Grouper

Why Banks Want to Return TARP Money

Interesting information, but it sounds like no one on this board uderstands banking. First of all it is a hugely leveraged business. 6 to 8% real capital, which can include long term debt, preferred stock, common stock, etc. All the rest of the money is FDIC insured deposits or Fed borrowings (costing anywhere from 0% to 4%). That means that $1B in TARP can turn into $15B in loans. The average cost of funding the loans is in the 1% to 2% range, so lending at 6% is extremely profitable. TARP was created because no one else would give banks capital. Buffett did his deal with Goldman and GE at 10% plus in the money (at the time) warrants.

Goldman, Citi, and BOA are trying to repay their TARP debts because they got back door TARP money from AIG. AIG paid out obligations at face value with your money, so now these guys can repay their TARP with free money (really should have been huge losses because AIG was bankrupt, and they should have received nothing).

Obama's 'Bad Bank' Plan Is a Turning Point

Bad Bank, Bad Idea
I am a modeler, a former banker, and a real estate developer. Modeling is not the issue. Everyone forgot that the fundamentals of the underlying asset are what matters, not the models, risk speads, average default rates, seniority tranche, etc. In the big runnup, deals were done by expert modelers, with no understanding of the underlying asset.

We already have a bad bank. It is called the FDIC. In the 80s, we had a bad bank called the FSLIC. It went bust, so we made the RTC. If the FDIC goes bust, we can make the FDIC Bad Bank. Fundamentally, failed decisons need to result in failure of the institution, not a bailout of the institution though an attempt at removing bad assets via a model created by another expert modeler with no understanding of the underlying asset.

When the FDIC takes over, you wipe out the stockholders, the bondhoders, the preferred, the TARP investment, Warren Buffett (who apparently has lost his touch), the Saudis, Singapore, and everyone else. At the end of the day, the taxpayer still pays, so lets wipe the slate clean, let people who understand underlying assets make the bids, and move on. Otherwise, we will end up like Japan, unable to get out of our own way for the next ten years.