The Nefarious and Destructive World of TARP

The announcement in the last few days of a deal reached between the U.S. Treasury and the moribund insurance giant A.I.G. (AIG) provides a very lucid insight in to the nefarious and destructive world of the Troubled Asset Relief Program, otherwise known as TARP.

Not only has A.I.G. received $152 billion to date and subsequently reported a third quarter loss of $25 billion, now they are to be cleared of their obligation on $53 billion worth of toxic credit default swaps. U.S. taxpayers are now on the hook for $205 billion courtesy of an institution which played in the Wall Street casino that passes for a "Financial sector" and lost.

Under the "free market" system, so expounded upon by government and Wall Street alike, A.I.G should be in chapter 11. Bailing out A.I.G and other failing institutions does absolutely nothing to address the fundamental issues at hand.

The economy is in crisis because unemployment and overarching debt levels pushed thousands of families in to the untenable situation where they did not earn enough to cover their debts. This burst the real estate bubble inflated by Alan Greenspan, crashed real estate prices, consumer spending and manufacturing. What we are seeing now is the inevitable result of lack of financial regulation, lax monetary policy and a symbiosis between government and the financial industry. The mortgages taken out by buyers had been bundled into complex financial instruments; mortgage backed securities.

The latter along with credit default swaps and derivatives set the stage for a global financial meltdown. The Glass-Steagal act of 1933 had been conceived to prevent the Banking sector from indulging in high risk investments to protect the depositors of these institutions. This was repealed at the end of the Clinton Administration through the Gramm-Leach-Bliley Act of 1999 which opened the gates to financial destruction. With the stroke of a pen, the financial services sector was given the power to literally bring down an economy .

The most urgent matter for Treasury to address is the toxic derivatives market. The notional amount of outstanding derivatives, as noted by the Bank of International settlements, comes close to $512 trillion. This represents a figure that is impossible to settle and is the real armageddon which banks are preparing for by hoarding the cash that they have received through the TARP..Unless this time bomb is defused by bringing the undeclared positions on the table, the duration and gravity of this crisis can only increase.

As the underlying assets of these instruments crumble the banks' exposure to counterparty risk increases and will lead to the inevitable collapse of even more banks and reduce the availability of investment credit even more. The underlying assets include interest rates, mortgages, foreign exchange rates, credit ratings on companies and even creditworthiness of entire countries. This is the level of insanity that has passed for "leveraged investment"

With over $3 trillion of taxpayer money injected in to banks, insurance companies, commercial paper, Fannie (FNM) and Freddie (FRE), what has come back to benefit the dying economy? A reduction in lending, increased interest rates on credit card payments and further losses for these same institutions. No big surprise as the real economy has never stopped its nosedive. Does the Treasury really not realize that there is no point in investing in companies that have no chance of redemption?

By handing over Americans' hard earned tax dollars and indebting future generations, the Treasury has been engaging in the biggest transfer of wealth in Human history. The U.S. is now the biggest debtor on the planet and the rest of the world has noticed. China, Japan and the oil kingdoms that buy U.S. debt are losing faith, and it's only a matter of time until they turn off the tap.

Comments

[venividivici:]

Spot on, Andrew!

2008 Dec 07 06:51 AM

[prudentinve...:]

You are right. The financial industry bailout was a mistake, and it keeps getting bigger. Government should have protected the banks' innocent customers, whether depositors or borrowers, but should never have gotten involved in guaranteeing the games banks were playing with each other via credit default swaps and other derivatives.

The financial industry should have been given notice that they need to get together and wind down the giant pyramid of CDS's they all had with each other in an orderly way, perhaps with the help of a government arbitration board, but no government money. It is, at the end of the day, a giant near-zero-sum game that financial companies were playing with each other.

