11:14.379 as a very aggressive angel investor. They aren't 00:11:14.379 --> 00:11:16.559 just handing over a rescue check. They are demanding 00:11:16.559 --> 00:11:19.039 a seat at the table. Non -voting, usually, but 00:11:19.039 --> 00:11:21.940 still a seat and a massive share of the upside. 00:11:22.480 --> 00:11:25.000 Exactly. If the bank recovers because the taxpayer 00:11:25.000 --> 00:11:28.279 lifeline and its stock skyrockets, the taxpayer 00:11:28.279 --> 00:11:31.320 gets to buy stock at the old low price and profit 00:11:31.320 --> 00:11:33.620 from that recovery. Makes sense. What was the 00:11:33.620 --> 00:11:36.059 next string attached? The second major string 00:11:36.059 --> 00:11:39.289 attached was executive compensation limits. For 00:11:39.289 --> 00:11:41.250 companies where the Treasury acquired equity 00:11:41.250 --> 00:11:44.070 through direct purchases, they had to eliminate 00:11:44.070 --> 00:11:47.350 compensation structures that encouraged unnecessary 00:11:47.350 --> 00:11:51.210 and excessive risk -taking. So no more golden 00:11:51.210 --> 00:11:53.549 parachutes for executives if things go south. 00:11:54.009 --> 00:11:56.889 And there was a $500 ,000 limit on tax deductions 00:11:56.889 --> 00:11:59.129 for executive pay, right? Right. They even included 00:11:59.129 --> 00:12:02.049 clawback provisions. Oh, meaning... If an executive 00:12:02.049 --> 00:12:04.929 got a massive bonus based on financial statements 00:12:04.929 --> 00:12:07.590 that were later proven to be inaccurate or deliberately 00:12:07.590 --> 00:12:10.470 false, the government could legally force them 00:12:10.470 --> 00:12:13.370 to repay that bonus. This raises an important 00:12:13.370 --> 00:12:15.409 question, however. You have all these rules on 00:12:15.409 --> 00:12:18.590 paper warrants, pay caps, clawbacks, but how 00:12:18.590 --> 00:12:21.009 do you actually oversee a program of this scale 00:12:21.009 --> 00:12:23.490 in real time? Yeah, we are talking about hundreds 00:12:23.490 --> 00:12:25.450 of billions of dollars moving at lightning speed 00:12:25.450 --> 00:12:27.950 into hundreds of different institutions. It was 00:12:27.950 --> 00:12:30.750 chaos. The Inspector General of the Treasury 00:12:30.750 --> 00:12:33.789 at the time, Eric Thorson, initially called the 00:12:33.789 --> 00:12:36.889 oversight workload a mess. He pointed out the 00:12:36.889 --> 00:12:39.549 sheer impossibility of overseeing TARP while 00:12:39.549 --> 00:12:42.909 simultaneously handling audits of dozens of actively 00:12:42.909 --> 00:12:46.139 failing banks. So Congress created SIGTARP to 00:12:46.139 --> 00:12:48.279 handle this, the Special Inspector General for 00:12:48.279 --> 00:12:51.299 the Troubled Asset Relief Program. Neil Barofsky 00:12:51.299 --> 00:12:53.720 was the first to hold the post. And their job 00:12:53.720 --> 00:12:56.360 was monumental. It really was. They had to prevent 00:12:56.360 --> 00:12:59.100 fraud, conflicts of interest, money laundering, 00:12:59.220 --> 00:13:02.159 and collusion across an incredibly complex web 00:13:02.159 --> 00:13:04.779 of disbursements. And the fraud wasn't just hypothetical, 00:13:04.960 --> 00:13:06.919 right? People actively tried to steal this money. 00:13:07.019 --> 00:13:10.269 Oh, absolutely. By October 2011, SIGTARP reported 00:13:10.269 --> 00:13:13.549 more than 150 ongoing criminal and civil investigations, 00:13:14.049 --> 00:13:16.509 and they eventually secured 28 criminal convictions. 