TOPICS > Economy

Following the Bailout Money Trail Yields Few Answers

December 24, 2008 at 6:20 PM EST
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With about half of the federal bailout allocation spent, questions remain about how exactly recipient banks used the money. Analysts give an update on where this $350 billion has gone.
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JEFFREY BROWN: When President Bush announced he would help automakers last week, it meant nearly all of the first $350 billion of federal bailout money had been committed. The questions now: How well has that money been spent? And what next?

We check back with three people we’ve talked to throughout the last months. Alan Blinder, former vice chairman of the Federal Reserve, is a professor of economics at Princeton University.

Alice Rivlin is a senior fellow at the Brookings Institution. She served at the Fed and as director of the Office of Management and Budget during the Clinton years.

Martin Feldstein of Harvard University was chairman of the Council of Economic Advisers under President Reagan.

And joining them tonight is Diane Casey Landry, chief operating officer and senior executive vice president for the American Bankers Association.

Well, Alan Blinder, I’ll start with you. You wrote an op-ed piece the other day titled “Missing the Target with $700 Billion.” So what’s the main thing you see that’s been missed?

ALAN BLINDER, Princeton University: Well, I think the main thing is the main thing that was in the bill. The bill was written mainly to buy the so-called trouble assets. That’s why it’s called the Troubled Asset Relief Program.

And, secondarily, and partly by dint of that, to get control of mortgages and refinance them to forestall foreclosures. The number of the dollars of the $350 billion that have been used for those two purposes is precisely zero, which strikes me as a little low.

JEFFREY BROWN: All right, Alice Rivlin. I mean, when you joined us last time, I think you were sort of giving the benefit of the doubt to Mr. Paulson, in terms of what he was trying to do. Where are you now?

ALICE RIVLIN, Public Policy Institute, Georgetown University: Yes, I think buying the troubled assets in a public auction turned out to be too difficult a thing to do and to explain. Actually, the Federal Reserve is buying them a lot of them now.

But I thought turning to direct capital injections into the banks was a good thing to do and has worked out reasonably well. But now we’ve got to move on to the other part of it, and very little has been used to help homeowners.

JEFFREY BROWN: All right. We’ll come back to what next.

Let me go to Martin Feldstein in Boston. Where are you now? What do you think?

MARTIN FELDSTEIN, Harvard University: I think that the TARP was totally misused. As Alan Blinder said, it never got around to dealing with what it was supposed to do, buying the impaired assets.

Putting $25 billion or less into a significant number of banks, spending $250 billion doing that really didn’t do anything to increase confidence in those banks. It didn’t do anything to increase the lending by those banks.

And to the extent that it simply increased capital so that they were in a position to expand their balance sheet, well, that really wasn’t the problem they faced. The big problem that the banks faced was a lack of confidence. And the amounts that were available in the TARP program, except for a few banks, were simply not enough to matter.

JEFFREY BROWN: Well, Diane Casey-Landry, that brings us to you, representing many of those banks. From their perspective, how has this gone?

DIANE CASEY-LANDRY, American Bankers Association: Well, first thing we’d tell you is that the banks didn’t ask for this program, but we think the program has been going reasonably well.

We’re very concerned that the program is still not available to all banks. There’s only been 155 banks that have received the funds. And lending has increased. If you measure lending from the second quarter to the third quarter, lending has gone up by 8 percent by the 18 largest banks that received the funds, or some $300 billion.

JEFFREY BROWN: It has increased?

DIANE CASEY-LANDRY: It has increased.

Criticisms of TARP

JEFFREY BROWN: Because there's a lot of criticism -- and we just heard it -- that this wasn't enough to actually get money funneling back out into the economy.

DIANE CASEY-LANDRY: Well, lending has increased.

JEFFREY BROWN: Do you see that, Alan Blinder?

ALAN BLINDER: I believe -- I mean, Diane probably knows more about this than I do -- that a good deal, if not more than all of that, was due to companies taking up lines of credit fearing that they wouldn't have them if they didn't grab them now.

But I want to be clear. I'm not blaming the banks at all here. I think it's the design of the program.

The government basically gave these capital injections to banks to shore them up, and some of it should have been given for that purpose. Don't get me wrong. But it gave it with no strings attached.

