Fallout: The Financial Crisis

Guarantees put taxpayer money at risk

Marketplace Staff Nov 6, 2009
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Fallout: The Financial Crisis

Guarantees put taxpayer money at risk

Marketplace Staff Nov 6, 2009
HTML EMBED:
COPY

TEXT OF STORY

Bill Radke: You know that when taxpayers bailed out the financial system last year, the government injected a lot of money into the banks. What you might have missed was the amount of guarantees the government was giving financial institutions — insuring bank debt, back-stopping money-market funds. Guarantees that were more valuable and more risky than Congress ever intended. That’s the conclusion of a new report out this morning from the Congressional Oversight Panel that’s still monitoring the bailouts. Harvard Law Professor Elizabeth Warren chairs the panel. And she joins us now. Good morning.

Elizabeth Warren: Hi, I’m glad to do it, Bill.

Radke: Why was our government so… What’s the word, professor? Vague? Secretive?

Warren: Well, I think the way to see it is they announced the guarantees and the dollar amounts behind them were not part of the headline.

Radke: And you can argue, professor, those guarantees ended up working pretty well.

Warren: Absolutely. The guarantees calmed the markets, and at least so far, they may actually turn a modest profit for the taxpayers.

Radke: So what’s the problem now?

Warren: Well, the problem is they came with enormous risk, but the real effect of them is that the guarantees distort the marketplace. And this is the heart of where what we call moral hazard exist.

Radke: Tell us more about that. Why is this a moral hazard?

Warren: Well think of it this way: If we have two financial institutions. One is regarded as too big to fail and it gets an implicit guarantee from the government, and the other one doesn’t. Then the one with the guarantee has a business model, or can have a business model that says — if you’ll let me draw it in the extreme — “Give me your money, investors. I’m going to go Las Vegas, bet it all on red 22. And if comes up red 22, man, we’re all rich. And if doesn’t come up red 22, hey, the taxpayers will pay you back the money you invested.”

Radke: How much taxpayer money is the government still gambling?

Warren: Well, the big one is on Citibank. We guaranteed more than $300 billion of outstanding value in their assets, and it’s still there. That is our single biggest guarantee.

Radke: And how transparent is the government being about that?

Warren: Well, we think we need a lot more transparency. And in particular, we think we need more transparency in the Citi transaction so we know whether or not our risk is really only small or if our risk is really quite substantial.

Radke: Harvard law professor Elizabeth Warren chairs the Congressional Oversight Panel. She’s out with her latest report this morning. Professor, thanks.

Warren: Oh, thank you.

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