WEBVTT 00:00:00.000 --> 00:00:02.759 In 2008, the United States government authorized 00:00:02.759 --> 00:00:08.740 a staggering $700 billion to basically buy up 00:00:08.740 --> 00:00:11.300 toxic, completely worthless mortgages. Right. 00:00:11.419 --> 00:00:13.480 The pitch to the public was actually pretty simple. 00:00:13.660 --> 00:00:15.500 Like, just clean up the neighborhood's financial 00:00:15.500 --> 00:00:18.120 trash so we can save the global economy. Yeah. 00:00:18.179 --> 00:00:20.100 But almost overnight, the government took all 00:00:20.100 --> 00:00:22.280 that money, completely abandoned that original 00:00:22.280 --> 00:00:24.899 plan, and used it to quietly become the largest 00:00:24.899 --> 00:00:27.100 equity partner in the history of private banking. 00:00:27.300 --> 00:00:30.039 It's pretty wild. And welcome to this deep dive. 00:00:30.559 --> 00:00:33.119 Today we're pointing a massive spotlight at the 00:00:33.119 --> 00:00:35.299 Troubled Asset Release Program, which is universally 00:00:35.299 --> 00:00:38.320 known as TARP. We really have a mountain of source 00:00:38.320 --> 00:00:40.640 material to unpack today. It's anchored by this 00:00:40.640 --> 00:00:43.119 really comprehensive Wikipedia article that breaks 00:00:43.119 --> 00:00:46.500 down TARP's origins, the underlying mechanics, 00:00:46.600 --> 00:00:49.979 and its highly debated aftermath. Exactly. And 00:00:49.979 --> 00:00:53.140 our mission today is to uncover the reality behind 00:00:53.140 --> 00:00:56.380 that massive $700 billion headline. Because we 00:00:56.380 --> 00:00:58.119 want to explore how a program that was designed 00:00:58.119 --> 00:01:01.560 to buy bad assets just radically changed course 00:01:01.560 --> 00:01:04.260 and how regulators ended up picking winners and 00:01:04.260 --> 00:01:06.159 losers. Right. And we're going to look into whether 00:01:06.159 --> 00:01:09.180 the official claim that TARP like made a profit 00:01:09.180 --> 00:01:12.400 for you, the taxpayer, actually holds up to scrutiny. 00:01:12.640 --> 00:01:15.980 So, think back to your own memory of the 2008 00:01:15.980 --> 00:01:18.500 panic. Whether you're trying to understand the 00:01:18.500 --> 00:01:21.579 roots of modern government interventions or you 00:01:21.579 --> 00:01:23.939 just want to know where hundreds of billions 00:01:23.939 --> 00:01:26.719 of your tax dollars actually went, this deep 00:01:26.719 --> 00:01:29.099 dive is going to give you that definitive, aha, 00:01:29.459 --> 00:01:32.739 perspective on crisis economics. But before we 00:01:32.739 --> 00:01:34.879 get into the weeds, we definitely need to set 00:01:34.879 --> 00:01:37.040 some ground rules. Oh, absolutely. Because the 00:01:37.040 --> 00:01:39.200 historical texts and the financial records we're 00:01:39.200 --> 00:01:41.920 analyzing today, well, they contain some very 00:01:42.030 --> 00:01:44.689 charged realities. Yeah, I mean we're talking 00:01:44.689 --> 00:01:47.450 about massive government bailouts, executive 00:01:47.450 --> 00:01:51.430 compensation, and the allocation of just unprecedented 00:01:51.430 --> 00:01:54.510 amounts of taxpayer wealth. Right, so to you 00:01:54.510 --> 00:01:56.980 listening... We really need to explicitly state 00:01:56.980 --> 00:01:59.420 that we are not taking any political sides today. 00:01:59.579 --> 00:02:01.780 Not at all. We are not endorsing the viewpoints 00:02:01.780 --> 00:02:03.879 of the original sources and we're not here to 00:02:03.879 --> 00:02:06.019 play Monday morning quarterback for either side 00:02:06.019 --> 00:02:08.939 of the political aisle. No, we are strictly here 00:02:08.939 --> 00:02:12.379 to impartially unpack the historical and factual 00:02:12.379 --> 00:02:15.099 mechanics of TARP exactly as they are documented 00:02:15.099 --> 00:02:17.379 in our source material. So let's set the stage. 00:02:17.560 --> 00:02:21.599 The year is 2008. The Emergency Economic Stabilization 00:02:21.599 --> 00:02:24.300 Act is signed into law by President George W. 00:02:24.360 --> 00:02:27.879 Bush. And the initial authorization is that massive 00:02:27.879 --> 00:02:31.689 $700 billion, though... It's worth noting it 00:02:31.689 --> 00:02:35.469 was later reduced to $475 billion by the Dodd 00:02:35.469 --> 00:02:37.490 -Frank Act. Right. And the original blueprint 00:02:37.490 --> 00:02:40.810 for TARP was for the Treasury to operate what 00:02:40.810 --> 00:02:43.129 they called a revolving purchase facility. Which 00:02:43.129 --> 00:02:45.830 basically meant they were targeting illiquid, 00:02:46.090 --> 00:02:48.930 really difficult to value, troubled assets. Mostly 00:02:48.930 --> 00:02:50.750 residential and commercial mortgages, right? 