TARP Equals Toxic Money

Government policy is to assist banks through government intervention. Basically providing money or guarantees through such programs as TARP, the government aspires to create confidence in the public that the banks are solvent and also to stimulate the banks to increase their lending to needy customers. However, there is an increasing prospect that the result will be the exact reverse of the intended objective.

There is a scenario where there will be three types of banks: 1) Nationalized banks are government funded banks such as Citigroup (C). Nationalization means in effect means the US government is the sole life support system to keep them from collapse. The formalities of acquiring stock are less important than who puts up the money or guarantees to keep them alive. Citigroup (and AIG) are nationalized by this definition. 2) Independent banks. These are banks that do not take government money. Banks like Goldman Sachs (GS) are working towards returning money so that they will not be under government control. B of A (BAC) would like to be in this group, but it is doubtful that B of A will make it. The presumption of this scenario is that if banks do not need government money, they must be OK. 3) TARP assisted banks. These are banks that have government money but which are not really in either of the other two groups. The government hopes TARP money will reinforce their position in the investing public.

Ironically, there is a growing risk that the public will see this in reverse. The stock market is already voting clearly how they see this, dramatically reducing the value of most banks' shares. The risk is that these banks in the middle will be seen as weak and possible risks, particularly to shareholders. It seems likely that many bank managements will start to return TARP money for fear that it is toxic and that their bank could be viewed as toxic for having this money. Banks may want to be free of government loans to be free of government imposed rules such as employee compensation and many other coming regulations. Talk about unintended consequences.

In summary, banks with TARP support may very well end up being viewed as toxic banks, as opposed to nationalized banks like Citibank or private banks like Goldman Sachs which operate without government support. If we see JP Morgan’s (JPM) Jaime Dimon, perhaps our most competent banker today, pushing to return money to the government, we can consider this a prophecy fulfilled.

Stock position: None.

Comments

[James Wilson:]

Toxic for those with 2 sets of books ?????

Mar 01 05:25 PM

[Big Al45:]

The idea that "TARP assisted Banks" will be viewed more adversely than "Nationalized Banks" is absurd. The two "Nationalized Banks" that the author cited are currently trading under $2 a share and its only a matter of time until C breaks the buck.

And yes, the public should regard "Independent Banks" as better investments that "TARP assisted banks." Most of the "Independent Banks" were smart enough and solvent enough to reject TARP money.

Paulson's forced TARP money on banks in an attempt to manipulate the market and protect the insolvent banks. He must think that investors are really stupid.

Mar 01 05:37 PM

[zermux:]

Paulson stated that the TARP money was only for healthy banks. All evidence certainly suggests that he was at best misleading us - at worst blatently lying to us. The alternative would be that the treasury and the FED had no clue about what was going on and have compentency issues.

I wonder if there is any chance of starting a class action law suit against the treasury/Fed for lying to us. At the very minimum there would be an opportunity to access emails and other documents that would tell us what they really thought at the time.

If it turns out that they were merely incompetent then I may be even more concerned about the future.


On Mar 01 05:37 PM Big Al45 wrote:

> Paulson's forced TARP money on banks in an attempt to manipulate
> the market and protect the insolvent banks. He must think that investors
> are really stupid.

Mar 01 06:31 PM

[jmorr:]

TARP funded banks are toxic to the equity, but the additional layer of funding looks pretty good to debt holders and trust preferred investors. Would you rather be sitting on junior debt of the insurance companies that have received no TARP, or the regional banks that have received the extra equity infusion. I'll take my chances with the TARP banks, less likely of a total wipeout!

Mar 01 08:04 PM

[ecliptix543:]

One variable for the regionals is their exposure to commercial real estate. We will see how that plays out throughout the rest of this year and into 2010. They may be better off now; there are quite a few empty strip malls around here and the outlook for small business leasing that space isn't very optimistic.


On Mar 01 06:54 PM ED K wrote:

> Looking at their earnings report tells me all I need to know.Toxic
> is putting it mildly I would rather say "TABOO".There are many regional
> banks that avoided the sub prime fiasco by not lowering their priciples
> and qualifications for their loans and have remained solvent and
> safe for all your banking needs.
>
> These regional banks could be the future of banking in our country
> as I believe we will see banks like C and BAC continue to struggle
> and maybe even fail.
>

Mar 01 08:56 PM

[InnocentsAb...:]

Let's see. Free money makes a corporation less healthy ? You are probably right. The companies getting the Fed and Treasury money are bad bets.

