The End of the Bank Bailouts?

Includes: BAC, C, MI, WFC, WTNY, XLF
by: Linus Wilson

Tim Geithner and other U.S. Treasury officials told Reuters on October 21, 2009, that they will put an end to three bank bailouts by the end of the year. Those programs are the Capital Purchase Program (CPP), the Targeted Investment Program (TIP), and the Capital Assistance Program (CAP). The first program, the CPP, injected cash in exchange for primarily preferred stock and warrants in over 680 banks. While about $205 billion has been passed out in that program, over $70 billion has also been returned.

The administration had been overstating the returns of banks repaying the CPP preferred stock and warrants by about 3 percent, according to my calculations. These early profits may be fleeting because taxpayers stand to lose all of their $2.33 billion, bad investment in CIT group. That would almost wipe out most of their profits from warrant repurchases thus far. The Targeted Investment Program (TIP) injected $20 billion each into Citibank (NYSE:C) and Bank of America (NYSE:BAC). The Capital Assistance Program (CAP) program was never used. Banks were more eager to turn to private investors to raise common equity capital by the time the CAP was introduced by Tim Geithner in February.

I say, “Good riddance!” The whole idea of encouraging banks to lend with preferred stock was a bad idea. The only thing that the preferred stock investments may have done was help banks be less dependent on nervous short-term creditors. My solo and joint research demonstrated that banks must raise common stock not, preferred stock, if they are to be expected to make good lending decisions going forward. Nevertheless, the Temporary Liquidity Guarantee Program (TGLP) by the Federal Deposit Insurance Corporation (FDIC) probably was the most effective measure to prevent banks from collapsing. It allowed them to borrow for up to three years at rates close to that of the U.S. Treasury. Taxpayers are lucky to have not seen losses from those under priced debt guarantees, yet. The FDIC confirmed on Tuesday that that program (for the most part) will be closing to new debt guarantees at the end of this month.

While the primary bank bailout programs of the Troubled Asset Relief Program (TARP) are likely to stop new investments in the next couple months, the old investments may be outstanding for years. The TARP preferred stock is perpetual. That means that it never has to be paid back. Thus, the government’s stakes in the nations’ banks could last long past our lifetimes. Hopefully, most of the banks will pay back the TARP long before my 100th birthday!

Disclosure: I only have long positions in broad-based index funds.