I said it last October and I’m sticking by it. And now, there’s actual evidence to back me up. The TARP bailout worked. The Wall Street crisis is over.
At least, the market thinks so. At around 30, the VIX, the market’s volatility barometer, is trading at less than half the average level of last autumn. A share of Morgan Stanley (MS) is trading more than 400% higher than its October low.
And by this coming Sept. 15, the first anniversary of the fall of Lehman Brothers, five of the original eight TARP banks will have repaid the American taxpayer $50 billion plus interest.
Don’t get me wrong. The economy is still in crummy shape. But, at least it’s functioning. Not too long ago, we fretted over TARP banks collapsing. Now, we worry about getting full value for our warrants in the same banks.
In an excellent piece published Wednesday, my WSJ colleague Peter Eavis grumbles about the measly 5.6% returns earned by taxpayers off their investment in the top 16 TARP banks.
But Paulson’s intent for TARP wasn’t just to make money for the taxpayer. It was to stabilize the credit markets and save the banks at the lowest possible cost.
And that’s exactly what TARP has done. Who can doubt the amazing recovery of the credit markets? The best performing asset class so far in 2009 has been distressed debt, up by nearly 40%.
And the banking system? Investors are now throwing money at it. In May, $85 billion of fresh capital was raised by TARP banks. Bank of America (BAC) alone has raised $33 billion in capital since the start of the year.
All of this is not to suggest that TARP alone made all these good things happen. Certainly, Ben Bernanke’s Fed has been pretty forgiving with its monetary policy.
Nor is it to suggest that Hank Paulson knew exactly what he was doing in the frenzied days of last fall. He didn’t. The TARP as originally conceived was to buy up toxic assets off the bank balance sheets. To this day, those assets are still sitting there.
But TARP was the beginning of the end of the crisis. And it was Paulson’s baby.
He got the Treasury its $700 billion blank-check, in spite of furious opposition from his own party. He got all the big banks – the good (JPMorgan), the bad (Bank of America) and the ugly (Citi) – to go along with TARP.
And by structuring the Treasury’s investments with repayable preferred equity and warrants, he gave both the taxpayer and the banks a workable exit strategy.
Of course, everybody in Washington and on Wall Street, got all excited when Obama came to town. The collective wisdom was that both Paulson and his TARP were failures. And the incoming Treasury secretary duly promised all sorts of new-fangled programs like the PPIP.
But what did Geithner end up doing?
Basically, what Paulson had done before. The TARP. Yes, the Treasury dressed the TARP up with the rigor of the ‘stress tests,’ but at its core Geithner’s primary policy is the TARP.
Nothing wrong with that. If something works, it works. Just give credit where it’s due. And that would be with Hank Paulson, national hero.