The Case for Allowing TARP Repayments 19 comments
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Reuters’s US commentary team had its first, rather bedraggled, morning meeting today. The news of the day is the TARP repayments. Matt Goldstein is worried that once the money is paid back, Congress won’t allow it to be re-lent, but I’m thinking that actually the opposite is true: if Treasury needs new firepower to rescue banks in real trouble, then — given Congressional opposition to any new bailout bill — the only way to get the necessary funds will be to use money already in the TARP account. Since the TARP is pretty much all spent by now, Treasury has little choice but to let JP Morgan et al replenish it.
Worries about stigmas, it seems, are very 2008 — back then, the idea was that if everybody got funding then the government wouldn’t be sending signals about who was healthy and who was ill. But in the wake of the stress-test results, pretending that all banks are equal is silly. So let the healthier banks repay the TARP funds — especially if the government retains some oversight over pay — and use that money, if necessary, to shore up the less-healthy banks. Treasury will likely need it if Elizabeth Warren gets her way and the stress tests are run again.
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To have the ability to grab capital when you need it and noone else in the market would provide it, then return it when you do not need it anymore, is an abuse of the taxpayer. The American taxpayer is broke. The decision to allow repayment of TARP should have been made with huge compensation to the interim risk taker...the taxpayer.
However, I do not want this exchange to mean that the banks can attempt to avoid their responsibility to lend responsibly. While I do not prefer my government to be a bank, or to dictate what a business does, I still prefer the government have strong legal oversight, especially during these precarious times.
In some ways, I am afraid that this will be a race by the banks to see who can cash in on our re-inflating bubble first. The banks which pay back TARP funds earliest will have the least goverment oversight, and have more room leverage themselves; not necessarily the right thing for the economy at this time.
This is a systemic problem, not limited to either of our (nearly identical) political parties.
On Jun 09 03:05 PM countrybanker wrote:
> Downside is the banks are still to big to fail...they still create
> systemic risk....thus the taxpayer must still be ready and willing
> to bail them out. They should not have been allowed to pay back TARP
> until Geitner and Bernanke made a mutual joint public announcement
> that xxxx bank no longer poses systemic risk to the banking system
> and thus to the American economy......and then continue their public
> statement that the FDIC, FED nor Treasury will guaranty their debt
> and they will be allowed to fail like other banks and companies
> (pre Obama).
>
> To have the ability to grab capital when you need it and noone else
> in the market would provide it, then return it when you do not need
> it anymore, is an abuse of the taxpayer. The American taxpayer is
> broke. The decision to allow repayment of TARP should have been made
> with huge compensation to the interim risk taker...the taxpayer.
For me, I draw a line that separates the investor and the average citizen. As an investor, TARP was cheap capital at 5%. What does this mean? Lets take WFC as an example. All % and ratios calculated using 2009’s 1Q report. WFC received $25 billion through TARP. With an asset to equity ratio of more than 12:1, that $25 billion translates to $300 billion in assets that it can lend to businesses and consumers (one of the purpose of TARP by the way). This leverage is obtain by issuing $275 billion of liabilities on top of the $25 billion in capital (“Assets = Liabilities + Stockholder’s Equity” or in numerical terms “$300 = $275 + $25). With me so far? Good.
Now let me throw out some numbers. The average cost of the $275 billion liability (I’m talking about debt here and not the cheaper less expensive deposits) is 2.29%. The cost of the $25 billion TARP is 5%. The provision for credit loss to net interest income ratio from 2009 1Q of 40%. And lastly, the income on the $300 billion asset is 5.22%. Putting all of these numbers together and what do we get?
Interest revenue (300*5.22%): $15.66
Interest expense (275*2.29%): $6.30
----------------------...
Net Interest Income: $9.36
Provision for credit losses (9.36*40%): $3.74
----------------------...
Net Interest Income after provision: $5.62
Taxes at 35%: $1.97
----------------------...
Net Income: $3.65
Payment for TARP (25*5%) $1.25
----------------------...
Net Income Available to Common: $2.40
$2.4 billion using equity of $25 billion. A return on equity of 9.6...much much lower than WFC's historical return of 15+. Obviously this crude calculation show's on HUGE pro of TARP. In evaluating strong vs weak, one should consider the earning power that banks have in utilizing the funds available...be it TARP or otherwise and regardless of the stigma associated with such funds. Saying this bank or that bank is stronger because they return TARP is in accurate.
Earlier I said I draw the line between the investor and the average citizen. So what does the average citizen in me say? I don't know because I'm busy listening to the investor.
Like reward points for the Bank, or, TARP points?
When you look at the banks balance sheets, you have to keep in mind the shadow market or the off balance sheet market. It is all paper trading. All the contract and such that the banks agrees to in the shadow market. This is a huge market. Far larger then you would ever imagine. For years this market has been allowed to be off balance sheet. Now with the new FASB rules created under the Sarbaines -Oxley requirements the FASB board has told every financial institution that its off balance sheet itmes must be on balance sheet by November 15th. Unless there is a change authorized by congress to the Sarbaines Oxley rules the Fasb board rules stand. That is staring us in the face right now. As soon as FASB made this rule the President immediately demanded the disbandment of the SEC which the FASB opperates under.
Just as we were mad at the SEC for their errors in Tyco, Madoff and others, the SEC has started cleaning its house and cleaning up its act to offer TRANSPARENCY under the Sarbaines Oxley requirements and the one industry that did not have any transparency was the banking sector. As such, the FASB board has been making initiative o offer this transparency. Needless to say, transparency to the government shell game is the last thing they want at this point so the President demanded the immediate closure of the SEC. It is in essence government turning on itself.
