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TARP Was An "Unmitigated Disaster"


Parsad
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I was just about to post the same article.

 

Seems a little nutty to say that TARP contributed to an "unnecessary panic in the marketplace that still hasn't been fully restored."  Or that it was TARP that caused financial stocks to plunge after it was put in place.  If there had been no TARP, the financial system would have been done for, and even WFC would have been decimated in terms of real future business prospects, as the economy would be in shambles.

 

Now, perhaps he has a point that the banks that did not need capital shouldn't have been forced to take it, but I don't think you can go from there to saying that TARP was an "unmitigated disaster."

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I agree Txlaw.  Where I disagree with Kovacevich, is that he's not considering all of the counterparty liability that would have taken down the system, if any of the big banks that needed the capital failed to do so because they were concerned with optics or perception. 

 

Wells may not have needed the money, but many, many banks in the system needed it...and if one of the large institutions went down, it could have caused a mass exodus from many other banks and pushed them over the edge too.  Once you get a run, it sure is hard to stop one unless you restore confidence in the system.  Cheers!   

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I agree Txlaw.  Where I disagree with Kovacevich, is that he's not considering all of the counterparty liability that would have taken down the system, if any of the big banks that needed the capital failed to do so because they were concerned with optics or perception. 

 

Wells may not have needed the money, but many, many banks in the system needed it...and if one of the large institutions went down, it could have caused a mass exodus from many other banks and pushed them over the edge too.  Once you get a run, it sure is hard to stop one unless you restore confidence in the system.  Cheers! 

 

You are right, Sanjeev.

 

It was all about  confidence in the system.  TARP for those who didn't think they needed it was very important for removing the stigma from the weak banks that would have been tagged as shaky and become lightning rods for bank runs.

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Not only do I agree with every single thing Mr. Kovacevich said, I truly thank you for posting this interview as I can now direct my friends/colleagues/investors to it instead of trying to deliver the same message each time I am asked for my opinion!

 

I think mainly that he's irritated that he wasn't able to buy lots more super cheap assets...I predicted standardized unemployment rates at well over 20% without TARP, and at this point I think that may have been conservative.

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I agree Txlaw.  Where I disagree with Kovacevich, is that he's not considering all of the counterparty liability that would have taken down the system, if any of the big banks that needed the capital failed to do so because they were concerned with optics or perception. 

 

Wells may not have needed the money, but many, many banks in the system needed it...and if one of the large institutions went down, it could have caused a mass exodus from many other banks and pushed them over the edge too.  Once you get a run, it sure is hard to stop one unless you restore confidence in the system.  Cheers! 

 

Spot on, Sanjeev.  Spot on.

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http://www.pbs.org/wgbh/pages/frontline/oral-history/financial-crisis/tags/tarp/

 

Kovacevich in the Frontline series said that he had no objection to liquidity to stave off a bank run, obviously Citi, BAC ML, Goldman, and MS might have needed this. But JPM, Wells, BONY, and State were okay and so were USB and PNC.  Forcing them all to take capital made the market doubt everything. I think we forget that between TARP and the stress tests in May 2009, the markets tanked much, much farther down. It was really the stress tests that broke the panic, not TARP.

 

Even Sheila Bair disagreed with TARP but she went along as a team player because that is what Paulson and Bernanke were pushing.

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