On the five-year anniversary of the failure of Lehman Bros. Inc., the White House defended on Sunday its actions to stem the aftermath of the 2008 financial crisis, arguing in a new report that bank stress tests, a post-crisis reform statute and the government's administration of a much-maligned auto and bank sector capital injection program were critical moves that helped stave off another Great Depression.
The report comes as critics contend that five years after the peak of the financial crisis many big banks still lack sufficient capital as a buffer against a future collapse. At the same time, the Dodd-Frank Act, the signature post-crisis reform statute, is still far from fully implemented.
Opponents of the Obama administration's response to the crisis also lament that the capital injection program, known as the Troubled Asset Relief Program, enshrined the belief that big banks -- many of which are even larger than before the crisis -- are too big to fail and would be bailed out again with taxpayers footing the bill.
That is even as the report points out that the government has set up a series of tools to allow a big bank to be dismantled so that its collapse doesn't cause Lehman-like collateral damage to the markets. Plus, taxpayer costs in the unraveling of the institution would be covered by a fee (collected after the fact) on big banks.
Specifically, the White House argued that the TARP program was far more successful than anyone expected, pointing out that the Congressional Budget Office had estimated previously that it would cost $350 billion, while the Treasury Department has received nearly $422 billion in payments back from the government's investments in the bailout program and separate injections into American International Group Inc.
Gene Sperling, White House national economic council director, lauded the administration's effort to stress test banks, calling it "the signature element" of the financial stability program. He said on a conference call about the report that it drove the big banks to raise $80 billion in capital from private sources within months of the release of the first set of results in 2009.
"This was feared by many to be too weak, potentially not differentiate enough," he said. "What was very striking was that this idea, this signature proposal by President Obama and [then] Sec. [Timothy] Geithner to ensure that these large banks had enough capital to continue to do lending, even in a more adverse scenario, led to major banks raising $80 billion in capital without one penny of federal dollars going into the major banks."
Sperling, who is leaving the administration at year-end, noted banks are significantly better capitalized, as capital levels more than doubled over the past five years. He also supported Basel III, a global agreement on bank capital that requires the largest banks to hold even more capital buffers as protection against a crisis.
Finally, he pointed to a recent leverage-limiting proposal introduced in July by the Federal Reserve Board and Federal Deposit Insurance Corp. that potentially could make U.S. banks cut back on their debt levels to an even greater extent than the amounts called for in the international agreement.
However, even though many critics of current bank capital levels, including former FDIC Chairman Sheila Bair, support this proposal, they also want it to restrict bank leverage even more. Also, concern has been expressed by fiscal policy makers about whether regulators will have the willpower to adopt it and if they do, will the final rule be one that keeps the banks from taking untoward risks.
The report points to other areas where the government stepped in to help stem panic and to limit future crises, including creating a Consumer Financial Protection Bureau, which writes rules for mortgages and other credit products. It was created after big bank regulators mostly fell asleep at the switch when it came to mortgage origination restrictions; nonetheless, Capitol Hill Republicans fought against its establishment as another example of big government, but also because it was to be run by one director, rather than a bipartisan panel.
Finally, the administration argued that key reforms have been implemented to "help ensure" that no financial institution is "too big to fail" and will be bailed out in another financial crisis. The report points out that big banks must write so-called living wills to ensure that in the event they fail they can be dismantled in a way that does not cause damage to the global markets.
The report praised the system set up post-crisis by the FDIC to help dismantle a failing bank so its collapse doesn't damage the system. But while many had hoped that a bank fund would be established in advance for just such a contingency, Dodd-Frank mandated that fees be collected after the fact, leaving many to believe taxpayer funds might still be employed to dismantle a failing big bank. Plus, critics said, a future Treasury Department might not have the willpower to go after the banks for fees.
Opponents said that, not unlike what happened in the past crisis, government could employ a so-called backdoor bailout by funding large institutional bank creditors and counterparties of a failing bank out of fear they might collapse as well. That was one of the impetuses for the AIG bailout, which ended up being a staggering $182.3 billion, as well as other large banks. (The report said the administration recouped more than $205 billion on the AIG bailout alone).
The report also said its efforts to restore the auto sector, which was on the brink of collapse, created jobs, with the Big Three automakers now profitable and gaining market share "for the first time in 20 years."
Auto bailout critics point to a Treasury watchdog group report from January that noted the White House has no "concrete exit plan" for its taxpayer-infused investment in Ally Financial Inc., formerly GMAC. The watchdog report noted that Ally owed taxpayers $14.6 billion. In response to concerns about the bailout, Sperling said due to the "bold actions" by the Federal government and by the workers and companies, the auto rescue "has worked out better than anyone could have dreamed of."
Geoffrey F. Aronow joined Sidley Austin LLP as a partner in the global securities and derivatives enforcement and regulatory practice. For other updates launch today's Movers & shakers slideshow.
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