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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

March 31, 2011 at 10:20 AM

Underneath the TARP: The cockroaches are bigger than ever

Treasury Secretary Tim Geithner says the TARP bank bailout is yielding a profit for the federal government. We’ll see. The facts will take time to come out, and require the efforts of a decimated press corps. But it’s not surprising. The rescue, if it worked half right, was always expected to produce such results.

That’s not the problem.

TARP was always seen by its smartest proponents, including candidate Obama, as half the solution to keeping the financial panic from turning into a deep depression. The other half, fundamental reform of the system, never happened, despite all the whining of bankers over the mild Dodd-Frank bill.

The panic and crash were a direct result of the dodgy swindles and high risk undertaken by the banking sector during the housing boom. These highly complex derivatives and other securities, insured with other complex vehicles cooked up by the likes of AIG, sold to investors in a world awash with money (your tax cuts at work), turned out to be the “financial weapons of mass destruction” that Warren Buffett warned against in 2003. Once housing values fell, mortgages went poof and a fire-sale mentality took hold, it turned out that many derivatives were “derived” from nothing.

Not much has changed. The banks are back to high profits, many coming from these “innovations,” and Mr. Obama’s chief of staff is a former executive from JPMorgan Chase. The regulators are just as whipped and captured as before the crash. The Too-Big-To-Fail banks that posed such systemic risk in 2008 are bigger than ever.

One thing has changed: Moral hazard. The bankers now know that whatever risky behavior they engage in, Uncle Sam will bail them out.

Meanwhile, the Wall Street Journal reports that Washington Mutual was a big customer at the Federal Reserve’s discount window in the days before it was taken over by the FDIC in the nation’s biggest bank failure. To the tune of some $6 billion. This is partly what the Fed is for, to be the lender of last resort. But the amounts show the degree of the bank run facing WaMu, one seeded by its old management, to be sure, but worsened by short-sellers on Wall Street. Regulators failed as well, both before and during WaMu’s crisis. But WaMu lacked the political pull of a New York institution, so it was closed and handed over to the very-well-connected Jamie Dimon.

Mission accomplished?

Today’s Econ Haiku:

Tycoons, they aren’t saints

Whatever Paul and Bill’s pique

They helped Seattle

Comments | More in Bailout, Banking, Washington Mutual

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