00:02:50.770 --> 00:02:53.569 Yeah. And the complex collateralized debt obligations, 00:02:53.750 --> 00:02:56.389 or CDOs, that were built on top of them. But 00:02:56.389 --> 00:02:58.169 crucially, these assets had to be originated 00:02:58.169 --> 00:03:02.449 on or before March Because that was the day Bear 00:03:02.449 --> 00:03:04.789 Stearns collapsed. Exactly. But, you know, let's 00:03:04.789 --> 00:03:06.949 actually break down what a CDO is because I think 00:03:06.949 --> 00:03:09.310 understanding the asset is key to understanding 00:03:09.310 --> 00:03:11.590 the whole panic. Oh, for sure. Think of a CDO 00:03:11.590 --> 00:03:14.569 like a financial smoothie. OK, a smoothie. Yeah. 00:03:14.810 --> 00:03:17.750 So for years, banks had been taking a few prime 00:03:17.750 --> 00:03:20.870 healthy mortgages, which we can call the strawberries, 00:03:21.310 --> 00:03:24.889 and blending them with thousands of highly risky 00:03:24.889 --> 00:03:27.610 subprime mortgages. Which is basically the dirt. 00:03:27.750 --> 00:03:30.729 Right, the dirt. all together, got the reading 00:03:30.729 --> 00:03:33.949 agencies to slap a AAA label on it, and sold 00:03:33.949 --> 00:03:37.590 the whole glass to global investors as this premium 00:03:37.590 --> 00:03:39.909 health drink. But when the housing market started 00:03:39.909 --> 00:03:42.009 to crack, everybody suddenly realized they were 00:03:42.009 --> 00:03:44.370 well, drinking dirt. Yeah. And the real problem 00:03:44.370 --> 00:03:47.710 was nobody knew the exact ratio of dirt to fruit 00:03:47.710 --> 00:03:50.310 in any given glass. Oh, wow. So no one knew what 00:03:50.310 --> 00:03:52.669 they were actually holding? Exactly. And that 00:03:52.669 --> 00:03:55.310 uncertainty caused the interbank lending market 00:03:55.310 --> 00:03:58.050 to just completely freeze up. Because banks rely 00:03:58.050 --> 00:04:00.849 on making those short -term overnight loans to 00:04:00.849 --> 00:04:03.650 each other just to, you know, meet basic reserve 00:04:03.650 --> 00:04:05.449 requirements and keep the financial plumbing 00:04:05.449 --> 00:04:08.310 working. Right. But Bank A wouldn't lend to Bank 00:04:08.310 --> 00:04:11.530 B because Bank A suspected Bank B's vault was 00:04:11.530 --> 00:04:14.349 just full of toxic smoothies. That makes sense. 00:04:14.610 --> 00:04:16.970 So the goal of TARP wasn't just to buy bad paper. 00:04:17.329 --> 00:04:19.670 It was to remove the uncertainty so banks would 00:04:19.670 --> 00:04:21.550 actually trust each other enough to start lending 00:04:21.550 --> 00:04:23.930 again. Yeah. The government's hypothesis was 00:04:23.930 --> 00:04:27.490 that these assets were vastly oversold. The panic 00:04:27.490 --> 00:04:30.990 had driven the prices down to rock bottom, reflecting 00:04:30.990 --> 00:04:33.910 this massive default rate that hadn't really 00:04:33.910 --> 00:04:36.509 materialized yet. So the Treasury decides to 00:04:36.509 --> 00:04:39.449 set up a mechanism to buy them. I kind of look 00:04:39.449 --> 00:04:42.970 at this original plan, like the government deciding 00:04:42.970 --> 00:04:46.290 to open a massive thrift store for terrible financial 00:04:46.290 --> 00:04:48.329 decisions. The thrift store, yeah. They announced 00:04:48.329 --> 00:04:50.970 to the banks, bring us your trash and we will 00:04:50.970 --> 00:04:53.689 buy it. But, you know, if you buy up all the 00:04:53.689 --> 00:04:55.389 trash in the neighborhood at a discount, does 00:04:55.389 --> 00:04:57.490 it actually make the neighborhood function again 00:04:57.490 --> 00:04:59.870 or just encourage people to throw out more trash? 00:05:00.050 --> 00:05:02.470 That's the big question. And they planned to 00:05:02.470 --> 00:05:05.110 use a very specific mechanism to do this buying, 00:05:05.430 --> 00:05:07.689 which was a reverse auction. Wait, how does a 00:05:07.689 --> 00:05:09.949 reverse auction? Well, in a standard option, 00:05:10.129 --> 00:05:12.850 you have one seller and many buyers who bid the 00:05:12.850 --> 00:05:15.250 price up, right? Right. In a reverse auction, 00:05:15.689 --> 00:05:17.709 the government is the single buyer with a giant 00:05:17.709 --> 00:05:20.550 pot of money, and the sellers, in this case, 00:05:20.670 --> 00:05:22.970 the banks, compete by bidding the price down. 00:05:23.069 --> 00:05:25.209 Oh, I see. So the Treasury would basically say, 00:05:25.269 --> 00:05:29.050 hey, we have $50 billion to buy CDOs. Submit 00:05:29.050 --> 00:05:31.750 your offers. The bank willing to take the biggest 00:05:31.750 --> 00:05:34.209 loss. you know, to sell their assets for the 00:05:34.209 --> 00:05:36.949 cheapest price wins the government cash. The 00:05:36.949 --> 00:05:39.629 theory being that this would help discover a 00:05:39.629 --> 00:05:42.189 true market price for assets that literally no 00:05:42.189 --> 00:05:44.490 one else wanted. Exactly. It cleans up the balance 00:05:44.490 --> 00:05:46.649 sheets and eventually the government could theoretically 00:05:46.649 --> 00:05:49.129 sell them later at a profit when prices recovered. 