The Success That Dare Not Speak Its Name

Two years ago the global financial system teetered on the brink. What happened?

By now the explanations of the housing bust and global financial panic are commonplace. Excessive leverage multiplied a modest correction in home prices into a capital-sucking vortex. Many financial institutions that made bad decisions during the boom—AIG, Lehman, Wachovia—went bust because of losses on mortgages

The failure of some key institutions initiated a domino effect in the overnight credit markets, where institutional investors began pulling their deposits and putting the money into Treasury Bills, whose yields became negative in some cases. So what happened to stop the madness?

In a world, TARP. Hank Paulson conceived it, and Barney Frank modified it so the US Government could place hundreds of billions of dollars into thousands of US banks. The effort stopped the run, especially on the biggest banks.

But now TARP has become a term of contempt, a populist pejorative that epitomizes elite self-dealing. Only—not. TARP funds stopped the institutional run on our banking system and were the epitome of an efficient government program: quick, effective, and profitable. Surprisingly few recipients have failed over the past two years, and many have returned the funds with interest.

Many think that without TARP, unemployment could have hit 25%, rather than 10%. Leadership requires tough decisions. TARP was one of them. Let’s hope the next batch of Congressional leaders will prove equally courageous.

Douglas R. Tengdin, CFA
Chief Investment Officer
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