bailouts get a bad rap

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Fact One: Of course it’s a bailout!

Fact two: any president, of any party, would have done the same thing.

You may feel concerned about the government rescue of lenders that recently blew up at Silicon Valley Bank and Signature Bank. Agencies including the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) cover all deposits at the two banks, even though FDIC insurance only applies to the first $250,000 in the account.

Some businesses and 1 percent of the population had more than the maximum insurable amount in the banks, and in theory they should have taken the pain of bankruptcy to recover what was left of their money along with all other creditors. By making them perfect, the government short-circuits a central feature of capitalism: the risk of failure that supposed to make people wary about using their money.

American capitalism, however, exists within an opportunistic political system that almost always favors the expedient over the prudent. Republicans are shouting President Biden Claims Taxpayers Won’t Fund Bailout, But a Republican president would have saved depositors as well. In fact, Republican President George W. Bush did just that in 2008Because the alternative would have been an immediate crisis worse than the financial crash that unfolded.

FDIC Representatives Luis Mayorga and Igor Fairmark speak to customers outside the Silicon Valley Bank headquarters on March 13, 2023 in Santa Clara, California. Reuters/Brittany Hosey-Small

The massive bailout of 2008 was extremely unpopular, although economists broadly agree that it prevented a depression that probably persists to this day. The Biden bailout, though much smaller, would have had a similar effect, given that deposit outflows at other regional banks under financial stress have abated, given regulators’ indication that they plan to return all deposits. .

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The Biden team now has a chance to apply some of the lessons learned from 2008. the key element of those bailouts was distressed asset relief program, or TARP, which involves the direct infusion of cash into hundreds of banks to keep them solvent. Since TARP required taxpayer money, Congress had to legislation authorizing up to $700 billion in spending. It took only about half of that money to stabilize the financial system.

The government charged interest on the money lent, and many banks repaid more than they took in. treasury department says The lifetime cost of TARP was only $32 billion., spread over several years. ProPublica tracked all the relief packages from the the government has done so far Made a net profit of $109 from TARP, as well as separate bailouts of mortgage agencies Fannie Mae and Freddie Mac. The biggest loss to taxpayers came not from a bank bailout, but from General Motors, which took $51 billion in government aid and yet declared bankruptcy. leaving $11.3 billion unpaid,

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Still, the government made some mistakes. In general, it did not impose adequate restrictions on banks taking bailout funds. there was an outcry Bail out banks are giving hefty bonus For executives in the midst of a severe recession, including some who took their firms into the abyss and were arguably responsible for the crisis in the first place. were alsobackdoor bailoutWhich allowed faltering firms like insurance giant AIG to pay trading partners like Goldman Sachs back at 100% when those counterparties should have taken losses commensurate with their own shoddy risk assessment.

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The Federal Reserve, Treasury Department and other agencies involved in the bailout were criticized opaque reporting This raised questions as to who was actually getting the dole money. in the end, were hardly any prosecution for fraud or any other criminal activity after the 2008 accident. This was not directly related to the bailout, but overall it left the impression that Washington was too comfortable with Wall Street at the expense of ordinary people.

Biden now grappling with the notion that the bank rescue of 2023 is a repeat in short form In the 2008 bailout. By any plausible definition, they are certainly bailouts, no matter what Biden says: the government choosing to intervene in private-sector business and prevent losses, even though it is not obligated to do so. Are. Dole out

But the Biden team may very well execute the 2023 bailouts in ways that make them more palatable than the rescue operations of 2008. Biden correct when he says that so far no taxpayer money is going toward bailouts. The money covering depositors above $250,000 is coming from the insurance pool that covers the banks, which funds the banks by paying premiums. As Republicans claim, it is possible that the cost would be passed on to bank customers through higher fees. But it is also possible that it may not be in sufficient quantity to make a difference.

There are also consequences for bank managers who drove their businesses over the edge of the cliff. Management and signature are out in Silicon Valley. He will not get any news bonus. Stock worthless and will not return. bank officials who have stock the biggest losers, In 2008, by contrast, most banks that received bailouts survived, allowing plunging stock prices to recover.

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Some Silicon Valley executives sold the stock shortly before the crash, when they may have learned of non-public information about the bank’s precarious position. for the same Executive at First Republic Bank, which hasn’t failed but under pressure, with shares falling, ever since Silicon Valley plunged. If the evidence exists, prosecutors would relish the opportunity to pursue insider-trading charges and fix a lack of accountability since 2008.

Federal prosecutors are also investigating was there any fraudulent activity In any failed bank. are shareholders sue every bank, Too. And if the crisis persists, regulators will have the luxury of focusing on a handful of recalcitrant individuals rather than trying to rescue the entire financial system all at once. There’s never a good time to be involved in a bank failure, but the worst possible time might be when the last bunch of crooks got away with it.

Rick Newman a senior columnist yahoo finance, follow him on twitter @rickjnewman

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