TARP: Bailout or Money Pit?

Since the TARP bill was passed in October, over $332 billion have been “committed for investment” to 473 financial institutions (according to Propublica.com).

Here are some more interesting facts:

1. 23 financial institutions received at least $2 billion in TARP funds.
2. These 23 institutions received 93% of the total funds distributed.
3. The average stock decline of these companies is -52% since the beginning of 2009, over twice the decline of the S&P 500.

If you believe in the efficient market hypothesis, then the market doesn’t seem to believe that these funds are going to be enough to save these critically wounded giants. Are they too big to fail or are they too big to possibly save? The only two stocks that have outperformed from this group are Goldman Sachs (GS) and Morgan Stanley (MS). Did they even need the bailout? You decide.

	Bailout Amount	Price YTD
Name	(in millions)	as of 3/5/09
AIG	$75,000	-77.7%
Bank of America (BAC) (incl. Merrill Lynch)	$45,000	-77.5%
Citigroup (C)	$45,000	-84.8%
Wells Fargo (WFC)	$25,000	-72.5%
JPMorgan Chase (JPM)	$25,000	-47.4%
General Motors (GM)	$14,284	-41.9%
Goldman Sachs (GS)	$10,000	-3.2%
Morgan Stanley (MS)	$10,000	12.1%
PNC Financial Services (PNC)	$7,579	-59.2%
U.S. Bancorp (USB)	$6,599	-64.0%
Chrysler	$5,500	NA
GMAC (GKM)	$5,000	-48.1%
SunTrust (STI)	$4,900	-66.8%
Capital One Financial Corp. (COF)	$3,555	-71.8%
Regions Financial Corp. (RF)	$3,500	-61.1%
Fifth Third Bancorp (FITB)	$3,408	-83.4%
American Express (AXP)	$3,389	-44.3%
BB&T (BBT)	$3,134	-51.5%
Bank of New York Mellon (BK)	$3,000	-30.6%
KeyCorp (KEY)	$2,500	-34.3%
CIT Group (CIT)	$2,330	-56.4%
Comerica Incorporated (CMA)	$2,250	-37.7%
State Street (STT)	$2,000	-50.9%
	average decline	-52.4%
	S&P 500	-24.4%

Comments

[CautiousInv...:]

I think the problem is larger than money; I think the fundamental problem is that investors do not believe the administration has a viable plan to restore stability to the banking system and systematically deal with the core issues facing the sector.

Under both Bush and Obama, the TARP program has lacked clear goals, has been implemented in piece meal fashion and has suffered from lack of transparency. From the very beginning, the U.S. government made the mistake of addressing each major bank failure differently: aiding the takeover of Bear Sterns by JPMorgan, allowing Lehman Brothers to go bankrupt and then dumping $180 billion into AIG.

Under Geithner, there has been his underwhelming perfromance as a speaker and his inability to inspire confidence by communicating a thoughtful, comprehensive plan. Details of the stress test were slow to materialize and then there were the nagging questions of which capital ratios were to be used in guaging solvency. And there is the suggestion that purchases of preferred shares will be calibrated as losses occur.

Finally, when the government increased its stake in Citi to 36% and infused more capital into AIG, the markets took this to mean the problems are large, never ending and too big to be fixed. TARP has lost credibility with the market.

Mar 08 09:05 AM

[Deweyp:]

Good article Chris, but the real unknown is how much farther down would these guys be without TARP. We have some very smart people working on the economic problem and I believe most have only the best intentions. It is always easy to throw stones at the moon. How many have actually managed to hit it? Only those that had what it takes. Before we condemn, let's be sure we have what it takes to do so accurately.

Mar 08 01:58 PM

[Econ 101:]

Why should the market believe these banks are going to make it? AIG, Citi and BAC should be liqudated. The people that drove these into the ground should pay with their jobs and without big severence packages. the congress is paying off their campaign contributions with our money and they should be out of office too.

Dont you wonder why a socialist like pelosi is giving money to banks? It is either a payoff or she wants them socialized. Either way it isnt good for you and me.

Mar 08 02:47 PM

[Scott Klein:]

Hi Chris, it's propublica.org not .com...

Mar 08 04:19 PM

[Donald Johnson:]

I think propublica.org has little credibility as an objective source of information. It's apparently backed by lefties.

When you make big moves you risk big mistakes. Paulson took big risks and made some big mistakes. Whether his efforts have been beneficials will be discussed by academics for years. I don't see easy answers to the Paulson question or to the crisis that still is evolving.

I wonder if there are smaller, less risky things that can be tried? I have no confidence in the Obama team and little confidence in the wisdom of those leading our major institutions.

Mar 08 11:46 PM

[PainfullyAware:]

TARP was a scam from the get go.

The Structure as written:
Congress "Gives" the money to treasury. The Treasury then writes the rules (with the help of the Fed Board). The Treasury and The Fed Board are the oversight (of the rules they wrote). Congress gets reports, but no say so or reprisal for policy revision.

There are too many other flaws to mention without a dissertation length comment.

Now Congress is upset about how things are progressing.

To The Fools In Congress - READ THE BILLS BEFORE YOU PASS THEM - IT IS YOUR JOB !!! STOP GIVING AWAY YOUR RESPONSIBILITY !!!

Mar 09 07:37 PM

[MarinerMarc:]

Great article Chris!

I'm trying to understand the math. AIG gets $75b, had a 52 week low of 0.33 and a market cap of $2.74b.

Given that, Why TARP money? Why not an M&A, LBO, or even a Hostile Takeover? (not by our gov., but by another corp.)

Mar 28 06:16 PM