00:13:17.149 --> 00:13:19.710 There was this one brazen case in March 2010 00:13:19.710 --> 00:13:21.570 involving the former president of the Park Avenue 00:13:21.570 --> 00:13:24.090 Bank, a man named Charles Antonucci. Tell us 00:13:24.090 --> 00:13:26.529 how someone actually tries to defraud a historic 00:13:26.529 --> 00:13:29.149 government bailout. Well, Antonucci essentially 00:13:29.149 --> 00:13:30.809 tried to trick the government into giving his 00:13:30.809 --> 00:13:34.409 struggling bank $11 million in TARP funds. How? 00:13:34.600 --> 00:13:37.039 The government required banks to have a certain 00:13:37.039 --> 00:13:39.559 amount of private capital to qualify for the 00:13:39.559 --> 00:13:43.360 matching TARP funds. Antonucci didn't have it. 00:13:43.580 --> 00:13:47.840 So he engaged in a complex round -tripping scheme. 00:13:47.960 --> 00:13:49.860 Round -tripping? Yeah, he took the bank's own 00:13:49.860 --> 00:13:52.720 money, moved it through various entities he controlled, 00:13:52.899 --> 00:13:56.519 and then deposited it back into the bank, falsely 00:13:56.519 --> 00:13:58.320 claiming it was his own personal investment. 00:13:58.490 --> 00:14:01.669 Wow. So he lied to regulators to make the bank 00:14:01.669 --> 00:14:03.889 look healthier than it was just to secure the 00:14:03.889 --> 00:14:08.029 taxpayer bailout. Exactly. But Sidge Tarp caught 00:14:08.029 --> 00:14:10.850 discrepancies and he was actually the first bank 00:14:10.850 --> 00:14:13.049 president criminally charged in relation to the 00:14:13.049 --> 00:14:15.289 Tarp program. OK. So the government is buying 00:14:15.289 --> 00:14:17.190 preferred stock. They have the warrants. They 00:14:17.190 --> 00:14:19.230 have the fraud investigators actively locking 00:14:19.230 --> 00:14:22.549 people up. But how did the broader banking industry 00:14:22.549 --> 00:14:25.129 actually behave once the checks cleared? Like, 00:14:25.169 --> 00:14:26.929 did the money do what it was supposed to do? 00:14:27.070 --> 00:14:29.190 Let's look at the primary goal sold to the American 00:14:29.190 --> 00:14:31.850 people, which was lending. The whole idea was 00:14:31.850 --> 00:14:34.750 to get banks to lend to consumers, small businesses 00:14:34.750 --> 00:14:37.450 and home buyers again. But a review by the New 00:14:37.450 --> 00:14:40.210 York Times of investor presentations and conference 00:14:40.210 --> 00:14:43.350 calls from bank executives found that very few 00:14:43.350 --> 00:14:46.350 banks actually cited lending as a priority for 00:14:46.350 --> 00:14:48.490 this money. And that is the part that makes people's 00:14:48.490 --> 00:14:51.059 blood boil. I mean, one bank chairman, Alan B. 00:14:51.159 --> 00:14:53.740 White of Plains Capital, literally called the 00:14:53.740 --> 00:14:57.259 massive cash infusion opportunity capital. Opportunity 00:14:57.259 --> 00:14:59.720 capital. Yeah. He noted on a call, and I quote, 00:15:00.159 --> 00:15:02.419 they didn't tell me I had to do anything particular 00:15:02.419 --> 00:15:05.279 with it. They viewed it as a no strings attached 00:15:05.279 --> 00:15:07.480 windfall from the taxpayers. Which is incredible. 00:15:07.860 --> 00:15:10.460 Many strong banks actually use the taxpayer money 00:15:10.460 --> 00:15:12.639 for consolidation instead of lending to Main 00:15:12.639 --> 00:15:15.100 Street. They use the government funds to buy 00:15:15.100 --> 00:15:17.500 up their weaker rivals. PNC Financial Services 00:15:17.500 --> 00:15:21.179 is the perfect example here. On October 24, 2008, 00:15:21.620 --> 00:15:24.440 PNC received seven point seven billion dollars 00:15:24.440 --> 00:15:27.379 in TART funds. Hours later, literally hours later, 00:15:27.399 --> 00:15:29.559 they announced an agreement to buy their longtime 00:15:29.559 --> 00:15:32.679 rival National City Corps at a massive bargain 00:15:32.679 --> 00:15:35.620 price. So the taxpayer money directly funded 00:15:35.620 --> 00:15:38.220 a corporate takeover. Then there was the lobbying 00:15:38.220 --> 00:15:41.580 aspect. During 2008, companies that received 00:15:41.580 --> 00:15:44.000 bailout money spent one hundred and fourteen 00:15:44.000 --> 00:15:47.419 million dollars on lobbying and campaign contributions. 