2008 Dec 07 08:21 AM

[shagbarker:]

Insight is better than hindsight. The repeal of Glass-Steagal, promotion of interstate banking, efforts designed to drive down real wages, eliminate or reduce pensions, health insurance, to de industrialize the United States all have had the effect of driving down wages and reducing aggregate purchasing power. People are not undergoing foreclosure to have fun, but because we adopted an economic and fiscal policy that made them to poor to pay their bills. In the short run preservation of financial assets and institutions may be necessary, but unless we adopt an incomes policy designed to increase wages and return purchasing power to consumers we are unlikely to succeed. Bail outs of GM and Ford may be distasteful but if we think that terminating UAW pensions and health care and cutting wages will sell more cars, well then I know this bridge in New York I would love to sell .

2008 Dec 07 08:40 AM

[socrateazz:]

The Detroit car companies have really been in trouble and getting worse for 30+ years. As they had problems, they would make minor changes. leverage up their value and continue on their way. Any companies that do not contain excess wealth over expenses will collapse when economies cause a reduction in revenue. Laying off workers is the current fix. The snowball is growing! I expect it to fly apart and make the world deal in real wealth not wealth in appearance only. Auto workers are only worth the amount of wealth they create! Anything in excess is borrowed wealth or with a bailout ...wealthfare.

2008 Dec 07 09:00 AM

[Moon Kil Woong:]

I think the current fed thinks like this. In the depression banks went under. So to stop a depression or any semblance of it, just stop the banks from going under. But, the death of banks is just one culmination of adverse circumstances, certainly not the root cause. If you said, keep the banks alive would it have stopped the depression? Probably not, after all closing the banks didn't help either although it kept many of them alive.

Dumping funny money, floating tons of treasuries which soak up cash leaving nothing for anyone else is just about as bad as closing banks. Yet, that is what the fed is doing precipitating a global shortage of dollars which fuels deflation among other things (although it keeps the dollar artificially high). Already the fed is blowing up their balance sheet by trillions with no oversight, paying interest on deposits to encourage banks not to loan but put money in the fed to fuel their artificial expansion, and dumping all the TARP money into friendly financial institutions that are doing nothing but using it to write off their losses (paying each other who then put it into treasuries).

TARP is just a drop compared to what they are doing under the TARP. I really wonder, are they intentionally shrinking the money supply? Are they intentionally trying to increase the Fed into more than a lender of last choice that will hold the keys to the economy maybe forever? Are they intentionally bankrupting the US and robbing taxpayers to pay their friend's lagress? You answer, I am a bit too biased at this point.

2008 Dec 07 10:16 AM

[Andy B.:]

"I really wonder, are they intentionally shrinking the money supply? Are they intentionally trying to increase the Fed into more than a lender of last choice that will hold the keys to the economy maybe forever? Are they intentionally bankrupting the US and robbing taxpayers to pay their friend's largess"

I believe they are intentionally doing it, but not necessarily for their friends. In order to usher in the New World Economic Order, America must be brought down to an equal economic footing with all the other countries. No more soverignty.

What's a better way to collapse our economy? Drain our resources with an endless war, huge transfers of money to other countries, an unprecedented and a purposely-created economic crisis with attached bailout and viola, eventual and inevitable economic collapse.

It's my belief that the current administration, the upcoming administration, the U. S. judicial branch, legislative branch and executive branch are all guilty of high treason and conspiracy to commit high treason. There is no other explanation for our current troubles. Either they are guilty of gross criminal mismanagement and stupidity or they are ruining our country on purpose to accomplish their NWO goals. Any fool can see Congress sold out this country a long time ago and continue to do so.

The sad thing is we can't revolt because we sold away our right to do so under the guise of national security. Just try to flex a muscle against our entrenched police state and you are branded as a terrorist and carted away. We sold our soul to the devil and now we must pay.

"This description of a sovereign state is denied, however, by those who assert that international law is binding. Because states are limited by treaties and international obligations and are not legally permitted by the United Nations Charter to commit aggression at will, they argue that the absolute freedom of a sovereign state is, and should be, a thing of the past. In current international practice this view is generally accepted. The United Nations is today considered the principal organ for restraining the exercise of sovereignty." (freedictionary.com)

2008 Dec 07 01:48 PM

[Warm_Paw:]