So a few banks will repay TARP. The Tarp will be made available and forced on smaller institutions. Eventually all our banks will be under some form of tarp restrictions and the weaker banks will not be able to repay the blooming interest payments that they will have to make to the government. They will raise fees everyday including Sunday and they will lose their competitiveness. Then the government will also be able to dictate how much people make with the new PAY CZAR. If the banks do not take TARP then the President will be able to take his new 5,000 strong secret police force (KGB and SS combined) and force the CEOS to take TARP. Hence we are finding that Bof A had to take TARP.
You see where this is going. IF..... IF THE worst case senario the government did a few weeks back was so indepth, and they used 9% unemployment and the President is going to hire part timers in the next wave of hiring the government does, will part time jobs from teenagers stop the forclosure rate from rising? If less and less people are spending (have you been to a Home Depot or a mall lately?) and the Us saving rate goes up, as it has been then Corporate forclosures are in the next ring of things that need worked through. As more and more businesses are being legislated to death (there has been a 17% INCREASE in mandates so far this administration) they will fail and their loan will be called.
As we raise taxes on corporations (Obama is proposing this right now... narrowing the loop holes) more US businesses with forign headquarters on shore in the US will move those offices off shore to avoid the tax implications. With that move goes more jobs. Microsoft admits that it will have to offshore a ton of jobs. Every corporation with forign markets will have to look at the savings to justify the stay. Hence, more job losses.
As the interest rate ticks up on our horrendious spending... We have spent 1 TRILLION DOLLARS since Obama took office and the President is proposing a new 1 trillion dollar medical scheme to replace something that is not broken.... And he will do some of that by taxing you... That means that next year we will need to use the credit card for 2 trillion dollars of new spending...
As the Chinese have 768 BILLION of this debt... And the treasury market has dropped by about 6.2% this year the Chinese are sitting on about 47.6 BILLION IN LOSSES by funding our credit card debt... You see how this is a house of cards. The same type of house of cards that has caught up with ma and pa kettle in middle Amerika, that has forced them to lose their credit card, or their medical insurance or their job, or their home... You see it. It is happening all around you. That is the path the government institutions are on. Last time I checked Banks are government institutions. Hence they do not want to be transparent.
Indeed, a government group immediately published its finding on the health of the bansk in the Us and they pointed out that the unemployment rate in the government forcast of the worst case senario is ALREADY HIGHER than the government projected. AND, the AVERAGE DROP IN HOUSE PRICES ON A NATIONAL SCALE IS ALREADY HIGHER THAN THEY PROJECTED. It was all smoke in mirrors to try to get the consumer to spend since the Us economy is 70% of consumer spending/ I want it, where is my credit card at??
I hope that helps. The data points are all over the place. The banks only want to repay the tarp so that they are not controlled by the government in how they pay their people. Simple truth is that GS has made so much money in their trading opperations this year that their bonuses they will pay this year will be so huge and so focused on so few in our society that if they were controlled by the government at bonus time the outcry and back lash against them would be so massive that they would have to change their business model. To avoid that, they need to repay tarp before the bonus season. That is the real reason for the repayment.
Investing1, if a house goes into foreclosure, how big will the losses be if any? Is there equity in the home? If a person was in the home for 5-10 years with and didn't take out any equity, I don't see a big loss if there's any at all. How was the loan previously structured? If a home buyer put a 20% down payment and foreclosed on his house the very next day, that home price would have to fall at least 20% before the bank would see any loss. So a bank that has an excellent mortgage control will fine. We've seen unemployment rate at 10%+ and inflation at 13%+ in the year 80's, in the 1930's, unemployment hit 25%. Wells Fargo, JPMorgan Chase, and Bank of America (under a different name before merger) all survived and thrived through those tougher periods.
One can nit-pick all they want, but they loose a lot of investment opportunity in the process.
On Jun 10 12:39 AM mac123449 wrote:
> My aunts house is being auctioned off next thursday hasn't made a
> mortgage payment in 10 months but they still let her live there that
> whole time i'm not a big fan of the banks but i almost feel sorry
> for them in this situation there going to take a huge loss.
Then, apparently, more and more people came to see that TARP really was needed, that the whole financial system was in danger of collapse unless the government injected money into the TBTF banks, because those banks really are the infrastucture. When Lehman was allowed to fail (call it an experiment), the resulting chaos seemed to prove that the TBTF banks could not be allowed to fail.
Now these banks are stabilizing and getting ready to pay back TARP funds. The purpose of TARP has been served. And now, some commenters are suggesting they should not be allowed to pay back TARP just yet, they may not be that strong. And Geithner and some commenters are talking about recycling the incoming money to smaller banks...ones that are not TBTF, meaning they play only minor roles in the infrastructure.
What?? Shouldn't the money being returned go back to the taxpayers from whom it came? Used to pay down the deficit? It shouldn't be recycled into purposes for which it was never intended. It shouldn't become a perpetual revolving fund for general bank support. I understand that the law is ambiguous about returned TARP funds. Apparently an exit strategy was not clearly articulated. So now we're in for a tug-of-war over the returned funds.
IMO, Congress should quickly clarify the TARP exit strategy and not leave it in the hands of the executive branch. Future risks in TBTF banks should be dealt with through proper regulations, not a permanent rainy-day fund that encourages banks to re-engage in the kinds of risky behaviors that got the whole mess started. Non-TBTF banks should be allowed to fail. If you're not TBTF, then by definition you might fail. At least in this area, let capitalism operate the way it operates best.
"Wells Fargo spokeswoman Julia Tunis Bernard said the bank wants to pay back TARP 'at the earliest practical date,' but hasn't applied to do so because the capital is being used for loans to 'creditworthy customers.'" -WSJ