00:15:47.559 --> 00:15:49.600 Wait, so they essentially used taxpayer -backed 00:15:49.600 --> 00:15:52.279 stability to fund efforts to influence the very 00:15:52.279 --> 00:15:55.059 lawmakers who bailed them out. Pretty much. Unbelievable. 00:15:55.879 --> 00:15:58.139 And what about those executive pay limits we 00:15:58.139 --> 00:16:00.240 talked about earlier, the ones meant to stop 00:16:00.240 --> 00:16:03.720 excessive bonuses? Well, Grave Crystal, a former 00:16:03.720 --> 00:16:06.159 compensation consultant, called the limits an 00:16:06.159 --> 00:16:10.100 absolute joke. Wall Street simply found loopholes. 00:16:10.360 --> 00:16:12.919 Because of course they did. If you can't pay 00:16:12.919 --> 00:16:16.139 a CEO a massive cash bonus, how do you get around 00:16:16.139 --> 00:16:19.220 the TARP rules? You defer the compensation. Banks 00:16:19.220 --> 00:16:21.139 simply converted those multi -million dollar 00:16:21.139 --> 00:16:23.899 cash bonuses into restricted stock units or other 00:16:23.899 --> 00:16:26.779 deferred assets. Ah, so the executives wouldn't 00:16:26.779 --> 00:16:28.879 get the money immediately, technically abiding 00:16:28.879 --> 00:16:30.799 by the letter of the short -term cash limit. 00:16:31.059 --> 00:16:32.940 Right, but they were still guaranteed massive 00:16:32.940 --> 00:16:35.240 payouts down the line once the government scrutiny 00:16:35.240 --> 00:16:37.820 faded. It just proved how incredibly difficult 00:16:37.820 --> 00:16:40.200 it is to regulate Wall Street compensation structures. 00:16:40.480 --> 00:16:42.740 There's another deeply troubling consequence 00:16:42.740 --> 00:16:45.279 buried in our sources regarding who actually 00:16:45.279 --> 00:16:48.360 got access to these lifelines. A study highlighted 00:16:48.360 --> 00:16:50.740 in the text found that in the Community Development 00:16:50.740 --> 00:16:53.740 Capital Initiative program, a typical white -owned 00:16:53.740 --> 00:16:56.440 bank was about 10 times more likely to receive 00:16:56.440 --> 00:16:59.679 TARP money than a black -owned bank. Even after 00:16:59.679 --> 00:17:01.519 controlling for other financial factors, yes. 00:17:01.580 --> 00:17:03.399 Wait, we can't just skip past that. Why did that 00:17:03.399 --> 00:17:05.519 happen? We're just reporting what the sources 00:17:05.519 --> 00:17:08.019 say here, but what was the mechanical reason 00:17:08.019 --> 00:17:11.200 for that disparity? It really reveals a profound 00:17:11.200 --> 00:17:13.720 systemic failure in how emergency bureaucracy 00:17:13.720 --> 00:17:17.259 functions. Larger, predominantly white -owned 00:17:17.259 --> 00:17:20.579 banks simply had better institutional access. 00:17:20.640 --> 00:17:23.430 Like better connections. Exactly. They had direct 00:17:23.430 --> 00:17:25.730 lines to Treasury officials, specialized lawyers 00:17:25.730 --> 00:17:28.710 on retainer, and the immense resources required 00:17:28.710 --> 00:17:31.750 to navigate the dense, complex tar paperwork 00:17:31.750 --> 00:17:34.130 immediately. And the minority -owned community 00:17:34.130 --> 00:17:36.309 banks. They often serve as the primary economic 00:17:36.309 --> 00:17:38.750 engines for marginalized communities, but they 00:17:38.750 --> 00:17:40.849 were stranded without that same rapid access 00:17:40.849 --> 00:17:43.710 to the government apparatus. Bureaucracy in a 00:17:43.710 --> 00:17:46.329 crisis almost always favors the well -connected. 