AIG saw easy money in insuring Credit Defaults thinking real estate prices would forever climb and therefore no defaults would occur.
Knowing housing prices were climbing many people used home equity loans (second mortgages) to pay for their homes riding this increase in home price.
When everyone realized they owed more than their equity and their teaser rates expired, they all handed in the keys at the same time.
The more selling, the more falling of house prices.
The more credit defaults.
Real Estate prices ramped up out of thin air, property value increased for no other reason than demand.
That value is now coming down again.
All a state of mind.
So to keep AIG from being yet another problem to add to the economic mess, while riding out the change in the state of mind, the govt has chosen to bail them out.
The Govt understands the way to mitigate our way out of this mess is to buffer the impact of the falling giants until the state of mind changes.
Yes at the expense of the tax payer, but the tax payer will know what true chaos is if their financial giants all collapse in a heap of dust.
No work, no taxes, no giants, no civilized infrastructure.

The interesting thing is the value of anything rides on human emotion and trillions are made and lost in the value investors deem a company or a home, to be worth.

The questions to be asked, where does the money come from when property increases in value, and where does it go when the same property loses it's value?

AIG not being able to pay the bank on it's insurance claim causes the banks to fail. The banks made very risky investments believing that insurance companies truly could cover the investment if the investment went bad. Banks and Insurance companies knew when the defauly swaps were larger than their own capital that would be impossible.
That's were greed overtook reason.

The bank implosions are also helped along by fractional reserve banking. This form of banking mutates the true amount of physical currency held by banks. They deem themselves at a higher value of money than is truly held and when the depositors all want their money back, the banks have to unwind money amounts they never truly had amassed thus making them go under faster.

I'm amazed there's no regulatory cap on a bank's capital and that they're allowed to leverage on money they don't have even if they can purchase insurance to cover the failure of their investments.

Surely AIG understood they couldn't cover the losses looking at their own capital. There should be a regulating body making sure these institutions can cover their worst case scenarios.

2008 Dec 07 02:16 PM

[CJJ:]

If the US is doing all you say, why don't you comment on the other countries of the world where the SAME EXACT THING IS HAPPENING and they have NO RIGHTS.
If the US is such a terrible place, move away to some fictional place where these things do not occur.
Only in the US can we have people who write a post like you have written at the same time we have lawyers and people defending the "rights" and "humane treatment" of terrorists out to take down our society.

On Dec 07 01:48 PM Andy B. wrote:

> "I really wonder, are they intentionally shrinking the money supply?
> Are they intentionally trying to increase the Fed into more than
> a lender of last choice that will hold the keys to the economy maybe
> forever? Are they intentionally bankrupting the US and robbing taxpayers
> to pay their friend's largess"
>
> I believe they are intentionally doing it, but not necessarily for
> their friends. In order to usher in the New World Economic Order,
> America must be brought down to an equal economic footing with all
> the other countries. No more soverignty.
>
> What's a better way to collapse our economy? Drain our resources
> with an endless war, huge transfers of money to other countries,
> an unprecedented and a purposely-created economic crisis with attached
> bailout and viola, eventual and inevitable economic collapse. <br/>
>
> It's my belief that the current administration, the upcoming administration,
> the U. S. judicial branch, legislative branch and executive branch
> are all guilty of high treason and conspiracy to commit high treason.
> There is no other explanation for our current troubles. Either they
> are guilty of gross criminal mismanagement and stupidity or they
> are ruining our country on purpose to accomplish their NWO goals.
> Any fool can see Congress sold out this country a long time ago and
> continue to do so.
>
> The sad thing is we can't revolt because we sold away our right to
> do so under the guise of national security. Just try to flex a muscle
> against our entrenched police state and you are branded as a terrorist
> and carted away. We sold our soul to the devil and now we must pay.
>
>
> "This description of a sovereign state is denied, however, by those
> who assert that international law is binding. Because states are
> limited by treaties and international obligations and are not legally
> permitted by the United Nations Charter to commit aggression at will,
> they argue that the absolute freedom of a sovereign state is, and
> should be, a thing of the past. In current international practice
> this view is generally accepted. The United Nations is today considered
> the principal organ for restraining the exercise of sovereignty."
> (freedictionary.com)

2008 Dec 07 10:22 PM

[Fred Gwynn:]

Unfortunately - this is the type of misinformation the feeds the paranoia, and conspirtacy theories, and true ignorance displayed here.

to statrt, AIG does not have a $205bn bailout, and AIG has tapped only about $60bn, of the supposed $150bn lifeline, to start. Now, I am not defending AIG, Congress or anyone, but let's get the facts straight.

