I observed some interesting behaviors in the investment industry following the collapse of Lehman Brothers in September 2008. There are many small investment firms that went out of business as a result of the fall.
Investment firms often leverage funds. Downside risk can be mitigated by a series of investments that go up as others go down and vice-versa. When Lehman Brothers went bankrupt they denied these firms a source of funds for leveraging. As Lehman went under, calls against all of its investments funds drew down the values of their funds to fire sale levels. Hence, a number for firms went under through no fault of their own.
Imagine working all of your life in a small investment firm. You put all of your capital in the firm. You work long hours. You don’t make the megabucks of the big firms. You make enough like everybody else, and whatever good fortune you get goes back in your firm. And suddenly, it is all gone. Your life’s work gone over night. And it was not your fault.
Had TARP or something like it been in place when Lehman went under then the cascade would have been prevented and many of these small firms could have been saved.
The conclusion is that TARP was intended to provide a firewall around some of the innocent investors who 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.
For the Tea Party to advocate that voting for TARP was a wrong idea – well – find someone who was washed out by the Lehman collapse and make your case. Remember that real people got hurt. Now imagine that the situation of many of these small firms is replicated to the large firms because TARP was not available, and think about how many jobs, jobs like yours and mine, are really dependent on the success of these larger firms who received TARP. Now think about risk and whose job you are willing to risk by not voting for TARP.
To me, TARP was a necessary evil. The recession would have become a depression without it. I don’t blame a politician who held his or her nose while voting for it.