TARP Repayment: Some Perspective

Today several financial companies were given permission to repay their TARP crutches. The market yawned. As expected, nowhere in Geithner's prepared statement was there even a brief mention of that "other" crutch, the TLGP subsidies that banks have used over the past 6 months. And as TARP is to bank equity, so the FDIC's TLGP is to debt (Zero Hedge has written extensively about the program in the past). The debt guarantee issue is a global phenomenon: not only focused on the US. In fact, the total crutches provided by developed countries to their banking systems currently amount to roughly half a trillion dollars, so when banks succeed in paying off about 10 times more than they did today, please let us know. Unfortunately, for that to happen the S&P will likely need an invisible hand boost well in the 3-4,000 range. That's a whole lot of share recall notices that State Street and BoNY would have to issue.

For readers curious for a brief version of this underrepresented problem, The Economist has a succinct summary:

Still, there is a long way to go. Paying off the first $68 billion is a healthy start, but western governments own roughly $450 billion in banks. If markets or the economy slump again, investors’ appetite for new shares will evaporate. Of the ten banks, eight had been pressed by the government to take funds in October, amid efforts to shore up the banking system. Although some individual institutions may try to claim that they took the money unwillingly, government intervention was necessary to prevent the entire system from collapsing as banks were found to own hundreds of billions of dollars of hard-to-value assets.

Even today all banks remain plugged into government life support systems. Central banks provide generous collateral rules for borrowing, in an effort to provide banks with liquidity. Some banks have managed to issue debt without government guarantees, but the system needs to refinance some $25.6 trillion of wholesale funding by 2011: without an implicit state back stop this would be impossible. And the value of banks’ assets is being sheltered by central banks’ asset purchasing programmes and in some cases flattered by more generous accounting rules. The truth is that the West has a thinly capitalised banking system that is being allowed to earn its way back to health. Save for defence and space exploration it is hard to think of a privately-run industry more dependent on the state.

It is probably worthy to keep this information in mind as pundits try to spin today's news as something constructive. But, as with everything else with the Obama administration, this has been merely one more tactic in the chess game of confidence.

And in keeping with the script, for some internal systemic perspectives, more of the "teleprompter" variety, below is an interview conducted by Fox Business Network with Dallas Fed president Dick Fisher. Of his points, perhaps this was the most relevant:

"I’m not surprised that these institutions want to re-pay the TARP money. The question is, can they repay the TARP money without putting themselves in long-term vulnerable positions? And I think you could view it as a healthy sign of those institutions that are able to raise capital to pay back the TARP money and we will again see how many of these institutions are able to do so. You also don’t want to create a permanent dependence on TARP money."

In other words: the government has priced the economic environment to perfection. A slip here or there, and the avalanche could easily resume, this time with a vengeance; however, next time good luck getting the public to agree with TARP 2 for those who said they were too confident and really needed those Barney Frank-unmediated bonuses.

Comments

[Bulldog12:]

Tyler, any idea of who is investing in these banks latest offerings? I have not seen any articles disclosing their identity.

Jun 09 04:09 PM

[Rollerball:]

Boa Constrictors choking on their own tails squeezing taxpayers and crushing capital markets in their coils. The "investors" buying bank dilution(s) are covering their shorts. You can bet GS, JPM, BAC, and practically anyone with a trading desk is still short C. They'll be one more sacrifice; besides, they had to many mailboxes offshore.

Jun 09 05:01 PM

[PainfullyAware:]

TARP = Treasury Assisted Rip-Off Plan !!!

It was pretty easy to conclude this within the first 40 pages I read of the First Bailout Bill.

Things Are Not Well.

Jun 09 05:33 PM

[Mad Hedge F...:]

No surprise here. The world’s largest hedge fund is taking profits on one of its biggest positions. I’m talking about the US Treasury allowing ten banks to repay $83 billion in TARP money. I guess the banks really want to get the government green eye shades out of their board rooms, who have been surreptitiously swiping the soap out of the executive washroom. This means paying back 5% money when it costs 6% to fund in the markets, and 10% of you want to raise equity. I guess it’s worth it if this enables you to revive your celebrity golf tournaments in California for “clients,” throw Caribbean parties for your top producers, and get the Gulfstream out of storage after it couldn’t be sold. Could bonus compensation also be an issue? Gee, do you think? I have to begrudgingly give the government credit for making a ton of money on this trade. Not only did they borrow from us at zero and lend at 5% in huge size. They also got, at the point of a shotgun, fistfuls of equity warrants that have tripled. And they did stop the bank runs that took Morgan Stanley (MS) down to a near death experience of $6, boosting it back up to a positively virile $32. Alas, if only I could play by their rules. I have a question, Mr. Geithner. Does the government have to pay taxes on those profits? Will it report them?