We are dealing pure and simple with a lack of self responsibility, compounded by an ability to transfer risk away to other people and institutions.
But at the heart, is people taking on too much debt, and a Congress pushing for higher and higher home ownership %.
The path to hell paved with good intentions.

2008 Dec 09 06:03 PM

[User 305589:]

AIG is THE cornerstone of the CDS-casino. That's really bad, but that's a fact. Of course, you can let AIG fail and watch how a financial tsunami rolls over the entire planet killing millions of sound businesses and many million jobs, incomes, savings, pensions etc.
Lehman's collapse and the shockwaves around the globe that followed should have given an indication of what we will likely face if AIG was allowed to fail.
On the other hand, that being said, the 512 trillion numbner sounds more horrible than it is. Ironically, the gazillions in GM-CDS that have been written (many times the actual amount of GM-debt outstanding) make it more complicated to let GM fail/file for Ch 11 and restructure it. The financial hydra has come full circle. Not only did the big banks drain ressources and talent from productive uses, they now make it harder to deal with the real economy that has been hit by their excesses.

At the end of the day, some people will again make unjustified fortunes on the back of the vast majority. Which is very bad as well - but a fact, nonetheless.

2008 Dec 10 08:52 AM

[Jason Rines...:]

Close to zero sum in settlement means roughly 2% of broker fees a counter-party somewhere has to pay out. Lehman derivatives settlement was1.7%. What is 2% of
$512 T? That is $10 T the global financial community must ultimately settle at a loss. Those are still staggering numbers to me. $64 T in U.S. derivatives to settle, $1.5 T. This is the amounts being dumped on taxpayers. What could the U.S. do with $1.5 T? Be well on our way to energy independence and massive job/wealth creation. PS: The article was well written.


On Dec 07 08:21 AM prudentinvestor wrote:

> You are right. The financial industry bailout was a mistake, and
> it keeps getting bigger. Government should have protected the banks'
> innocent customers, whether depositors or borrowers, but should never
> have gotten involved in guaranteeing the games banks were playing
> with each other via credit default swaps and other derivatives.
>
>
> The financial industry should have been given notice that they need
> to get together and wind down the giant pyramid of CDS's they all
> had with each other in an orderly way, perhaps with the help of a
> government arbitration board, but no government money. It is, at
> the end of the day, a giant near-zero-sum game that financial companies
> were playing with each other.

2008 Dec 10 11:45 AM

[sr9web:]

Why any public company should be able to own CDS protection against debt they don't own puzzles me. A CDS is a form of insurance and the 1st rule of insurance is: Do you have an insurable interest?

These CDS's must be regulated very carefully.

2008 Dec 10 10:17 PM

[andy b:]

I'm not moving away because I'm staying here so that when the eventual collapse comes and anarchy reins I can be part of the execution squads that hunt down the corrupt politicans and their families. That seems to be quite an effective policy with the war between the Israelis and the Hamas; not only are the Hamas leaders being killed but so are their families in bombing raids. You can't beat that! Even that policy will make any sociopathic and suicidal Palestinian think twice about leading a terrorist group when they know that their whole family will be executed along with them for their terrorist activities. These cowards think they can hide behind their wives and children and mosques but they are finding out otherwise.

It is also an effective deterrent in China; a quick trial and execution with a bullet to the back of the head for corrupt politicians and criminals.

Taking it one step further; execute all known gang members in the United States and all career criminals.

On Dec 07 10:22 PM CJJ wrote:

> If the US is doing all you say, why don't you comment on the other
> countries of the world where the SAME EXACT THING IS HAPPENING and they have NO RIGHTS. If the US is such a terrible place, move away to some fictional place where these things do not occur.
>
> On Dec 07 01:48 PM Andy B. wrote:

Jan 04 02:51 PM