00:05:49.230 --> 00:05:52.689 But. there is a massive flaw in that plan, right? 00:05:52.750 --> 00:05:54.850 Which is why it completely fell apart. A huge 00:05:54.850 --> 00:05:57.529 flaw. Because if a bank wins that reverse auction 00:05:57.529 --> 00:06:00.750 and sells a toxic CDO to the government for, 00:06:00.750 --> 00:06:04.529 let's say, 30 cents on the dollar, accounting 00:06:04.529 --> 00:06:06.850 rules step in. Right, specifically mark -to -market 00:06:06.850 --> 00:06:09.600 accounting. Yeah. That rule might force that 00:06:09.600 --> 00:06:12.860 bank to then revalue all the other similar CDOs 00:06:12.860 --> 00:06:15.360 sitting in its vault at that new official 30 00:06:15.360 --> 00:06:17.779 cent price tag. And that is the exact mechanism 00:06:17.779 --> 00:06:20.620 that doomed the reverse auction. Recognizing 00:06:20.620 --> 00:06:24.000 those massive unrealized losses all at once would 00:06:24.000 --> 00:06:26.120 wipe out a bank's capital reserves instantly. 00:06:26.319 --> 00:06:29.019 It would literally trigger the exact insolvency 00:06:29.019 --> 00:06:31.250 the government was trying to prevent. Exactly. 00:06:31.730 --> 00:06:34.129 The banks simply couldn't afford to sell at the 00:06:34.129 --> 00:06:36.870 true market clearing price. It was a cash 22. 00:06:37.149 --> 00:06:39.589 Which brings us to one of the most dramatic pivots 00:06:39.589 --> 00:06:41.769 in modern economic history. Yeah, the thrift 00:06:41.769 --> 00:06:44.500 store concept was totally scrapped. The reverse 00:06:44.500 --> 00:06:47.259 auction was just thrown out the window. And the 00:06:47.259 --> 00:06:49.740 catalyst for this abrupt shift actually came 00:06:49.740 --> 00:06:52.740 from across the Atlantic. Right. The UK prime 00:06:52.740 --> 00:06:55.220 minister, Gordon Brown, visited the White House 00:06:55.220 --> 00:06:57.920 for an international summit and he brought a 00:06:57.920 --> 00:07:00.000 completely different blueprint. Because the UK 00:07:00.000 --> 00:07:02.519 wasn't bothering with the impossible math of 00:07:02.519 --> 00:07:05.500 pricing toxic mortgages. No, they weren't. Their 00:07:05.500 --> 00:07:07.620 approach to mitigating the credit squeeze was 00:07:07.620 --> 00:07:11.129 a three part plan. Funding. debt guarantees, 00:07:11.689 --> 00:07:14.170 and crucially, infusing capital directly into 00:07:14.170 --> 00:07:17.050 the banks. Direct cash injections. Yep. The U 00:07:17.050 --> 00:07:19.129 .S. Treasury looked at this, realized their whole 00:07:19.129 --> 00:07:21.329 auction plan was way too slow and complicated, 00:07:21.910 --> 00:07:24.110 and rapidly pivoted to what became known as the 00:07:24.110 --> 00:07:26.189 capital purchase program. So they took the first 00:07:26.189 --> 00:07:29.769 $250 billion of TARP funds and used it to buy 00:07:29.769 --> 00:07:32.870 stakes in hundreds of U .S. banks. They did this 00:07:32.870 --> 00:07:35.509 by purchasing preferred stock. And this is a 00:07:35.509 --> 00:07:38.420 really crucial detail. OK, why preferred stock? 00:07:38.959 --> 00:07:41.379 Well, preferred stock is a unique financial instrument. 00:07:41.819 --> 00:07:44.519 It sits right below debt and above common equity 00:07:44.519 --> 00:07:46.860 in a company's capital structure. Right. So for 00:07:46.860 --> 00:07:49.459 the banks, issuing preferred stock to the government 00:07:49.459 --> 00:07:52.860 was kind of a magic bullet. It instantly boosted 00:07:52.860 --> 00:07:55.439 their tier one capital, which is the core measure 00:07:55.439 --> 00:07:57.620 of a bank's financial strength. And it did that 00:07:57.620 --> 00:08:00.240 without forcing them to value their toxic assets. 00:08:00.459 --> 00:08:02.439 Exactly. And without diluting the voting rights 00:08:02.439 --> 00:08:05.720 of the bank's existing leadership. That is wild. 00:08:06.180 --> 00:08:08.500 I mean, it's an incredibly pragmatic solution 00:08:08.500 --> 00:08:11.420 to a math problem, but it fundamentally transformed 00:08:11.420 --> 00:08:13.620 the U .S. government's role in the economy. It 00:08:13.620 --> 00:08:15.759 really did. I mean, think about the irony here. 00:08:16.110 --> 00:08:19.670 How does the US, which is the global poster child 00:08:19.670 --> 00:08:22.550 for free market capitalism, end up copying a 00:08:22.550 --> 00:08:25.750 European model that essentially borders on nationalizing 00:08:25.750 --> 00:08:28.569 the banking sector? It's a massive shift. But 00:08:28.569 --> 00:08:31.129 it was just the pragmatic reality of a crisis. 00:08:31.810 --> 00:08:34.149 Direct capital injections boosted solvency so 00:08:34.149 --> 00:08:36.990 much faster than valuing toxic mortgages ever 00:08:36.990 --> 00:08:39.289 could. But it changed the government overnight 00:08:39.289 --> 00:08:41.830 from being a buyer of distressed assets to being 00:08:41.830 --> 00:08:44.330 the largest equity partner in private enterprise. 