Jun 09 06:40 PM

[Davewmart:]

Just half a trillion in crutches to the banking system?
I had understood that the UK alone has issued guarantees and such for around 1.2 trillion.
I suppose it depends on how much actually goes bad - perhaps I am lacking in faith.
Tyler, it would be great if you could cast your eye over the UK's position at some time - perhaps I am having a bad dream, and the banking losses and the cover-ups don't make the US look straight-laced.

Jun 09 07:40 PM

[bearfund:]

I guess I look at it a bit differently: if I could issue FDIC-insured debt at 2% and pay the FDIC a few measly basis points for its guarantee, I'd do it too. Not because I have a weak balance sheet and am desperate for cash but because I can make money risk-free if my borrowing cost is that low. The problem is that the cost of that guarantee has been set deliberately at a level far too low to compensate the FDIC for the risk that some of the bad banks will fail. That doesn't mean every bank issuing guaranteed debt is a bad bank, it just means the FDIC is handing out taxpayer money to both good banks and bad.

Jun 09 11:14 PM

[Jeff Nielson:]

I'd like to clarify a few details. The "$1/2 trillion" figure is only the EQUITY investments by Western governments. U.S. banks, alone, have received over $10 TRILLION in hand-outs, loans, and pledges - with much more on the way. Fannie and Freddie, by themselves, will likely require hundreds of billions in hand-outs over the next two years.

Second, Canadian banks are totally separate from this mess. No equity investments by government, no "sub-prime" market, and relatively small loan losses. They are TRULY "well-capitalized", unlike the "zombie" banking systems of several Western nations.

Finally, during 2007, as U.S. banks were just beginning to implode, China's government was RAISING reserve requirements for its banks FIVE times. So Chinese banks not only avoided most of the "toxic" products, themselves - but their reserve ratios are huge compared to Western banks.

It is pure fantasy for most Western banking sectors to believe they will ever regain their previous dominance - and market share.

Jun 09 11:16 PM

[Moon Kil Woong:]

Jeff Nielson is 100% correct. I can use some of the $8 trillion in government backed bonds to repay TARP at a lot lower rate. The public will never notice. That's because the Fed and Treasury says they don't want to disclose it or it will shatter public confidence.

Until the people under TARP can prove the government hasn't bought or backstopped a single bonds or debt instrument they should not be able to repay. It proves they are not strong enough to cover 100% of their own obligations.

Of course, this is impossible since all of them are sucking on the greatest government free money bong of all and can't kick the addiction. Even Congress could not hope to pass a $8 trillion backstop the banks on public funds plan, yet that's exactly what has happened.

TARP is a drop in the bucket with regards to the generosities being given to banks. I think all Barney Frank TARP rules should apply to all the other government supports as well. Then no one will be so eager to repay TARP. Those repaying TARP can play they aren't relying on government bailouts but in fact they are. Every penny coming from AIG is bailout $. Every mortgage bond Freddie Mac and fannie Mae buy at rediculously low rates is government bailout $ as well. As the author points out, the banking industry has become overly reliant on government support. None of the TARP banks can dare claim real autonomy from it's support. To do so it to perpetrate a lie.

If they don't want TARP restrictions they should only be able to absolve themselves of it by absolving themselves of all government support indefinitly.

Jun 09 11:40 PM

[Stock Marke...:]

I asked Tyler a similar question a few weeks ago. With all this buying of new bank debt all over, who is buying this stuff so quickly? Is there a public registry, Tyler or something to see who is actually buying all these new shares and new bond offerings?

If it turns out to be Uncle Sam...head for the hills!


On Jun 09 04:09 PM Bulldog12 wrote:

> Tyler, any idea of who is investing in these banks latest offerings?
> I have not seen any articles disclosing their identity.

Jun 10 10:32 AM

[WilMart:]

Woong and Nielson are right on the mark. And it seems the total gross notional amount in derivatives (worldwide) keeps getting misquoted now as a moving target. I think I read where Bloomberg quoted it at 400-600 trillion, but my data indicates closer to 1.2 QUADRILLION.

I suppose the wonderfully rebounding physical economy of infrastructure advancement and related employment gains are helping that figure out (as long as behaviorial economists on Capital Hill tell us that perception dictates reality, why not engage in that delightful fiction as well?)

-WM

Jun 10 07:04 PM