Wednesday, October 6, 2010

Under The Shelter of TARP

As Tea Party activists target Republicans who supported the 2008-09 federal bailout which rescued the U.S. financial system (and would be in the black as of today if it weren't for losses related to mortgages), Rich Straton reflects on the story of a friend in Newport Beach who had spent nearly 20 years building up a fund specializing in municipal bonds that had served its investors well until Lehman Bros. failed in September 2008:
Lehman was one of the leading providers of the bond funds that Bob leveraged against each other. As Lehman went under, calls against all of its investments drew down the values of all of their funds to fire sale levels. For Bob, all the investments were down in his hedge fund and the fund was bankrupt.

Almost 20 years of work and the reputation that goes with it was almost all gone. Bob took the remnants of the fund and started over. And the point is that Bob did nothing wrong. He was the prudent investor and advisor. The problems with Lehman cascaded into his business. They also cascaded into other small investment businesses that went bankrupt that season.

Had TARP or something like it been in place when Lehman went under then the cascade would have been prevented and Bob’s fund would have been saved.

The conclusion is that TARP was intended to provide a firewall around some of the innocent investors who, like Bob, did nothing wrong. These are the people who responsibly managed the retirements of lots of small investors whose retirements are now either gone or severely impaired. The impact could have been disastrous for so many.

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