00:08:45.080 --> 00:08:48.000 The scale of these capital injections was just 00:08:48.000 --> 00:08:50.740 staggering. Like Citigroup and Bank of America 00:08:50.740 --> 00:08:56.000 each received $45 billion. Wow. $45 billion each. 00:08:56.179 --> 00:08:59.620 Each. But the scope quickly expanded way beyond 00:08:59.620 --> 00:09:02.720 traditional banking. The Treasury injected $79 00:09:02.720 --> 00:09:06.799 .7 billion into automakers. Specifically General 00:09:06.799 --> 00:09:09.019 Motors and Chrysler, right? Yeah. And another 00:09:09.019 --> 00:09:12.059 $67 .8 billion went to the insurance giant, AIG. 00:09:12.220 --> 00:09:15.730 OK, hold on. Why are car companies and an insurance 00:09:15.730 --> 00:09:18.830 firm getting money from a program that was explicitly 00:09:18.830 --> 00:09:21.429 designed to relieve troubled mortgages? One word, 00:09:22.230 --> 00:09:25.250 contagion. Contagion. Yeah. AIG wasn't just selling 00:09:25.250 --> 00:09:27.350 regular life insurance. Their financial products 00:09:27.350 --> 00:09:29.889 division was selling credit default swaps. Ah, 00:09:30.129 --> 00:09:32.090 great. And a credit default swap is essentially 00:09:32.090 --> 00:09:34.669 an insurance policy on those toxic CDOs we talked 00:09:34.669 --> 00:09:36.610 about earlier. So Wall Street was buying these 00:09:36.610 --> 00:09:38.850 policies by the billions. Exactly. So when the 00:09:38.850 --> 00:09:41.940 housing market collapsed, AIG suddenly owed billions 00:09:41.940 --> 00:09:44.440 of dollars in payouts to banks all over the world. 00:09:44.759 --> 00:09:47.399 And if AIG goes bankrupt? Then the banks holding 00:09:47.399 --> 00:09:50.059 those policies don't get paid, and the entire 00:09:50.059 --> 00:09:52.340 global financial system collapses like a row 00:09:52.340 --> 00:09:55.299 of dominoes. Wow. So the government injected 00:09:55.299 --> 00:09:59.759 that $67 .8 billion into AIG specifically to 00:09:59.759 --> 00:10:01.440 funnel that money straight through them to the 00:10:01.440 --> 00:10:04.259 banks just to stop the chain reaction. That is 00:10:04.259 --> 00:10:06.779 incredible. And I guess the automakers were similarly 00:10:06.779 --> 00:10:09.120 intertwined. Yeah, their massive finance arms 00:10:09.120 --> 00:10:11.879 and sprawling supply chains were just deeply 00:10:11.879 --> 00:10:14.480 embedded in those frozen credit markets. But, 00:10:14.620 --> 00:10:17.019 you know, with limited funds and the entire economy 00:10:17.019 --> 00:10:19.759 teetering, regulators had to make hard choices 00:10:19.759 --> 00:10:21.620 about who actually got a lifeline. I mean, they 00:10:21.620 --> 00:10:24.059 couldn't save everyone. No, they couldn't. So 00:10:24.059 --> 00:10:26.100 to decide who would get the money and survive, 00:10:26.779 --> 00:10:29.059 regulators relied on a confidential rating system 00:10:29.059 --> 00:10:32.450 known as Camels. Camels. Like the animal. Yeah, 00:10:32.470 --> 00:10:34.590 spelled exactly like the animal. It stands for 00:10:34.590 --> 00:10:37.450 capital adequacy, assets, management capability, 00:10:37.730 --> 00:10:40.029 earnings, liquidity, and sensitivity to market 00:10:40.029 --> 00:10:43.110 risk. Got it. Regulators use this system to secretly 00:10:43.110 --> 00:10:46.070 classify the nation's 8 ,500 banks on a scale 00:10:46.070 --> 00:10:49.629 of one to five. So a ranking of one meant a bank 00:10:49.629 --> 00:10:52.809 was fundamentally sound and a prime candidate 00:10:52.809 --> 00:10:54.909 for government capital. Right. And a ranking 00:10:54.909 --> 00:10:58.090 of five meant they were weak, highly vulnerable 00:10:58.090 --> 00:11:02.269 and honestly likely to be left to fail. So the 00:11:02.269 --> 00:11:04.750 government was actively deciding which institutions 00:11:04.750 --> 00:11:07.590 would live or die. They were performing financial 00:11:07.590 --> 00:11:10.250 triage. Exactly. They weren't bailing out the 00:11:10.250 --> 00:11:12.909 weakest links. They were heavily fortifying the 00:11:12.909 --> 00:11:15.389 survivors. They looked at who had been profitable, 00:11:15.769 --> 00:11:17.669 who had management that could weather the storm, 00:11:17.750 --> 00:11:20.509 and they concentrated the capital right there. 