Drucker: Policymakers deserve credit for saving a sinking ship

Vanessa Drucker 450 Index

Last week, the S&P 500 touched multi year highs, a feat that few would have predicted during the cataclysmic months of 2009. Ironically, earlier this month, Matt Taibbi of Giant Squid Goldman Sachs fame, published another excoriating piece in Rolling Stone magazine.

Taibbi’s article, which outlines various deceptions perpetrated during several government bailouts from 2008-2010, deserves a look. It is unremarkable for its investigative journalism, and offers absolutely no new revelations, at least to those who were paying attention during the upheavals. What it does provide is a critical reminder of the shocking events surrounding the crisis. We all tend to forget too easily.

Taibbi’s account of a fictitious “narrative,” describes a strategy designed to salvage and recapitalize the banking sector, to the detriment of mortgage holders and consumers. Some main points are:

  • Initial promises to use TARP funds to buy and modify mortgages were transformed overnight into plans to infuse money directly into banks and companies

  • Out of $50 billion earmarked in 2009 for helping homeowners, so far only $4 billion has been disbursed

  • Banks have been parking interest-generating money at the Fed, rather than parlaying those funds into loans

  • Banks have used artificially cheap government money to achieve their TARP repayments

  • Government mischaracterized institutions, most notoriously Citi and AIG Financial Products, as sound, in order to “bolster confidence” in the system

  • Stress tests proved an accounting mockery

  • Executives finessed TARP restrictions to pay themselves bonuses and long-term restricted stock

I tend to support Taibbi’s view, despite its shrill language, particularly the unintended consequences of creating a class of Too-Big-To-Fail institutions, and I have written about the subject extensively since 2009. But it’s only fair to weigh the context. In 2008, Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke faced a likelihood of global financial collapse, as markets imploded. Fractional reserve banking is, and will always be, a confidence game, sometimes requiring smoke and mirrors to prevent devastating bank runs. This time, as the world gets back to business, and financial markets revive, give some credit to policymakers who saved the ship.

Vanessa Drucker is the American Editor of Fund Strategy, based in New York City. She has worked as a financial journalist for 20 years. In the 1980s, she practiced banking and securities law on Wall Street, and is the author of two business novels. Vanessa can be contacted at vanessa.drucker@centaur.co.uk.