Bailouts get a bad rap

Fact one: Of course it’s a rescue!

Fact two: Any president, regardless of party, would have done the same.

You may be upset by the federal bailout of the two lenders that were recently blown up, Silicon Valley Bank and Signature Bank. Agencies like the Federal Reserve and Federal Deposit Insurance Corp. (FDIC) covered all deposits at the two bankrupt banks, although FDIC insurance only covers the first $250,000 in an account.

Some corporations and 1 percenters had parked far more than the insurable maximum with the banks, and in theory they should have endured the pain of bankruptcy lining up with all other creditors to recover the rest of their money. In completing them, the government has short-circuited a central feature of capitalism: the risk of failure, designed to make people cautious about how they spend their money.

However, American capitalism exists within an opportunistic political system that almost always favors the expedient over what might be prudent. Republicans howl over President Biden’s claim that taxpayers wouldn’t fund the bailout, but a Republican president would have bailed out savers, too. In fact, Republican President George W. Bush did just that in 2008, because the alternative would have been an immediate crisis worse than the financial crash that was unfolding.

FDIC Representatives Luis Mayorga and Igor Fayermark speak to customers outside of Silicon Valley Bank's headquarters in Santa Clara, California, U.S. March 13, 2023. REUTERS/Brittany Hosea-Small

FDIC Representatives Luis Mayorga and Igor Fayermark speak to customers outside of Silicon Valley Bank’s headquarters in Santa Clara, California, U.S. March 13, 2023. REUTERS/Brittany Hosea-Small

The gargantuan bailouts of 2008 were deeply unpopular, although economists largely agree they averted a depression that could linger to this day. The Biden bailouts, while much smaller, appear to be having a similar effect, as deposit outflows at other regional banks experiencing financial stress have eased as regulators signal they plan to cover all deposits .

The Biden team now has an opportunity to apply some of the lessons learned in 2008. The key element of these bailouts was the Troubled Assets Relief Program, or TARP, which provided cash directly to hundreds of banks to keep them solvent. Because TARP needed taxpayers’ money, Congress had to pass legislation authorizing up to $700 billion in spending. It only took about half that money to stabilize the financial system.

The government charged interest on the money spent, and many banks paid back more than they took in. The Treasury Department says the lifetime cost of TARP was only $32 billion spread over many years. ProPublica has tracked all of the financial crisis bailouts and says the government has so far made a net gain of $109 from TARP, plus the separate bailouts from mortgage agencies Fannie Mae and Freddie Mac. The biggest loss for taxpayers came not from any bank bailout, but from General Motors, which took $51 billion in government aid but filed for bankruptcy anyway, leaving $11.3 billion unpaid.

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Despite this, the government has made some mistakes. In general, banks accepting bailouts have not been sufficiently restricted. One outrage was bailed out banks, which in the midst of a crushing recession paid fat bonuses to executives, including some who led their firms into the abyss and arguably were to blame for the crisis in the first place. There have also been “backdoor bailouts,” which have allowed faltering firms like insurance giant AIG to pay back trading partners like Goldman Sachs 100% when those counterparties suffered losses consistent with their own lousy risk assessment.

The Federal Reserve, Treasury Department and others involved in the bailouts have been criticized for opaque reporting that raised questions about exactly who received the bailout money. After all, after the 2008 crash, there were hardly any criminal cases for fraud or other criminal activity. This had nothing to do with the bailouts, but overall it left the impression that Washington was far too comfortable with Wall Street at the expense of ordinary people.

Biden is now fighting the impression that the 2023 bank bailouts are a miniature repeat of the 2008 bailouts. They are definitely bailouts, by any plausible definition, no matter what Biden says: the government chooses to intervene in private sector business and prevent losses, although it has no obligation to do so. RESCUE.

But the Biden team could very well execute the 2023 bailouts in a way that makes them more palatable than the 2008 bailouts. Biden is right when he says no taxpayer money is going into the bailouts — until now. The money that covers depositors over $250,000 comes from the insurance pool that covers the banks, which fund the banks by paying premiums. It’s possible the costs could trickle down to bank customers through higher fees, as Republicans claim. But it’s also possible that it’s not enough to make a difference.

There are also implications for bank executives who have pushed their businesses to the edge of a cliff. Management in Silicon Valley and at Signature is out. You will not receive any new bonuses. The stock is worthless and won’t come back. Bank managers who held stocks are among the biggest losers. In contrast, in 2008 most banks that received bailouts survived, allowing a recovery in falling stock values.

Some Silicon Valley executives sold shares just before the collapse when they could have known non-public information about the bank’s precarious state. Ditto for executives at First Republic Bank, which has not failed but is under pressure as shares have fallen since Silicon Valley went under. Prosecutors will relish the opportunity to pursue insider trading charges when the evidence is in place and rectify the 2008 galling lack of accountability.

The federal prosecutor’s office is also examining whether any of the failed banks have engaged in fraudulent activities. Shareholders are also suing every bank. And if the crisis stays contained, regulators will have the luxury of focusing on a handful of rebels rather than trying to bail out the entire financial system at once. There’s never a good time to be involved in a bank failure, but the worst time might be after the last group of villains got away with it.

Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman

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