00:11:20.720 --> 00:11:23.120 But stepping in as an equity partner with hundreds 00:11:23.120 --> 00:11:25.320 of billions of taxpayer dollars means you have 00:11:25.320 --> 00:11:27.240 to protect the taxpayer. Yeah, you would hope 00:11:27.240 --> 00:11:29.799 so. So the Emergency Economic Stabilization Act 00:11:29.799 --> 00:11:32.919 did come with strings attached. If a bank took 00:11:32.919 --> 00:11:35.399 TARP money, they were forced to issue equity 00:11:35.399 --> 00:11:37.840 warrants to the Treasury. And a warrant is basically 00:11:37.840 --> 00:11:39.860 a security that gives the holder the right to 00:11:39.860 --> 00:11:42.419 purchase shares of a company at a specific, fixed 00:11:42.419 --> 00:11:45.440 price in the future. Exactly. It is pure upside 00:11:45.440 --> 00:11:48.100 protection. So if a bank uses taxpayer money 00:11:48.100 --> 00:11:50.549 to survive... And its stock price eventually 00:11:50.549 --> 00:11:54.769 skyrockets to, say, $50 a share. But the government 00:11:54.769 --> 00:11:57.710 holds a warrant to buy it at $10. The taxpayer 00:11:57.710 --> 00:12:00.870 gets to capture that massive $40 profit spread. 00:12:01.529 --> 00:12:04.669 Yep. And alongside those warrants, Congress imposed 00:12:04.669 --> 00:12:07.730 strict limits on executive compensation for the 00:12:07.730 --> 00:12:10.409 top earners at institutions taking significant 00:12:10.409 --> 00:12:12.929 TARP funds. They capped the annual corporate 00:12:12.929 --> 00:12:16.110 tax deduction for executive pay at $500 ,000, 00:12:16.169 --> 00:12:19.309 didn't they? Yes. And they mandated clawbacks, 00:12:19.809 --> 00:12:22.870 meaning if a bonus was paid out based on financial 00:12:22.870 --> 00:12:25.590 data that later proved to be false, the executive 00:12:25.590 --> 00:12:27.590 actually had to return the money. Oh, that's 00:12:27.590 --> 00:12:30.190 interesting. And they strictly prohibited golden 00:12:30.190 --> 00:12:32.049 parachutes, you know, those multimillion dollar 00:12:32.049 --> 00:12:34.049 exit packages executives normally receive when 00:12:34.049 --> 00:12:36.309 they get fired or resign. So on paper, this sounds 00:12:36.309 --> 00:12:38.710 like a highly disciplined rescue package. You've 00:12:38.710 --> 00:12:41.250 got upside for the taxpayer, pay caps for the 00:12:41.250 --> 00:12:44.409 executives. And the stated overarching goal was 00:12:44.409 --> 00:12:46.549 to unfreeze the credit markets so banks would 00:12:46.549 --> 00:12:48.529 start lending to consumers and small businesses 00:12:48.529 --> 00:12:51.169 again. Right. That was the macro goal, saving 00:12:51.169 --> 00:12:53.330 the system and getting money flowing to the public. 00:12:53.470 --> 00:12:55.409 But the historical record shows a completely 00:12:55.409 --> 00:12:57.730 different reality on the ground. Oh, totally. 00:12:57.950 --> 00:12:59.970 If you look at a review conducted by the New 00:12:59.970 --> 00:13:02.590 York Times of investor presentations and conference 00:13:02.590 --> 00:13:05.789 calls from that exact period, you find that very 00:13:05.789 --> 00:13:08.429 few bank executives actually cited consumer lending 00:13:08.429 --> 00:13:11.789 as a priority for their TARP funds. Really? So 00:13:11.789 --> 00:13:14.809 what did they view the money as? An overwhelming 00:13:14.809 --> 00:13:16.929 majority of them viewed the capital injection 00:13:16.929 --> 00:13:19.990 as basically a no strings attached windfall. 00:13:20.129 --> 00:13:23.809 Wow. They openly told their investors they plan 00:13:23.809 --> 00:13:26.049 to use the money to pay down their own internal 00:13:26.049 --> 00:13:29.769 debt. build up a war chest for the future, or, 00:13:30.029 --> 00:13:32.830 and this is the most controversial part, acquire 00:13:32.830 --> 00:13:34.710 their struggling competitors. It's like giving 00:13:34.710 --> 00:13:37.490 your teenager emergency cash to put gas in their 00:13:37.490 --> 00:13:39.409 car so they can get to work and be responsible. 00:13:39.529 --> 00:13:41.870 Right. And instead, they take your money, walk 00:13:41.870 --> 00:13:44.509 down the street, and use it to execute a hostile 00:13:44.509 --> 00:13:47.409 takeover of their rival's lemonade stand. That 00:13:47.409 --> 00:13:49.990 is a perfect analogy. The government's incredibly 00:13:49.990 --> 00:13:52.289 loose definition of what constituted a healthy 00:13:52.289 --> 00:13:56.159 institution practically set the stage for a massive 00:13:56.159 --> 00:13:58.960 wave of industry consolidation. So by handing 00:13:58.960 --> 00:14:01.639 billions in tier one capital to the strongest 00:14:01.639 --> 00:14:05.159 banks, regulators handed them the exact ammunition 00:14:05.159 --> 00:14:08.220 they needed to buy up the week. Exactly. And 00:14:08.220 --> 00:14:11.340 PNC Financial Services is the absolute textbook 00:14:11.340 --> 00:14:13.799 example of exploiting this loophole. What did 00:14:13.799 --> 00:14:18.039 PNC do? Well, on October 24, 2008, PNC received 00:14:18.039 --> 00:14:22.159 $7 .7 billion in TARP funds. Okay. Literally 00:14:22.159 --> 00:14:24.919 hours after the funds were approved, PNC announced 00:14:24.919 --> 00:14:27.519 an agreement to buy their struggling, longtime 00:14:27.519 --> 00:14:31.240 regional rival, National City Corps, for $5 .58 00:14:31.240 --> 00:14:34.200 billion. Wait, literally hours later. Hours. 