10 Years Later, Assessing the Dangerous Legacy of TARP

While businesses should take risks in order to innovate, too many companies are operating today with the notion that, if things don’t work out, Uncle Sam will be there to bail them out.
October 9, 2018 • Commentary
This article appeared in Real Clear Markets on October 9, 2018.

When the Troubled Asset Relief Program (TARP) was proposed ten Septembers ago, I was the only large financial company CEO who was adamantly opposed and publicly tried to persuade Congress not to pass the law. After bailouts in the 1970s and 80s, many large businesses already had the expectation they’d be bailed out despite bad behavior or a faulty business model. I was also worried the money would flow to companies that didn’t need it.

In other words, I thought it was very possible that TARP would end up being more subsidy than savior and, in doing so, would deepen a legacy of corporate government dependency.

A decade later, it’s proved to be that way. While businesses should take risks in order to innovate, too many companies are operating today with the notion that, if things don’t work out, Uncle Sam will be there to bail them out.

Americans recognize the role TARP played in building this belief.

According to a recent Charles Koch Institute (CKI) survey, while a plurality of Americans ultimately think TARP helped the United States, they also see the bailout as no different than other kinds of government support that, for generations, has gone to the politically well‐​connected. When asked whether they thought TARP was at all like other forms of government‐​provided financial support to companies, such as funding for professional sports stadiums or the kind of favors cities and states are dangling before Amazon for HQ2, 57 percent of respondents likened the bailouts to these types of handouts.

Americans also overwhelmingly believe TARP set the stage for other well‐​connected companies to plead for bailouts in the future. Nearly 70 percent of respondents said they believe TARP increased the likelihood of future subsidies. And almost three‐​quarters of voters, 72 percent, said “too big to fail” is still a problem. A plurality, 46 percent, actually thinks the world would be a better place if TARP never happened.

The American people are wise.

My former firm, BB&T, ultimately received TARP money, but how that fact came to be illustrates the unease Americans have about TARP.

The day after Congress passed bailout legislation, I received a call from our federal regulator saying that, although BB&T was very strongly capitalized by long standing regulatory standards, they were “concerned” we would not have enough capital to meet the new standards. Keep in mind, these new standards were completely unknown, but the regulator said he was confident we “needed” the TARP money to pass a government audit.

So, under pressure from federal overseers, the company made the very difficult decision to accept even though we knew we were healthy and had significant reserves.

Our acceptance was a public relations boon for the lawmakers who voted for TARP. After all, the odds TARP would “succeed” radically improved if the banks that didn’t actually need the money participated. There would be little consequence for their bad vote.

The bailout certainly benefitted some, but it actually hurt healthy institutions like BB&T. TARP actually cost BB&T between $50 million and $100 million given the cost of accepting money we absolutely did not need. It was a rip‐​off for healthy banks because they had to pay high, above‐​market interest rates, and the government took warrants in our stock — all when we didn’t need the money. (Eventually regulators agreed with that fact.)

Here’s the most important finding of CKI’s poll, though, in my mind: more than 60 percent of Americans said that, those ten Septembers ago, federal policymakers had other viable alternatives than the government‐​funded financial rescues.

That fact is undisputable. Having been intimately involved in these discussions in 2008, I can confirm what the public believes—other options were on the table, but we chose to bail out reckless actors, a move likely to force taxpayers to come to the rescue once more in the future.

The best way to prevent another meltdown is not to incentivize bad behavior, which is what TARP did by bailing out bad business models, but to require banks to have the type of strong capital positions that BB&T held in 2008.

BB&T never needed TARP money, and ultimately, we didn’t use it. While some banks may have benefitted, one of TARP’s most notable contributions is the culture of corporate welfare it helped promote. Our experience from ten Septembers ago is not one that I want Congress to repeat, and it’s clear the American people don’t want it to repeat either.

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