Why The TARP Covered All Big Banks

Back when the government was figuring out what do about the financial crisis, there were a lot of rumors about how it handled the bailout. Some banks complained that they never wanted the money, but I heard few good explanations of how things actually went down -- or why the government would force money upon banks that didn't need it. But former CEO of BB&T bank John Allison provides some insight. I find his perspective useful and fascinating.

Allison's remarks come from an interview with the Big Think as part of its "What Went Wrong?" series that focuses on the financial crisis. I wondered what Allison's experience was dealing with the government during the bailout. He replied:

I was very opposed to the TARP program. In fact, I wrote Congress and tried very hard to keep TARP from happening. Unfortunately, however, once TARP was approved by Congress, there was significant regulatory pressure placed on all the large financial institutions to participate in TARP, particularly on all the $100 billion and over banks. The pressure was based on Bernanke's study of the Great Depression, where Roosevelt tried to bail out individual companies and the market reacted when he did that. At the time that TARP was instituted, there were three large financial institutions that were under stress, but Bernanke didn't want to bail those three out, because it'd be obvious he was helping them, so he used regulatory, I mean, intense regulatory pressure, to encourage all the $100 billion and over institutions to participate.

TARP was really a negative for the financial institutions. We didn't need the capital; we had to pay very high interest rates. They got warrants. And so it was really a subsidy for the unhealthy institutions at the expense of the healthy institutions. BB&T was one of the first banks to pay back TARP -- we paid it back as quickly as we possibly could.

I think his comment about Bernanke makes a lot of sense. It's well known that the Fed chief is a student of the Great Depression, so he certainly would have worried about whatever obstacles that FDR ran into. And it makes sense that Roosevelt would have had the trouble described. The moment the government has to selectively bail out a few firms, those firms' investors, creditors and counterparties will flip out. So instead, Bernanke decided to just bail out the entire system, so that it was harder for the market to decipher which firms were really the worst-off.

If you believe that markets deserve this information, then you probably hate this idea. If you think that it's sensible for regulators to prevent panic, then you might like Bernanke's strategy. I fall somewhere in between, as I see both sides. What I find most troubling is that the institutions that didn't need the bailout were not only forced to take the money, but also paid a hefty price for doing so and had to live under the government's compensation rules.

And that's really the harm that Allison talks about. I doubt banks would have complained as loudly if the government just handed them free money. But there were plenty of strings attached. In a sense, the interest and warrants that the healthy banks were forced to pay did ensure the survival of those who would have failed. Even though those troubled institutions didn't directly collect those payments, their benefit was derived by their investors and creditors not understanding the full extent of their problems and by not having a competitive disadvantage because under government constraints while competitors weren't.

The moral of the story, of course, is that bailouts are undesirable. That's why I strongly advocate Congress' efforts to create a non-bank resolution authority and whatever else is necessary to ensure that firms are allowed to fail. If these banks didn't have to be bailed out, then the financial system would have been better off -- even if it wouldn't have necessarily prevented the crisis altogether.