00:14:34.570 --> 00:14:37.210 So they used a taxpayer lifeline as a private 00:14:37.210 --> 00:14:39.629 equity slush fund for a strategic acquisition. 00:14:39.909 --> 00:14:41.730 They absolutely did. And the friction between 00:14:41.730 --> 00:14:43.750 Wall Street and Washington didn't stop at how 00:14:43.750 --> 00:14:46.149 the money was spent, did it? It extended to how 00:14:46.149 --> 00:14:48.309 the banks fought the rules after the panic subsided. 00:14:48.490 --> 00:14:51.090 Oh yeah, specifically regarding those equity 00:14:51.090 --> 00:14:53.470 warrants designed to protect the taxpayer. Right, 00:14:53.509 --> 00:14:55.330 because once the financial system stabilized, 00:14:55.789 --> 00:14:57.769 the American Bankers Association aggressively 00:14:57.769 --> 00:15:00.049 lobbied Congress to cancel the warrants entirely. 00:15:00.350 --> 00:15:02.830 Yeah, the industry actually argued that the warrants 00:15:02.830 --> 00:15:05.350 were an onerous exit fee that punished banks 00:15:05.350 --> 00:15:07.409 for participating in a program the government 00:15:07.409 --> 00:15:10.210 had begged them to join. An onerous exit fee. 00:15:10.250 --> 00:15:12.409 It was the primary condition of the rescue. I 00:15:12.409 --> 00:15:14.429 mean, no. And the sheer scale of what they were 00:15:14.429 --> 00:15:16.850 asking for is just mind blowing. The sources 00:15:16.850 --> 00:15:19.470 note that for Goldman Sachs alone, if Congress 00:15:19.470 --> 00:15:21.710 had caved and canceled their warrants, it would 00:15:21.710 --> 00:15:24.629 have amounted to a direct taxpayer subsidy of 00:15:24.629 --> 00:15:27.570 anywhere between five billion and twenty four 00:15:27.570 --> 00:15:31.460 billion dollars. Just for one. That's insane. 00:15:31.860 --> 00:15:34.500 Now to their credit, Goldman Sachs' own leadership 00:15:34.500 --> 00:15:37.179 at the time did publicly state they believe taxpayers 00:15:37.179 --> 00:15:39.759 should expect a decent return on their investment. 00:15:39.879 --> 00:15:43.320 Sure. But the broader industry -wide lobbying 00:15:43.320 --> 00:15:46.179 effort to quietly erase the taxpayers' upside 00:15:46.600 --> 00:15:49.480 was intense and it was highly organized. You 00:15:49.480 --> 00:15:51.480 know, with hundreds of billions of dollars moving 00:15:51.480 --> 00:15:54.200 this quickly, with rules being rewritten literally 00:15:54.200 --> 00:15:57.019 overnight, and banks using rescue funds for mergers, 00:15:57.480 --> 00:15:59.740 we have to look at the criminal element. Oh, 00:15:59.740 --> 00:16:01.639 inevitably. Did anyone try to flat out steal 00:16:01.639 --> 00:16:04.240 from TARP? Oh, absolutely. I mean, unprecedented 00:16:04.240 --> 00:16:07.580 government spending always creates a shadow economy 00:16:07.580 --> 00:16:10.940 of opportunists. Right. So to police the bailout, 00:16:11.340 --> 00:16:13.990 Congress established SIGTARP. which is the Special 00:16:13.990 --> 00:16:16.149 Inspector General for the Troubled Asset Relief 00:16:16.149 --> 00:16:18.289 Program. And what was their mandate? Their mandate 00:16:18.289 --> 00:16:21.309 was to aggressively hunt down fraud, waste and 00:16:21.309 --> 00:16:24.590 abuse. And they found plenty of it. It eventually 00:16:24.590 --> 00:16:28.149 led to over 150 ongoing criminal and civil investigations 00:16:28.149 --> 00:16:32.210 that resulted in 28 criminal convictions. The 00:16:32.210 --> 00:16:34.990 very first TARP fraud case brought by the SEC 00:16:34.990 --> 00:16:37.429 in 2009 was against a financial planner named 00:16:37.429 --> 00:16:40.289 Gordon Grigg, right? Yeah, Gordon Grigg. He orchestrated 00:16:40.289 --> 00:16:42.909 a Ponzi scheme, tricking investors by claiming 00:16:42.909 --> 00:16:45.769 he had access to guaranteed government -backed 00:16:45.769 --> 00:16:48.529 TARP securities, which of course did not exist. 00:16:48.590 --> 00:16:51.129 Did not exist at all. But a more systemic example 00:16:51.129 --> 00:16:53.529 is Charles Antonucci. Who was he? He was the 00:16:53.529 --> 00:16:55.529 former president of the Park Avenue Bank in New 00:16:55.529 --> 00:16:58.639 York. And Tanushi tried to secure $11 million 00:16:58.639 --> 00:17:01.840 in TARP funds, but his bank didn't actually meet 00:17:01.840 --> 00:17:04.619 the capital requirements to qualify. Ah, so what 00:17:04.619 --> 00:17:07.940 did he do? He executed this really complex fraud. 00:17:08.559 --> 00:17:11.200 He invested his own money into his bank to make 00:17:11.200 --> 00:17:13.920 its capital position look stronger to regulators. 00:17:14.039 --> 00:17:16.420 OK. But he didn't actually use his own money. 00:17:16.740 --> 00:17:19.380 He used the bank's own funds, round -tripped 00:17:19.380 --> 00:17:21.759 them through another entity he controlled to 00:17:21.759 --> 00:17:23.559 create the illusion of a personal investment. 