Who Lost the Most in the Financial Crisis? Ordinary Americans.

Bloomberg Opinion marks the 10th anniversary of Lehman’s bankruptcy with a collection of columns from around the world. Read more.

A decade after the collapse of Lehman Brothers Holdings Inc., there are still arguments about who was responsible for the 2008 financial crisis. But it’s also worth revisiting who paid for the crisis and who profited from it.

Any discussion about winners and losers, of course, must start with the bank bailouts. The centerpiece of that rescue was the Troubled Asset Relief Program, or TARP, an October 2008 federal law that authorized the U.S. government to “invest” in banks and their toxic mortgage-related assets. The U.S. Treasury invested $426 billion and ultimately recovered $441 billion when TARP ended in December 2014.

While it’s true that TARP turned a profit, the reward was laughably inadequate for the risk. The program bought assets that were deeply distressed — assets that ought to pay above-market returns when prices recover. Instead, TARP generated a return of less than 1 percent a year from October 2008 to 2014, while the S&P 500 Financials Index returned 5.3 percent and the S&P 500 Index returned 12 percent, including dividends. The difference amounts to hundreds of billions of dollars.

The Federal Reserve threw banks a lifeline, too, by holding interest rates near zero for years. The average effective federal funds rate dropped to 0.16 percent in December 2008 and remained below 0.25 percent through the end of 2015. That allowed banks to borrow money cheaply. It also sapped savers of badly needed income.

Those moves were undoubtedly necessary to keep the financial system and the larger economy from collapsing. But banks bore too little of the burden, and it’s difficult to view the bailouts as anything other than a massive wealth transfer from ordinary Americans to financial firms.

But there was another — arguably bigger — wealth transfer during the financial crisis between ordinary investors and more sophisticated ones. As the stock market tumbled from November 2007 to February 2009, retail investors pulled a net $152 billion from U.S. stock mutual funds, according to data compiled by Morningstar, including adviser and retirement share classes. More than half of those redemptions, or $78 billion, were during the market’s lowest points from September 2008 to February 2009.

Continue reading “Who Lost the Most in the Financial Crisis? Ordinary Americans.”