00:17:46.430 --> 00:17:48.809 That's devastating. And as the broader banking 00:17:48.809 --> 00:17:51.309 sector stabilized, the well -connected banks 00:17:51.309 --> 00:17:53.549 started fighting back against the very protections 00:17:53.549 --> 00:17:56.589 the taxpayers demanded. The American Bankers 00:17:56.589 --> 00:17:59.750 Association actively lobbied Congress to cancel 00:17:59.750 --> 00:18:01.990 those equity warrants we discussed earlier. They 00:18:01.990 --> 00:18:05.069 actually had the audacity to call them an onerous 00:18:05.069 --> 00:18:08.950 exit fee. An onerous exit fee. I mean, to put 00:18:08.950 --> 00:18:11.369 that in perspective, if the government had simply 00:18:11.369 --> 00:18:14.049 canceled the warrants for Goldman Sachs alone, 00:18:14.490 --> 00:18:16.890 it would have amounted to a taxpayer subsidy 00:18:16.890 --> 00:18:19.849 to that one single bank of between $5 billion 00:18:19.849 --> 00:18:22.970 and $24 billion. Thankfully, they weren't canceled. 00:18:23.349 --> 00:18:25.690 And even Goldman Sachs publicly stated later 00:18:25.690 --> 00:18:27.630 that taxpayers should expect a decent return 00:18:27.630 --> 00:18:29.690 on the risk they took. But if you are listening 00:18:29.690 --> 00:18:31.250 to this, you have to be wondering something. 00:18:31.630 --> 00:18:34.069 If the whole point of TARP was to get banks to 00:18:34.069 --> 00:18:36.549 lend to consumers and small businesses, but the 00:18:36.549 --> 00:18:39.009 banks just hoarded the money, used it to buy 00:18:39.009 --> 00:18:41.869 each other, deferred their bonuses, spent millions 00:18:41.869 --> 00:18:44.809 lobbying, and left minority -owned banks behind, 00:18:45.430 --> 00:18:47.569 didn't the program fundamentally fail its primary 00:18:47.569 --> 00:18:50.529 objective? Well, that is the great paradox of 00:18:50.529 --> 00:18:53.599 TARP. If you judge it strictly by the goal of 00:18:53.599 --> 00:18:55.900 stimulating consumer lending and helping Main 00:18:55.900 --> 00:18:58.599 Street in the short term, its execution was highly 00:18:58.599 --> 00:19:01.259 flawed. The money just did not flow down to local 00:19:01.259 --> 00:19:03.059 businesses and home buyers in the way it was 00:19:03.059 --> 00:19:06.089 advertised. Right. However... If we look at the 00:19:06.089 --> 00:19:08.950 broader existential goal, preventing a complete 00:19:08.950 --> 00:19:11.329 cascading collapse of the global financial sector, 00:19:11.910 --> 00:19:14.309 the program was achieved. It stopped the panic. 00:19:14.569 --> 00:19:17.650 Yes. It recapitalized the system. It kept ATMs 00:19:17.650 --> 00:19:20.029 working. It achieved its ultimate objective, 00:19:20.069 --> 00:19:22.970 even though the mechanics of how it did so heavily 00:19:22.970 --> 00:19:25.490 favored the biggest, most powerful players. Which 00:19:25.490 --> 00:19:28.069 brings us to the final tally, because despite 00:19:28.069 --> 00:19:30.269 all the outrage, the controversies, the hoarding, 00:19:30.269 --> 00:19:33.059 and the fraud, The ultimate financial outcome 00:19:33.059 --> 00:19:35.339 of TARP is entirely counterintuitive to what 00:19:35.339 --> 00:19:37.660 most people probably remember. Yeah, the program 00:19:37.660 --> 00:19:40.859 essentially ended in December 2014 when the Treasury 00:19:40.859 --> 00:19:43.059 sold its remaining holdings in Ally Financial. 00:19:43.640 --> 00:19:45.339 And when the dust finally settled and the books 00:19:45.339 --> 00:19:48.339 were closed, the numbers were incredibly surprising. 00:19:48.579 --> 00:19:50.640 Let's go through them. The government dispersed 00:19:50.640 --> 00:19:54.359 about $426 .4 billion over the life of the program. 00:19:54.700 --> 00:19:57.440 But total proceeds, meaning money paid back through 00:19:57.440 --> 00:20:00.359 interest, dividends, and selling off those angel 00:20:00.359 --> 00:20:04.960 investor warrants came to $441 .7 billion. Meaning 00:20:04.960 --> 00:20:07.319 on paper, the U .S. Treasury actually generated 00:20:07.319 --> 00:20:12.019 a $15 .3 billion surplus. A profit. And the breakdown 00:20:12.019 --> 00:20:14.299 of where that massive amount of money went is 00:20:14.299 --> 00:20:16.200 also really revealing. It wasn't just banks, 00:20:16.319 --> 00:20:19.180 right? No, it wasn't. About $204 .9 billion went 00:20:19.180 --> 00:20:21.559 to banks through the capital purchase program. 