So the banks haven't violated any trusts or promises or anything like that. And they're doing what they should be doing. I think they're doing more or less what I'd be doing if I was running one of these banks.

JEFFREY BROWN: OK, so that's another issue -- I'll start with you, Alice Rivlin -- that's the no-strings-attached part of the criticism here. Give the money to the banks, but -- and we actually kind of -- we looked at part of this last night, the inability even to account for a lot of that money. What do you think about that?

ALICE RIVLIN: Well, I think they -- it isn't that they can't account for it. It was capital. And you don't expect them to have an accounting for how they spent capital. That doesn't make sense.

What we don't know is what would have happened if we hadn't done this. Remember, we haven't lost any more major banks in this period, and the authorities were pretty worried that we might, that we might have a domino cascade of failed institutions, and that they might stop lending altogether, which was virtually the situation at the time this was launched.

So I think, as far as it went, it's been a reasonable success, but it's true they didn't put a lot of conditions on it. They didn't say, "You can't pay dividends," or, "You can't do this," or, "You can't do that." But those kinds of conditions I think are popular, but not necessarily good.

JEFFREY BROWN: Well, Martin Feldstein, that's the question that can't be answered, I guess. What would have happened but for giving the money to the banks?

MARTIN FELDSTEIN, Harvard University: Yes, that can't be answered, but I think what's really missing in this discussion is that the TARP wasn't used for what is really the fundamental problem, and the fundamental problem is in the housing market.

And it's not just that some individuals are facing the potential loss of their homes because they cannot afford to meet their monthly payments. It's a more systemic problem than that caused by the very high and rising loan-to-value ratios of mortgages.

And that hangs as a cloud over the financial institutions, because we don't know how much more we're going to see defaults and foreclosures driving down house prices and driving down the value of those mortgage-backed securities that are a large part of the bank's balance sheet.

JEFFREY BROWN: So staying with -- sorry, go ahead.

MARTIN FELDSTEIN: The TARP didn't do anything -- I was going to say, the TARP didn't do anything to deal with that problem.

Congress aims to help homeowners

JEFFREY BROWN: Well, let me stay with you. What would you like to see happen, now that we're looking at the second half of the $700 billion?

MARTIN FELDSTEIN: I think that the Congress wants to see -- and I agree with this -- wants to see them use the TARP funds to buy down mortgages, to help people stay in their homes, but also to deal with this more systemic problem that we have large numbers of mortgages which substantially exceed the true current appraised value of those homes.

And by sharing with the creditors to bring that down, we'll be able to provide some greater securities and greater confidence in the financial institutions.

JEFFREY BROWN: Diane Casey-Landry, first, why hasn't the money that has gone out so far to the banks helped with the mortgage and foreclosure problem?

DIANE CASEY-LANDRY: Well, I think Treasury's first effort was to try to get the money into the hands of the banks so they could be lending that money out there and trying to stimulate the economy and unfreeze the markets.

Second, with the way rates have been coming down, you have been stimulating lending, because you've seen an uptick in refinancings, as consumers are finding that they can go in there and refinance their mortgage now. And, finally, the banks...

JEFFREY BROWN: But I'm sorry. But you've seen -- you've seen an uptick in the numbers, huh?

DIANE CASEY-LANDRY: Yes, absolutely, with the Fed's recent action, in terms of reduction in rates, there's been a definite increase in mortgage applications -- refinancings.

And in terms of for the foreclosure markets, almost every bank today has a program trying to reach out to borrowers that are qualified that they can, in fact, help and refinance. And whether you go through Hope Now or you go through the FHA program, there are means to actually help those borrowers who are in trouble.

JEFFREY BROWN: Alan Blinder, go ahead.

MARTIN FELDSTEIN: Yes, the Hope for Homeowners -- I was going to say, the Hope for Homeowners program was originally proposed as something that would help some 2 million homeowners. The Congressional Budget Office said, well, probably only 300,000. It's actually helped fewer than 200, not 200,000, but 200.

JEFFREY BROWN: All right, go ahead and respond to that.

ALAN BLINDER: Jeffrey, I was going to say that, Diane put her finger on an absolutely appropriate point. It was the Fed's program to do what -- not exactly what, but more or less what the TARP was designed to do, the Fed doing it, because the Treasury wouldn't, that pushed these mortgage rates down and did, indeed, set off a round of financings.

