The U.S. Government Accountability Office (GAO) has released a comprehensive report on the government’s role in aiding large banks during the crisis, and how well new regulations can be expected to prevent bailouts the next time we have a recession. For anyone who’s been paying attention the last few years there isn’t a lot of new information, but the lack of clear recommendations and the lack of action is pretty underwhelming.
GAO report explains government bailout programs
The GAO report, titled “Government Support for Bank Holding Companies”, explains that TARP, QE, and other government bailout programs “helped to stabilize financial conditions, while participating firms also accrued benefits specific to their own institutions, such as liquidity benefits from programs that allowed them to borrow at longer maturities and at interest rates that were below possible market alternatives.” Some critics of the bailouts argue that they didn’t have much effect on the economy, but the GAO report claims that it “helped to avert a more severe crisis.”
“At the end of 2008, program use—measured for each institution as the percentage of total assets supported by the programs—was higher on average for banks and bank holding companies with $50 billion or more in total assets than for smaller firms,” says the report. “Differences in program use were driven in part by how institutions funded themselves. For example, while smaller banks relied more on deposit funding, larger bank holding companies relied more on short-term funding markets and participated more in programs that assisted these markets.”
Peter Lynch was one of the best growth investors of all time. As the Magellan Fund manager at Fidelity Investments between 1977 and 1990, he averaged a 29.2% annual return. Q1 2021 hedge fund letters, conferences and more The fund manager's investment strategy was straightforward. He wanted to find growth companies and sit on them Read More
This is the main justification behind the Dodd-Frank Act, if banks are forced to hold more capital than they can better withstand external pressures. But after more than a hundred pages of analysis, all the GAO can really say is that the law’s success depends on how it’s implemented and that not enough has been done to put concrete rules into place.
Setting timeframe for completing the process
“We recommend that the Chairman of the Board of Governors of the Federal Reserve System set timeframes for completing the process for drafting policies and procedures,” says the report. It doesn’t even call for specific rules, just for a timeframe for when we might know what those specific rules are.
Even people who don’t like Dodd-Frank should be able to get behind this. In the long run, we need to have policies in place to prevent another crisis; in the short run we need to get rid of the regulatory risk that still hangs over the financial sector.