Kovacevich: TARP Was One of The Worst Economic Decisions in History

Kovacevich: TARP Was One of The Worst Economic Decisions in History

Kovacevich: TARP Was One of The Worst Economic Decisions in History

Richard Kovacevich, former Chairman & CEO of Wells Fargo, provides his thoughts on how the government handled the financial crisis five years ago, and why he thinks the TARP program actually made the crisis worse.


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joining us now is dick kovacevich. he was in those closed doorbailout discussions during the crisis. and thank you very much for joining us. good morning. i know you were there at the time and i know you have a slightly different opinion than hank paulson does about t.a.r.p. why don’t you tell us what youthought about it? i think it was one of the worst economic decisions in the history of the united states. everybody was well intentioned. but the proposition that hank put before us was if we took this money, the confidence in the industry would go up.and i was arguing that day until i was told to be quiet is theopposite would happen. and let’s look at the facts. shortly after t.a.r.p., the stock market fell by 40% and the banking industry stocks fell by 80%. so how can anyone say that t.a.r.p. increased the confidence level of an industry when its stock market valuation fell by 80%. i think it caused the crisis to get much greater than it would have been if it would have beenhandled differently. and i think as we look back, you know, we could’ve handled it differently. and i think the facts support that handling the crisis differently would have made the crisis less severe than it actually was. you know, dick, there’s no question that the crisis put a lot of companies in the position, a lot of banks in the position where they weren’t going to be able to continue to function. if t.a.r.p. wasn’t the right answer, what was? well, see, what you should have done in my opinion is that most of the financial institutions after bear stearns and lehman were having a liquidity crisis. because they were not — they were funded with wholesale funds and therefore in the markets were seizing up. so i think what they should have done is to say that because of the seizing up of the markets, the fed and the treasury is going liquidity to those institutions who we do not think will fail but who need support at this time from theliquidity standpoint. and therefore you should have done that — they could also have said so that, you know, you don’t convey that there are safe banks and unsafe banks. you say the other institutions, at least at the moment are not suffering from liquidity. however, if they should, we are prepared to help them, as well. and if you would have done that, you would have then not conveyed as you did with the way this was operated is that the entire industry is in deep, deep trouble. the world is coming to an end and even banks that were aaa rated the day before now need $25 billion. the market reacted as you would expect it would and that i would argue that it would. it would be devastating and the confidence would decrease significantly not increase. what do you make of this argument? a, that you would be putting a scarlet letter on those banks that were in trouble? and, b, that we would be following the model of japan and the uk where we serially, serially bailed out banks onlywhen they needed to be bailed out but it took a much longertime. when you look at their economy and, frankly in the uk, i think you could argue and in japan, it took too long and the idea of recapitalizing the whole system at one time, even though irecognize you think it was a liquidity issue, there was still a capital issue, at least for some institutions. well, it was only a few institutions that were capitalized. how can you have an industry that could come back within six months of receiving this money and paying it back. and within a year, practicallyeveryone paid it back if, indeed, it was other than a liquidity crisis. we had record earnings in the first quarter of 2009. you think the reason we had record earnings in the first quarter of 2009 was because we received $25 billion in capital in october? the difference is we weren’t in as bad of shape as japan. and my point is you always have the opportunity to do something differently if it’s not working. everyone knew there was a liquidity crisis. what they — what you don’t understand is that everyone understood who needed the money and why.what shocked the market is that institutions they thought did not need the money that were performing reasonably well whodidn’t take the risk that other companies took in the crisis also needed money. oh, my god, the whole system is in bad shape.paulson described the program this morning as a voluntary one. i take it you take issue with that too. come on. he even says in his book about me as i was saying i don’t want the money. he says he looked over at ben bernanke and said that if you do not take this money, your primary regulator is going tocall you capital deficient on monday morning. is that voluntary?no, it doesn’t sound like you have much of a choice there. let’s talk a little bit about the fed. next week, the fomc is meeting and the market is speculating, at least, they will begin tapering. you think it’s about time? they have to taper now. the price has already been paid. it’s built into the market today, it would be shocking to the market if they do not taper. so they have to taper. and the amount is not relevant, just do something.whatever you think, the minimum amount, if you’re worried about it. i don’t think that the qe-3 is working. so, you know, i would definitely do $20 billion. but if you don’t like $20 billion, do ten and do it in treasuries because that’s the least valuable.but you have to taper because the market is expecting it. and the market will not understand anything if they do not taper in september. one question i have, back to the banking system for one second. it’s a question i’m asking all week it’s about concentration. and all of the mergers that took place during 2008 really to get through the night to the extent you believe that was the right decision, i’d be curious about that, as well. but, you know, now — given where we are, wells fargo, your former bank now controls about 30% of all mortgage origination. does that make sense for the country? from a policy perspective?well, yes, in this sense. we really don’t control 30% — in fact, it was probably 25. but half of the mortgages — half of our market share, mortgages originated by us through our retail network.the other half of our business is simply helping otheroriginators by channeling multiple originators together to get enough of a volume so that they can be given to fannie andfreddie and put out to the market. so it’s a wholesale function and someone has to do it. so the real concentration, if you want to call that, is the originations that you do yourself and that’s about a 15% level for us. so it’s still very diverse in terms of retail originations. dick, i want to thank you very much for joining us today. and we hope to see you back here onset again soon.

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