Now, that helps on one part of the problem. It doesn't help on the part of the problem that Marty has been emphasizing, which is the underwater mortgages and the need to write down those mortgages, meaning both the lender and probably the government kick in something.

JEFFREY BROWN: All right, let me let Alice Rivlin in on the housing issue here.

ALICE RIVLIN: Well, I think there are a lot of things that need to be done at once. And one is to keep the pressure on interest rates coming down.

The Fed has announced it's going to bring interest rates down. And I think they mean mortgage rates. That way they're going to buy Fannie Mae and Freddie Mac securities and buy mortgages directly. That will help, and it can help some more.

And the more we get mortgage rates down, the easier it will be to refinance and to keep people in their homes.

Other industries get in line

JEFFREY BROWN: Let me raise another issue. I'll start with you, Alice Rivlin, is we have the automakers have come and now are going to -- they're going to get some money. There are already in line other industries.

What happens next, in terms of that kind of flow?

ALICE RIVLIN: It makes me very nervous...

JEFFREY BROWN: Very nervous.

ALICE RIVLIN: ... because there's no place to draw the line. It's unfortunate that we're bailing out the automakers, and I hope it's temporary and leads to a serious restructuring of the automobile industry.

JEFFREY BROWN: Alan Blinder, do you want to pick up on that? What happens when other industries get in line?

ALAN BLINDER: Yes, I will, but, first, I wanted to make the point that the automakers are having heavy conditions put upon them, totally unlike what the deal that Secretary Paulson struck with the banks.

But Alice is -- well, I agree with one thing Alice said and disagreed with the other. I think it's most unfortunate. I think there is no obvious place to draw the line. There will be other industries lining up at the government's door looking for bailouts of various sorts.

But we're facing probably the worst recession since the 1930s. And I just don't think we could afford to roll the dice and gamble on the real demise of the auto industry at this point in time. So I think it was the right thing to do.

JEFFREY BROWN: The right thing there, but where are you going to draw the line, as the other industries come in?

ALAN BLINDER: You try to draw the line on things that are systemically important. We use that phrase a lot just in the financial system, but I mean broader, systemically important to the economy as a whole.

Unfortunately, a lot of industries can make that claim, and they've got to be judgment calls.

JEFFREY BROWN: Martin Feldstein, do you have a formula there or an equation that you use?

MARTIN FELDSTEIN: Well, I have -- the most recent thing that has come forward have been the commercial realtors saying that they're going to be in trouble because, as tenants move out or can't afford to pay their rents, the commercial real estate prices are going to drop.

Well, yes, they're going to drop. And that's exactly what should happen. They should be allowed to re-price to appropriate levels.

It's very different from the automobile industry. We don't worry about large numbers of employees. We don't worry about whether customers will be there. The buildings are not going to disappear.

So the government should look at that request and say, "Sorry, no, you made your investments. If they don't work out well, well, somebody else will buy that building at a better price."

Are more rules necessary?

JEFFREY BROWN: Well, Diane Casey-Landry, one last issue here, and it's been raised, is going forward there's a lot of talk about putting more guidelines, more rules on what happens if anymore money is given. Will that be acceptable?

DIANE CASEY-LANDRY: Well, first, I want to be very clear. Unlike these other industries, the banking industry is healthy. The funds are only being made available to healthy banks. That's one of the provisions that the Treasury Department required, is that you got to have additional capital so you could lend, but you had to be healthy.

So the banks didn't need the money. They got the money so they could do additional lending.

Second, the Treasury Department put a provision into the term of the agreement -- that's called Section 5.3, very technical -- but a provision in the agreement that allows them to change the terms of that agreement at any point in time if the Congress passes a new law or if there's some additional provisions.

But we think the rules should be reasonable. Let the banks get out there, those who want the money.

And, remember, not every bank has taken the money. Only 156, and we have 8,400 banks in this country. And I think that what people need to remember is that our industry is healthy. And now they're better capitalized, and the government is going to get a good return on that money.

JEFFREY BROWN: All right, well, I want to thank you for bringing -- all of you for bringing us up to date. Alan Blinder, Martin Feldstein, Alice Rivlin, and Diane Casey-Landry, thank you all.