00:20:22.079 --> 00:20:26.289 But $79 .7 billion went to automakers, specifically 00:20:26.289 --> 00:20:29.089 General Motors and Chrysler, to prevent the total 00:20:29.089 --> 00:20:31.309 collapse of the American manufacturing supply 00:20:31.309 --> 00:20:34.609 chain. Wow. And $67 .8 billion went to the insurance 00:20:34.609 --> 00:20:36.589 giant, AIG, because their failure would have 00:20:36.589 --> 00:20:39.650 brought down the banks anyway. Plus, $45 .6 billion 00:20:39.650 --> 00:20:41.910 was allocated for housing and foreclosure assistance. 00:20:42.029 --> 00:20:44.130 So wait, the government bailed out Wall Street? 00:20:44.329 --> 00:20:46.869 saved the American auto industry from total extinction 00:20:46.869 --> 00:20:49.690 and actually made a $15 billion profit at the 00:20:49.690 --> 00:20:51.609 end of the day. Well, there is a very significant 00:20:51.609 --> 00:20:54.069 economic catch to that profit calculation. Ah, 00:20:54.069 --> 00:20:56.250 there's always a catch. What is it? The entire 00:20:56.250 --> 00:20:58.890 TARP program was funded by deficit spending. 00:21:00.029 --> 00:21:01.970 The government did not have hundreds of billions 00:21:01.970 --> 00:21:03.769 of dollars just sitting in a check -in count. 00:21:04.329 --> 00:21:06.369 They had to borrow the money they injected into 00:21:06.369 --> 00:21:10.029 the system by issuing Treasury bonds. Okay, and 00:21:10.029 --> 00:21:13.450 borrowing money. costs money. Exactly. During 00:21:13.450 --> 00:21:16.549 2008 and 2009, the interest rate on that newly 00:21:16.549 --> 00:21:19.609 issued debt was between 2 and nearly 4 percent. 00:21:20.390 --> 00:21:22.769 That means the cost to service the debt the government 00:21:22.769 --> 00:21:25.630 incurred just to fund the TARP program was at 00:21:25.630 --> 00:21:29.250 least 8 to 16 billion dollars a year. So what 00:21:29.250 --> 00:21:31.849 does this all mean? It's exactly like borrowing 00:21:31.849 --> 00:21:34.490 money on a high -interest credit card to invest 00:21:34.490 --> 00:21:36.730 in a friend's struggling business. That's a great 00:21:36.730 --> 00:21:38.549 way to look at it. Yeah, like sure, you might 00:21:38.549 --> 00:21:40.710 make a $15 return on the actual investment when 00:21:40.710 --> 00:21:42.130 your friend pays you back, and you can point 00:21:42.130 --> 00:21:44.269 to that and say, look, I made a profit. But if 00:21:44.269 --> 00:21:46.789 you paid $50 in credit card interest over five 00:21:46.789 --> 00:21:48.970 years just to get the cash to make the investment 00:21:48.970 --> 00:21:51.890 in the first place, your profit is entirely an 00:21:51.890 --> 00:21:54.269 illusion. The interest payments completely eat 00:21:54.269 --> 00:21:56.529 the games. If we connect this to the bigger picture. 00:21:56.759 --> 00:21:59.960 The claim that the government explicitly profited 00:21:59.960 --> 00:22:02.680 from TARP is highly debatable when you factor 00:22:02.680 --> 00:22:06.799 in that massive cost of borrowing. the macroeconomic 00:22:06.799 --> 00:22:10.660 impact is undeniable. In a 2012 survey of leading 00:22:10.660 --> 00:22:12.579 economists by the University of Chicago Booth 00:22:12.579 --> 00:22:15.319 School of Business, there was wide agreement 00:22:15.319 --> 00:22:18.460 that unemployment at the end of 2010 would have 00:22:18.460 --> 00:22:21.079 been much, much higher without the TARP program. 