Follow The Money: A Guide to TARP

| About: JPMorgan Chase (JPM)

With 1.1 trillion dollars of taxpayer funds being sent in to rescue major bank, Jamie Dimon is confident about JPMorgan Chase’s (NYSE:JPM) ability to pay back. Congress is pushing for more regulation and banks are eager to keep the books to themselves. Paying back the loans will be the one way banks can avoid the doubts and demands for more legislative oversight.

JPMorgan Chase & Co.’s CEO, Jamie Dimon is an outspoken expert on the advantages and disadvantages of TARP funding. After all, JPMorgan gobbled up $25 billion of taxpayer money on the bank’s road to recovery. On Thursday, Dimon, calling the TARP funds a “scarlet letter for the bank,” said he would like to pay the money back.

JPMorgan now joins other big TARP beneficiaries Wells Fargo (NYSE:WFC) and Goldman Sachs (NYSE:GS) in getting the government away from bank boardrooms, away from their balance sheets where troubled assets are stowed, and away from their profit and loss statements, where corporate compensation figures reside. Many observers question the banking industry’s motivation, wondering if the banks may soon be back with extended hands.

JPMorgan posted a $2.1 billion profit in the first quarter compared to a $2.5 billion gain in the first quarter of 2008. JPMorgan, Goldman and Wells have said they could raise private money to repay the TARP funds.

What seems a simple solution may not be that simple. Wells Fargo posted a solid first quarter profit but has some disturbing assets on the books. Goldman’s revamped first quarter profit does not reflect a December loss of nearly $2 billion. Dimon’s bank took a $1.1 billion hit from home equity loans. All may not be as well as the first quarter profits show.

What is TARP?

The Emergency Economic Stabilization Act [EESA] was presented to and passed by Congress during the Bush Administration’s closing days in October 2008. EESA was enacted to stabilize U.S. financial institutions that were overburdened by failing mortgages. The Troubled Asset Relief Program resulted from the EESA legislation.

Congress authorized the Treasury to spend $700 Billion to stabilize the economy. $350 billion was released in the fall of 2008. Prior to the release of the second $350 billion, Congress insisted on more oversight, including restraints and certain limits to corporate compensation packages.

While the largest recipient of taxpayer money is ailing AIG, the majority of TARP recipients have been banks. More than 200 banks have made use of taxpayer money. As of April 16, 2008, only $353 million has been repaid. These repayments have come from small to midsize banks.

Understanding What a $1.1 Trillion TARP Bailout Means for Americans

Who and How Much?

Take the money and run was the initial reaction by the struggling banks. The tone began to change with the Congressional call for oversight and the talk of bank nationalization. The taxpayer bailout now stands at $1.1 trillion with $70 billion used to bailout AIG. By industry and as of April 16, 2008, funds have been dispersed as follows:

The ten largest bank loans are:

TARP Bottom Line

When the Obama rescue plan is detailed, taxpayers may cringe at the $4.4 trillion cost. Unemployment rose by another 610,000 last week and now stands at 6 million. The situation is expected to worsen before it improves. Foreclosure notices are rising rapidly. U.S. taxpayers are hurting, and the divide between American taxpayers and the banking institutions continues to widen. Goldman Sachs paid its employees an average of $168,000 in just the first quarter of 2009. In 2008, more than 950 Goldman employees made more than $1 million. Meanwhile the bank took $10 billion from taxpayers and another $10 billion for ailing AIG, who received the money from taxpayers.

Congress has now spent $590.4 billion of the $700 billion TARP funds. There are many unresolved issues. The administration has placed the banks at the top of the list in its recovery agenda. Too big to fail institutions are all regarded as high taxpayer risk. The government cannot take the taxpayer down that road again. Yet, more TARP money may be needed.

The problem lies in troubled asset valuation. With high and rising unemployment and a general decline in consumer wealth, the troubled assets may not regain their value for an extended period. Real estate prices are not gaining momentum.

Congress released a report on April 8, 2009 citing TARP as “a short-term bridge from earlier prosperity to future prosperity.” The report views the Treasury’s action guardedly: “If the economic crises is deeper than anticipated, it is possible that Treasury will need to take very different actions in order to restore financial stability.”

Economists believe there are three policy alternatives for distressed financial systems; liquidation, receivership or subsidization. TARP represents stabilization through subsidization. The Congressional report elaborates, “taxpayers become particularly impatient when subsidies are used to help banks acquire other banks, stave off losses by bank shareholders or serve existing management.”

It sounds like Jamie Dimon gets the message. The scarlet letter seems an appropriate symbol for TARP recipients who fall into the report’s characterizations.

The Obama administration has not agreed that repayment will qualify for banks for lack of regulation. The government position seems to be that if the banks needed help once, they may need it again and the government seeks to remove that possibility from the table. Taxpayers show surprisingly strong support for Obama’s message.

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