A free lunch is never very healthy for a business in the long run. Companies that get subsidies usually end up on the ropes. They become focused on getting more free lunches, rather than producing products anyone would want.

Kind of like the auto industry and the New York banks.

Trying to remember how the poor single mothers were supposed to get off welfare ?

I can easily imagine a large high school cafeteria full of the creditors of GM and BAC, sitting down, and getting day long seminars on how to get productive work, now that their investment free lunches are no longer panning out. My question is, will they have to bring their own lunches to the seminars ?

Mar 01 09:19 PM

[a fat panda:]

The real problem with the TARP is that it insulates the banks from reality. Giving them cheap capital only makes it easier to keep dead assets on the books. What this article fails to mention is the impact on well run banks. They have to get capital from the open markets where it is much more expensive. So we are subsidizing poor managers of capital at the expense of prudent managers of capital. That is fairly stupid public policy.

Mar 01 09:32 PM

[Stone Fox C...:]

The author nailed it. Having TARP funds will be negative for your stock. Fast Money tried to get the IberiaBank CEO to state that in theory having cheap money from the govt would be good and allow them to loan more money, but it appears that the stupid restrictions are too onerous. Partly I wonder if the execs just want to make more money or if it really holds the bank back. Now the crap with Northern Trust sponsoring a golf tourney is harmful. Being able to host events will put non-TARP banks ahead of the field.

The govt has to be the worst investors in history. We'll give you money, but you can't hire any qualified people. You can't market your company even when it generates profits. Its one thing to block excessive bonuses and such that execs don't deserve, but the rest is non-sense. Loved the part about the $50M in charity. Ouch.... Barney might be wiping egg off his face for a long time. Oh wait, Dems don't give to charities.

Mar 02 12:14 AM

[MattZN:]

TARP costs the banks 5%/yr for 5 years and 9% thereafter, right? I wouldn't call that cheap. No bank in their right mind would try to write 30-year mortgages at 5% using money that is going to be costing them 9% for most of that period.

Despite all the screaming we hear from the press and congress, TARP was never designed to be used by banks to make loans. Treasury knew it. The banks knew it. Apparently nobody else could be bothered to spend the 20 seconds it takes to do the math and come to the same conclusion. TARP was designed for the singular purpose of propping up balance sheets, and that is IT.

And why again would we want banks to be loaning more? Debt is what got us into this mess in the first place.

It would be nice if banks pushed back a little to make that point clear, and for congress to stop making absurd, ridiculous comments about what TARP was or was not supposed to do. Even a 10-year-old can understand math this simple.

Insofar as Citi and AIG goes, the situation those two are in have nothing whatsoever to do with TARP or any other government aid. Without that aid both would be in bankruptcy. The share price certainly would not be any higher.

There isn't much of a point in having the government take over the entities when the chain reaction that would be caused by their complete failure would likely cost the taxpayer a lot more then the money the government has already pumped in. I'd love to see AIG ripped apart but not until as much of their derivatives portfolio as possible is taken down. Otherwise the counterparty risk will create a chain-reaction of additional failures and people will realize that, hey, maybe it wasn't such a good idea as they thought it would be! In fact I think we are down to the point where only AIG, Citi, and BofA have derivative portfolios large enough to create a world-wide systemic chain reaction if they go down like Leman did. That's actually an improvement!

In anycase, if TARP could be said to be bad for the rest of the big banks, the reason would be more along the lines of the hysteria being promulgated by the media. If TARP weren't around I'm sure the media would find other punching bags to fuel their hysteria with. That said, I think most of the remaining bigger banks, like Wells, would rather just be given a credit line with the government that they can then choose not to actually use. It's kinda silly to be paying 5%/yr in interest on money that can't actually be used to further the interests of the bank beyond shoring up its balance sheet.

-Matt

Mar 02 12:56 AM

[PainfullyAware:]

TARP was a swindle of the American People.

If you think different; you did not read the legislation.

Band aids do not re-mediate gaping wounds. The Worst Is Yet To Come.

Mar 02 05:42 PM