00:22:21.440 --> 00:22:23.500 Historically speaking, how does this compare 00:22:23.500 --> 00:22:25.859 to other times the government had to step in 00:22:25.859 --> 00:22:28.160 and save the day? We could look at the Reconstruction 00:22:28.160 --> 00:22:30.420 Finance Corporation in the 1930s during the Great 00:22:30.420 --> 00:22:32.680 Depression, where the government bought stock 00:22:32.680 --> 00:22:35.859 in about 6 ,000 distressed banks. When the economy 00:22:35.859 --> 00:22:38.539 finally stabilized, they sold the stock and roughly 00:22:38.539 --> 00:22:40.920 broke even. OK, what about more recently? Or 00:22:40.920 --> 00:22:43.299 look at the savings and loan crisis in the 1980s. 00:22:43.380 --> 00:22:46.079 The bailout cost to the S &L crisis amounted 00:22:46.079 --> 00:22:49.259 to about 3 .2 % of GDP, and much of that was 00:22:49.259 --> 00:22:51.759 never recovered. Yeah, a 2019 study estimated 00:22:51.759 --> 00:22:55.140 that the total direct cost of all the 2008 crisis 00:22:55.140 --> 00:22:57.970 -related bailouts including TARP, the Federal 00:22:57.970 --> 00:23:00.069 Reserve Lending Programs, and the Fannie Mae 00:23:00.069 --> 00:23:03.049 and Freddie Mac bailouts, was about $500 billion, 00:23:03.450 --> 00:23:07.829 or roughly 3 .5 % of GDP in 2009. But TARP itself 00:23:07.829 --> 00:23:10.849 was different. Yes. What makes TARP unique among 00:23:10.849 --> 00:23:13.049 these interventions is that on the principal 00:23:13.049 --> 00:23:15.650 investments made by the fund itself, the government 00:23:15.650 --> 00:23:18.589 actually got its money back. In the realm of 00:23:18.589 --> 00:23:20.950 massive government crisis interventions, getting 00:23:20.950 --> 00:23:23.309 the principal back is a remarkably rare feat. 00:23:23.519 --> 00:23:25.640 As we wrap this up for you listening, diving 00:23:25.640 --> 00:23:28.299 into the granular facts of TARP really reveals 00:23:28.299 --> 00:23:30.700 something profound about how our modern economic 00:23:30.700 --> 00:23:33.779 system operates. Massive government interventions 00:23:33.779 --> 00:23:37.000 in a time of crisis are incredibly messy. Highly 00:23:37.000 --> 00:23:39.980 messy. They are vastly unequal in their distribution, 00:23:40.339 --> 00:23:42.920 often leaving smaller, marginalized institutions 00:23:42.920 --> 00:23:46.019 totally out in the cold. And the people who cause 00:23:46.019 --> 00:23:48.579 the problem, the executives chasing volatile 00:23:48.579 --> 00:23:51.380 returns, often end up benefiting the most from 00:23:51.380 --> 00:23:54.470 the solution. It's true. And yet, mathematically 00:23:54.470 --> 00:23:57.230 and systemically, the intervention was successful 00:23:57.230 --> 00:23:59.630 in preventing a far worse outcome for everyday 00:23:59.630 --> 00:24:02.490 people. The absolute collapse of the global economy 00:24:02.490 --> 00:24:04.990 was avoided. It's the ultimate double -edged 00:24:04.990 --> 00:24:07.950 sword of economic policy. The system survived, 00:24:08.390 --> 00:24:11.670 the ATMs kept dispensing cash, but the precedent 00:24:11.670 --> 00:24:14.450 set during those chaotic weens in 2008 will echo 00:24:14.450 --> 00:24:16.869 for decades. Absolutely. Which leaves us with 00:24:16.869 --> 00:24:19.150 a final thought for you to mull over. We started 00:24:19.150 --> 00:24:21.390 by talking about plumbing. The government stepped 00:24:21.390 --> 00:24:24.029 in, acted as the ultimate plumber, replaced the 00:24:24.029 --> 00:24:26.369 damaged pipes with cash, and even managed to 00:24:26.369 --> 00:24:28.490 get their plumbing feedback. Right. But if the 00:24:28.490 --> 00:24:30.569 government has proven that it can and will step 00:24:30.569 --> 00:24:33.150 in with hundreds of billions of dollars to save 00:24:33.369 --> 00:24:35.910 too big to fail, institutions from their own 00:24:35.910 --> 00:24:39.150 toxic pipes, what incentive do those massive 00:24:39.150 --> 00:24:41.930 institutions have to avoid making the exact same 00:24:41.930 --> 00:24:44.210 reckless gambles today? If Wall Street knows 00:24:44.210 --> 00:24:46.309 the deep pocket of plumber is always on standby, 00:24:46.750 --> 00:24:49.089 does the success of the 2008 rescue virtually 00:24:49.089 --> 00:24:52.009 guarantee the next crisis? Something to think 00:24:52.009 --> 00:24:52.250 about.