00:17:23.720 --> 00:17:26.400 Wow, that is brazen. Yeah, he was caught making 00:17:26.400 --> 00:17:29.119 false statements to regulators and the FBI brought 00:17:29.119 --> 00:17:31.779 him down. But, you know, the millions lost to 00:17:31.779 --> 00:17:34.259 individual fraudsters like Grig and Antonucci 00:17:34.259 --> 00:17:37.559 kind of pale in comparison to the billions at 00:17:37.559 --> 00:17:39.640 the center of the official accounting debate. 00:17:39.839 --> 00:17:41.759 This is where it gets really interesting. Because 00:17:41.759 --> 00:17:44.660 officially, the TARP program wound down on December 00:17:44.660 --> 00:17:47.440 19th, 2014, when the U .S. Treasury sold off 00:17:47.440 --> 00:17:49.940 its final shares of Ally Financial, which was 00:17:49.940 --> 00:17:52.250 formerly GMA. Right. And when the books were 00:17:52.250 --> 00:17:53.970 finally closed, the U .S. government reported 00:17:53.970 --> 00:17:58.509 a $15 .3 billion surplus. A surplus? Yeah. Through 00:17:58.509 --> 00:18:01.009 dividends, interest, and the sale of those equity 00:18:01.009 --> 00:18:04.029 warrants, the Treasury reported earning $441 00:18:04.029 --> 00:18:07.869 .7 billion on the $426 .4 billion they actually 00:18:07.869 --> 00:18:10.009 dispersed. OK, hold on. We really have to push 00:18:10.009 --> 00:18:11.950 back hard on the hidden mechanics of that math. 00:18:12.210 --> 00:18:15.430 Let's do it. How can the Treasury declare a $15 00:18:15.430 --> 00:18:18.599 billion profit? when the entire TARP program 00:18:18.599 --> 00:18:21.099 was funded by deficit spending. I mean, the government 00:18:21.099 --> 00:18:24.420 literally had to put $426 billion on the National 00:18:24.420 --> 00:18:27.480 Credit Card just to lend it to the banks. And 00:18:27.480 --> 00:18:29.839 this is exactly the crux of the legacy debate. 00:18:30.180 --> 00:18:32.359 You have to separate a strict cash flow accounting 00:18:32.359 --> 00:18:36.059 metric from the true macroeconomic cost. The 00:18:36.059 --> 00:18:39.940 $15 .3 billion surplus is simply cash in minus 00:18:39.940 --> 00:18:42.859 cash out for those specific TARP investments. 00:18:43.579 --> 00:18:45.920 It completely ignores the cost of borrowing the 00:18:45.920 --> 00:18:48.799 initial funds. So if the interest rate on the 00:18:48.799 --> 00:18:50.599 deficit spending used to fund TARP was between, 00:18:50.619 --> 00:18:53.259 let's say, 2 % and 4 % during the height of the 00:18:53.259 --> 00:18:56.000 crisis, the cost just to service that debt was 00:18:56.000 --> 00:18:59.259 $8 to $16 billion a year. Over the multiyear 00:18:59.259 --> 00:19:01.680 lifespan of the program, that interest completely 00:19:01.680 --> 00:19:04.539 obliterates that so -called $15 billion surplus. 00:19:04.660 --> 00:19:06.539 It absolutely wipes it out. And if you zoom out 00:19:06.539 --> 00:19:09.599 even further, the academic consensus paints a 00:19:09.599 --> 00:19:11.880 much, much more expensive picture. What did the 00:19:11.880 --> 00:19:15.220 academics find? Well, in 2019, an economist named 00:19:15.220 --> 00:19:17.680 Deborah Lucas published a really comprehensive 00:19:17.680 --> 00:19:20.019 study in the Annual Review of Financial Economics. 00:19:20.160 --> 00:19:22.839 OK. She didn't just look at cash flows. She looked 00:19:22.839 --> 00:19:25.279 at the fair value of the massive risks the government 00:19:25.279 --> 00:19:28.799 took on. And she estimated that the actual direct 00:19:28.799 --> 00:19:32.559 cost of the 2008 crisis -related bailouts, including 00:19:32.559 --> 00:19:35.519 TARP and other Federal Reserve facilities, was 00:19:35.519 --> 00:19:40.019 roughly five hundred billion dollars. Wait, five 00:19:40.019 --> 00:19:44.420 hundred? $500 billion. $500 billion. That is 00:19:44.420 --> 00:19:46.700 astronomical. To put that in perspective, that 00:19:46.700 --> 00:19:49.480 was about 3 .5 % of the entire United States 00:19:49.480 --> 00:19:52.880 gross domestic product in 2009. Wow. Yeah, Lucas's 00:19:52.880 --> 00:19:55.740 research explicitly challenges the popular kind 00:19:55.740 --> 00:19:58.059 of politically convenient narrative that the 00:19:58.059 --> 00:20:00.740 bailouts carried no cost simply because the headline 00:20:00.740 --> 00:20:03.119 loan amounts were repaid. And what's truly fascinating 00:20:03.119 --> 00:20:05.559 about her study is her conclusion regarding who 00:20:05.559 --> 00:20:07.380 actually walked away with the most value because 00:20:07.380 --> 00:20:09.519 it wasn't just the banks or their executives. 