Ten Banks Escape from TARP: Reason to Celebrate?

By Patrick Watson

Tuesday ten of the large banks that received money last year from Hank Paulson’s horribly-misnamed Troubled Asset Relief Program repaid the government a total of $68 billion. Combined with repayments by smaller banks and dividends paid to the Treasury, taxpayers will have recovered almost $75 billion of the $700 billion TARP program. Reason to celebrate, right? Not so fast.

First, there is a strong possibility that this $75 billion will head right back out the door. Recall that last year Congress authorized the Treasury Secretary - then Hank Paulson - to lend or invest up to $700 billion at one time. These repayments now give Timothy Geithner cash to “help” pretty much anyone else he wishes. As we all know, the bailout queue is long and getting longer. The chance taxpayers recovered anything today is nil.

Second, look at who repaid and who didn’t. Goldman Sachs (GS), Morgan Stanley (MS) and JP Morgan Chase (JPM) all gave back the money. Citigroup (C), Bank of America (BAC) and Wells Fargo (WFC) didn’t. Why? Good question, and neither the banks nor the Treasury nor the Fed is talking. We do not know if any banks asked to repay the money and were refused, or if they never even asked. So much for open, transparent government.

Third, should we conclude that the firms which escaped from TARP are stronger and safer than the others? No. We should conclude that they escaped from the TARP, and that’s about it. The “stress tests” they passed have already been proven laughably optimistic, to the point that the Congressionally-appointed TARP overseer is calling for the whole exercise to be repeated.

Barry Ritholtz at The Big Picture blog has an interesting theory. He suspects the entire TARP exercise was a massive ruse to conceal the fact that Citigroup was on the brink of collapse last fall. The other banks were not pictures of health, he says, but the real crisis centered on Citi. The only way to rescue Citi without causing a panic was to create the appearance that all the banks were in the same boat. That crisis having passed, the bystander banks are now being permitted to go their own way.

Whether Ritholtz is right or not, I don’t know. I’ve thought for months that Citi is probably on its deathbed. Regardless, the banking crisis is far from over. The best case is that we have years of deleveraging and tight credit as asset values are marked to reality and the banks rebuild their balance sheets. The worst case… you don’t want to know.

Disclosure: No positions

Comments

[apppro:]

I will only truly celebrate when all these (you) pundits go away and I can turn on my computer and not see all these articles (blogs) listed under my Yahoo 'NEWS?' links.

Enough is Enough!

Jun 10 07:40 AM

[captainccs:]

>>>. I’ve thought for months that Citi is probably on its deathbed.

No, Citi and other dead ducks are being sold to the American Taxpayer, whether they want to invest in these bankruptcy prone banks or not:

Citigroup launches public exchange offers:
biz.yahoo.com/ap/09061...

To add insult to injury, you won't even be able to vote your shares.

Jun 10 09:43 AM

[Mad Hedge F...:]

Not me. 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 10 10:36 AM

[DannyBoy153:]

C and WFC didn't apply for TARP repayment, no word on BAC as why they didn't repay. C needs the fund because part of the TARP will be converted to common. WFC needs the money because it's making money on the the cheap capital (by my crude estimate, a potential $2 billion+ per year by using $25 billion of TARP equity at 5%).

Jun 10 02:33 PM

[discov:]

I want some tarp myself. I will start a new bank, apply for TARP get 25 billion, then go buy JNK with all of it.

JNK yields 13.16% annually. I will pocket the 8.6% over the tarp interest rate and do no work.

If JNK goes in the crapper I will apply for TARP funds

ha ha ha ha ha....so stupid, yet still a more viable model than what the banks are running.

Jun 10 05:34 PM

[TimT:]

Genius....


On Jun 10 10:36 AM Mad Hedge Fund Trader wrote:

> Not me. 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 (seekingalpha.com/symbo...)
> 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 11 12:37 PM