CHAIRMAN MASSAD: Bold, Steady Leadership in the Face of the Financial Crisis

As President Obama took office in January of 2009, our nation was in the depths of the worst financial crisis since the Great Depression. We were losing more than 750,000 jobs a month. Ultimately, those job losses totaled nearly nine million. Over five million American families lost their homes. Countless small businesses were shuttered, and about thirteen trillion dollars in family wealth was destroyed, costing many Americans their retirement savings, their chance to go to college, and other opportunities.

We’ve come a long way in the eight years since the President took office. Since 2010, we have seen seventy-nine consecutive months of private sector job growth, adding a total of 15.5 million jobs. The unemployment rate has been cut in half, rising home prices have restored more than six trillion dollars in home equity, the S&P 500 has risen by about three hundred percent, and we have seen the fastest sustained deficit reduction since World War II.

The causes of the crisis were many, accumulating over a number of years. They included a bubble in house and other asset prices; banks and investors taking on excessive risk they did not understand; mounting corporate and household debt; and a neglected regulatory system that had significant gaps and deficiencies. But once a crisis starts and threatens to take down the financial system, the focus must not be on looking for someone—or something—to blame, but instead on stopping the panic and preventing the economy from crashing. And so, President Obama’s administration launched an all-out effort to do just that.

A central part of the effort to stabilize the financial system was the Troubled Asset Relief Program, or TARP. TARP was a bipartisan program that the Bush Administration launched by providing capital to the largest banks. I was honored to serve my country by helping President Obama continue the work of TARP. We provided capital to hundreds of smaller banks, including over eighty-four community development financial institutions. We implemented a housing program that helped five million Americans stay in their homes by modifying their mortgage payments. We restarted the frozen credit markets, by providing backstops and using government capital to leverage private investment. And we prevented the U.S. auto industry from collapsing.

President Obama also took action by requiring stress tests of the biggest banks to determine how much additional capital they needed. And we made sure they raised it.

The work didn’t stop there. In fact, the effort to stop the crisis and get the economy moving involved many other programs—some launched by the Federal Reserve Board, the Treasury, the Federal Deposit Insurance Corporation, and other agencies. These efforts were complemented by the monetary policies of the Federal Reserve and the President’s economic stimulus package. It was a war fought on many fronts, and it succeeded.

President Obama exhibited steely determination and a willingness to be bold and creative. There was no playbook. There was no precedent. And it wasn’t clear what would work. It was a process of considering a number of possible solutions and making corrections as we went.

The President showed wise judgment. He waded through a diversity of opinions on every issue. There were those who said the government should let the market correct itself, while others said we must nationalize the big banks. Some argued our first priority in stopping the crisis must be to not create moral hazard—let those who made bad choices suffer their fate or else there would be no incentive to avoid taking excessive risk in the future.

President Obama recognized that fighting a financial panic is like fighting an out-of-control fire in your neighborhood. Passively hoping it will burn itself out may mean it spreads and takes down the whole community. And as the fire rages, it doesn’t matter whether your neighbor was at fault for smoking in bed. You must still put it out to save the community.

And we did. Our economy recovered faster for it. One need only contrast the slower pace of recovery in countries that failed to act as comprehensively and as expeditiously as we did.

TARP not only enabled our banking system to recapitalize and our credit markets to restart; we also recovered more on all the investment programs than we disbursed—$442.1 billion recovered versus $434 billion disbursed.

Could we have done things better? Certainly. And we should learn from our experience. But given the magnitude and unprecedented nature of what we were facing, some of the second guessing—with the benefit of hindsight—was like criticizing the fire department for using one bucket of water too many.

In my view, our biggest shortcoming was a failure to communicate why the actions were necessary to help Main Street. Many believed we simply helped Wall Street. But the financial system is like the circulatory system—the body can’t live if it isn’t pumping blood to all parts.

President Obama also moved quickly to pursue reforms that would address the weaknesses of our regulatory system and the gaps in oversight. One of the most glaring was the complete lack of regulation of over-the-counter swaps. These types of transactions, such as credit default swaps, brought AIG to the brink of collapse. But for the massive intervention by the federal government, AIG would have fallen, and probably taken our economy down with it. A total of $182 billion was committed over the course of several months to prevent that from happening. Though we recovered all these funds at a profit, such a commitment was an outrage—and should never have been necessary.

As in the United States, swaps were largely unregulated around the world. The market was a tangled spider web of bilateral transactions among the world’s largest financial institutions, with no transparency and nothing to ensure adequate capital or collateral. Therefore, a default by one big bank could easily lead to a cascade of defaults. In the spring of 2009, President Obama joined the other leaders of the G20 in committing to address this issue, through a set of reforms of these markets. The U.S. enacted these measures as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, along with a variety of other measures needed to modernize our regulatory system and address causes of the crisis.

The Commodity Futures Trading Commission was the primary agency charged with implementing these swaps reforms. And we have largely completed the job. The reforms have required that more capital and collateral stand behind these transactions, and that standardized swaps are cleared on central clearinghouses and traded on regulated platforms. They have required that swap dealers abide by basic oversight requirements, and that we increase transparency in this market.

Swaps, which are a type of derivative, are now being regulated in a manner that is more consistent with other derivatives markets—such as futures. These markets have generally functioned effectively over the years. Although most Americans do not participate in these markets directly, they profoundly affect the prices we all pay for food, energy, and most other goods and services. They enable farmers to lock in a price for their crops or airlines to hedge the costs of fuel.

Many other reforms have been implemented under Dodd Frank, with the overarching goal to make the system safe for failure. That is, failure is part of a healthy, competitive economy. We want a system in which the failure of a major financial institution does not create a systemic crisis. Other reforms include increased bank capital requirements, limitations on certain types of risky activities, and developing the means to resolve a large institution without resorting to taxpayer funds. The work is not yet finished on any of these fronts, but the progress we have made over the past six years has been substantial.

Following the 2016 presidential election, repeal of Dodd-Frank is now mentioned as a priority of the incoming Trump administration. But a wholesale repeal seems unlikely. Eliminating all the steps we have taken, which have decreased the risk that a globally significant financial institution’s failure will take down our economy, would not seem to deliver on the President-elect’s promises to working class voters, many of whom believe the government has been captured by powerful interests. Moreover, there is a wide consensus that the reforms made to bring transparency and oversight to the swaps market made sense.  We may see changes in details, but I do not expect repeal of this new framework.

Even before he assumed the Oval Office, President Obama was confronted with one of the most significant challenges any modern president has faced. And I believe that when historians look back, Barack Obama’s legacy will be one of bold thinking and steady leadership—and a commitment to do everything he could to prevent an economic crash and reduce the pain of this terrible event, and then put in place common-sense measures to help ensure this doesn’t happen again.

Should more have been done to help those hardest hit by the crisis? Yes, but TARP funds could only be used, by law, to purchase troubled assets from financial institutions. More importantly, Republicans in Congress blocked other initiatives.

Our economy still faces significant challenges, particularly as a result of structural shifts that have occurred over decades due to globalization. This past election underscores that.   We need to do more to have an economy that creates opportunity for all Americans, such as infrastructure spending, job training, increasing the minimum wage, tax reform, and making higher education more affordable. But we would be much further from that goal if it weren’t for the focus, determination, and good judgment of our forty-fourth president.

Timothy G. Massad is Chairman of the U.S. Commodity Futures Trading Commission. He previously served as the Assistant Secretary for Financial Stability at the U.S. Department of the Treasury, where he was responsible for overseeing the Troubled Asset Relief Program.

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