00:20:09.680 --> 00:20:12.299 No, it wasn't. She argues that the largest direct 00:20:12.299 --> 00:20:14.279 beneficiaries of the bailouts were the unsecured 00:20:14.279 --> 00:20:16.400 creditors of those financial institutions. The 00:20:16.400 --> 00:20:19.579 unsecured creditors. Yeah. Think about how bankruptcy 00:20:19.579 --> 00:20:23.140 is supposed to work. If a bank fails, the people 00:20:23.140 --> 00:20:25.819 who lent it money on an unsecured basis are supposed 00:20:25.819 --> 00:20:28.700 to take a massive haircut. They're supposed to 00:20:28.700 --> 00:20:30.819 lose their shirts. Because that's the risk they 00:20:30.819 --> 00:20:33.859 took. Exactly. But because the government stepped 00:20:33.859 --> 00:20:36.940 in with TARP and absorbed all that systemic risk, 00:20:37.480 --> 00:20:40.000 those creditors were made entirely whole at the 00:20:40.000 --> 00:20:42.819 taxpayers' ultimate expense. But to be fair, 00:20:43.039 --> 00:20:45.019 we do have to look at the alternative, because 00:20:45.019 --> 00:20:47.799 the entire justification for absorbing that $500 00:20:47.799 --> 00:20:51.420 billion cost was the threat of a complete economic 00:20:51.420 --> 00:20:53.460 collapse. And there is broad consensus on that 00:20:53.460 --> 00:20:56.440 front as well. A survey of leading macroeconomic 00:20:56.440 --> 00:20:58.539 experts conducted by the University of Chicago 00:20:58.539 --> 00:21:00.799 Booth School of Business found general agreement 00:21:00.799 --> 00:21:02.980 on this. What do they agree on? They agree that 00:21:02.980 --> 00:21:05.420 without the TARP program, unemployment at the 00:21:05.420 --> 00:21:07.500 end of 2010 would have been significantly higher. 00:21:07.759 --> 00:21:10.519 The intervention stopped the freefall. It genuinely 00:21:10.519 --> 00:21:13.440 saved jobs. So it prevented a depression. But 00:21:13.440 --> 00:21:15.720 it did so through a mechanism that permanently 00:21:15.720 --> 00:21:17.599 altered the relationship between the government 00:21:17.599 --> 00:21:20.400 and the financial sector at a massive hidden 00:21:20.400 --> 00:21:23.720 systemic cost. Exactly. It stabilized the system. 00:21:24.380 --> 00:21:26.900 But it did so by feeding capital to the strong, 00:21:27.420 --> 00:21:30.559 allowing them to absorb the weak. So let's distill 00:21:30.559 --> 00:21:32.500 this whole journey for you listening. Yeah, it's 00:21:32.500 --> 00:21:35.240 a lot to take in. The troubled asset relief program 00:21:35.240 --> 00:21:38.519 began as this engineering -like attempt to simply 00:21:38.519 --> 00:21:41.519 buy bad mortgages at a discount. But when the 00:21:41.519 --> 00:21:43.839 reality of mark -to -market accounting made that 00:21:43.839 --> 00:21:47.180 reverse auction impossible, the government executed 00:21:47.180 --> 00:21:50.039 a rapid fire pivot. They completely abandoned 00:21:50.039 --> 00:21:52.599 the toxic assets. Right. They injected capital 00:21:52.599 --> 00:21:55.319 directly into banks, automakers, and insurers, 00:21:55.759 --> 00:21:58.700 and overnight became an equity partner in private 00:21:58.700 --> 00:22:00.980 enterprise. And while it successfully thawed 00:22:00.980 --> 00:22:03.420 the frozen credit markets and kept unemployment 00:22:03.420 --> 00:22:06.200 from spiraling into a depression, it also provided 00:22:06.200 --> 00:22:09.559 a massive windfall. A windfall that fueled historic 00:22:09.559 --> 00:22:12.640 industry consolidation, rewarding the very institutions 00:22:12.640 --> 00:22:15.339 that were too big to fail. Exactly. So whenever 00:22:15.339 --> 00:22:17.339 you hear politicians today debating the merits 00:22:17.339 --> 00:22:19.759 of bailouts, you now know the vast difference 00:22:19.759 --> 00:22:21.900 between the headline numbers on the evening news, 00:22:22.140 --> 00:22:24.640 the stated intent of the lawmakers, and where 00:22:24.640 --> 00:22:27.900 the money actually flows in practice. It is never, 00:22:28.079 --> 00:22:30.539 ever as simple as just pointing a hose at a fire. 00:22:30.859 --> 00:22:32.819 Which leaves us with a final thought for you 00:22:32.819 --> 00:22:35.720 to mull over. We've seen how the 2008 TARC recipients 00:22:35.720 --> 00:22:38.240 not only survived the worst crisis in a generation, 00:22:38.579 --> 00:22:41.000 but many used the government's money to consolidate 00:22:41.000 --> 00:22:45.400 power and emerge larger than ever. So if another 00:22:45.400 --> 00:22:48.180 systemic crisis hits tomorrow, and the government 00:22:48.180 --> 00:22:50.559 is forced to step in again as the ultimate savior, 00:22:51.099 --> 00:22:53.759 will the knowledge of how 2008 played out encourage 00:22:53.759 --> 00:22:56.380 even riskier behavior this time around? That's 00:22:56.380 --> 00:22:58.359 a scary thought. If the fire department is guaranteed 00:22:58.359 --> 00:23:00.279 to show up and rebuild your house bigger than 00:23:00.279 --> 00:23:02.910 it was before, how careful are you really going 00:23:02.910 --> 00:23:05.190 to be with the matches? Thanks for joining us 00:23:05.190 --> 00:23:05.970 on this deep dive.