Bailouts get a bad rap

Fact one: Of course it’s a bailout!

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

You might be feeling miffed about the government rescue of the two lenders that blew up recently, Silicon Valley Bank and Signature Bank. Agencies including the Federal Reserve and the Federal Deposit Insurance Corp. (FDIC) covered all deposits at the two busted banks, even though FDIC insurance only applies to the first $250,000 in an account.

Some businesses and 1 percenters had way more than the insurable maximum parked at the banks, and in theory they should have borne the pain of bankruptcy by getting in line to recover whatever was left of their money along with all other creditors. By making them whole, the government short-circuited a central feature of capitalism: the risk of failure that is supposed to make people careful about how they deploy their money.

American capitalism, however, exists inside an opportunistic political system that almost always favors what is expedient over what might be prudent. Republicans are howling about President Biden’s claim that taxpayers won’t fund the bailout, but a Republican president would have saved the depositors, too. In fact, Republican President George W. Bush did just that in 2008, because the alternative would have been an immediate crisis even worse than the financial crash that unfolded.

The gargantuan 2008 bailouts were deeply unpopular, ever though economists broadly agree that they prevented a depression that might have persisted to this day. The Biden bailouts, though much smaller, seem to be having a similar effect, given that deposit outflows at other regional banks under financial stress have abated, given the regulators’ signal that they plan to back all deposits.

The Biden team now has a chance to apply some of the lessons learned from 2008. The main element of those bailouts was the Troubled Assets Relief Program, or TARP, which involved direct infusions of cash into hundreds of banks, to keep them solvent. Since TARP did require taxpayer money, Congress had to pass a law authorizing up to $700 billion in spending. It only took about half of that money to stabilize the financial system.

The government charged interest on the money it doled out, and many banks repaid more than they took. The Treasury Dept. says the lifetime cost of TARP was only $32 billion, spread over many years. ProPublica tracked all the bailouts from the financial crisis and says the government has so far earned a net profit of $109 profit from TARP, plus the separate bailouts of mortgage agencies Fannie Mae and Freddie Mac. The biggest loss to taxpayers came not from any bank bailout but from General Motors, which took $51 billion in government aid yet declared bankruptcy anyway, leaving $11.3 billion unpaid.

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Still, the government made some mistakes. In general, it didn’t put enough restrictions on banks that took bailout money. One outrage was bailed-out banks paying fat bonuses to executives in the midst of a grueling recession, including some who led their firms into the abyss and were arguably responsible for the crisis in the first place. There were also “backdoor bailouts” that allowed floundering firms such as insurance giant AIG to pay back trading partners such as Goldman Sachs at 100%, when those counterparties should have taken losses commensurate with their own lousy risk assessment.

The Federal Reserve, the Treasury Dept. and other agencies involved in the bailouts drew criticism for opaque reporting that raised questions about who, exactly, was getting bailout money. Finally, there were hardly any prosecutions for fraud or any other criminal activity after the 2008 crash. That wasn’t directly related to the bailouts, but on the whole it left the impression that Washington was way too cozy with Wall Street, at the expense of ordinary folks.

Biden is now battling the impression that the bank rescues of 2023 are a repeat in miniature of the 2008 bailouts. They’re definitely bailouts, by any plausible definition, no matter what Biden says: The government is choosing to intervene in private-sector business and prevent losses, even though it’s not obligated to do that. B-A-I-L-O-U-T.

But the Biden team may very well execute the 2023 bailouts in ways that make them more palatable than the 2008 rescues. Biden is right when he says no taxpayer money is going toward the bailouts—so far. The money covering depositors above $250,000 is coming from the insurance pool that covers banks, which banks fund by paying premiums. It’s possible that cost will filter down to bank customers through higher fees, as Republicans claim. But it’s also possible it won’t amount to enough to make a difference.

There are also repercussions for the bank managers who drove their businesses to the edge of a cliff. Management at Silicon Valley and Signature is out. They won't get any new bonuses. The stock is worthless and won’t come back. Bank executives who held stock are among the biggest losers. In 2008, by contrast, most banks that got bailouts survived, allowing plunging stock values to recover.

Some executives at Silicon Valley sold stock shortly before the collapse, when they could have known non-public information about the bank’s precarious position. Same for execs at First Republic Bank, which hasn’t failed but has been under stress, with shares plunging, since Silicon Valley went under. Prosecutors will relish the opportunity to pursue insider-trading charges if the evidence is there, and correct the infuriating lack of accountability from 2008.

Federal prosecutors are also looking into whether there was fraudulent activity at either of the failed banks. Shareholders are suing each bank, as well. And if the crisis remains contained, regulators will have the luxury of focusing on a handful of recalcitrants instead of trying to save 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 after the last group of scoundrels got away with it.

Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman

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