Category Archives: Congress

Frank Sends Letter on TARP Repayments to Committee Members

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Barney Frank’s letter to members of the House Financial Services Committee

To: Members, Financial Services Committee

From: Barney Frank, Chairman

Today the Treasury announced that 10 of the largest financial institutions participating in the Capital Purchase Program (CPP) will be allowed to repay the $68 billion investment made by American taxpayers.

That does not alter ‘taxpayer’ risk. They lose once private capital is gone in either case.

That is good news on three fronts. First, it means the program is working and has begun to help restore stability to our vital financial system.

The ‘improvement’ had nothing to do with TARP. It may have been helped by the FDIC not closing down these institutions when capital was deemed deficient, but the FDIC could have kept those institutions open under those same terms and conditions as imposed by TARP.

Second, it means that the government will have additional resources to address continuing needs without having to ask taxpayers for more money or increasing borrowing.

Functionally the FDIC can impose the same terms and conditions. The difference is that the FDIC is ‘funded’ by a tax on banks, rather than TARP being an obligation of ‘general revenues.’ However, the FDIC is guaranteed by the government and the FDIC tax on banks that is passed through to the general public might be more regressive than the average IRS tax.

Also, regarding ‘borrowing’ the TARP funds advanced to banks add the reserves that are used to buy the additional government securities.

And, third, it means that that the taxpayer protections and compensation restrictions that Congress insisted be included in the original legislation are having the intended effect – taxpayers are participating in the upside as these institutions recover and raise additional private capital in order to exit the government program.

Again, functionally the FDIC could have imposed the identical terms and conditions.

In sum, today’s announcement means that over one third – approximately $70 billion – of the $199 invested through the CPP has been, or will soon, be repaid. In addition CPP recipients have already paid an additional $4.5 in preferred stock dividends during the past seven months. That means that almost $75 billion has already been earned or repaid. Further those who repay have the right to repurchase the warrants held by Treasury at current market value – further increasing the return to taxpayers.

Yes, it has functioned as a tax on banks and the private sector in general, thereby reducing aggregate demand during a punishing recession that has resulted from government’s failure to sustain aggregate demand.

Congratulations- job well done!!!


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Fed Disclosure of Member Bank Borrowings

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(email exchange)

>   
>   On Tue, May 12, 2009 at 10:35 AM, wrote:
>   
>   We are talking trillions of dollars from our pocket…
>   

The Fed is lending to its member banks. That is the same as the banks taking in deposits insured by the FDIC. Banks specific loans are only seen by regulators as a matter of public purpose.

Do you want every loan by every bank revealed? If so, lobby congress, as the majority in congress doesn’t want that.

Your beef is with congress, not the Fed.

Also, loans to member banks are not ‘dollars from our pocket’ unless they aren’t repayable, and the regulators monitor banks for capital compliance and they’ve done an ok job so far in that regard. Relatively few FDIC losses given the magnitude of the slowdown.

>   
>   Where is accountability for keeping the dead alive?
>   

Funding banks is not keeping the dead alive. All banks are always publicly funded via FDIC insured deposits. So happens the Fed is offering funds cheaper and for longer term than the FDIC, so it’s getting the business.


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Why it matters how the 700 billion is accounted for

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It would be counter productive to add the $700 billion to the budget deficit calculation if the proposal goes through and is executed, since Congress is likely to take measures to somehow constrain spending or increase revenues to try to ‘pay for it’. This would be highly contractionary at precisely the wrong time.

Note that if the Fed buys mortgage securities it doesn’t add to the deficit, while the Treasury buying the same securities does? And in both cases treasury securities are sold to ‘offset operating factors’; either way, Fed or Treasury, the government exchanges treasury securities for mortgage securities.

When any agent of the government buys financial assets, that particularly spending per se doesn’t add to aggregate demand, or in any way or directly alter output and employment.

Yet here we are listening to the Fed Chairman, the Treasury Secretary, and members of Congress talking about $700 billion of ‘taxpayer money’ and a potential increase in the deficit of $700 billion.
And no one argues with statements like ‘it is even more than we spent in Iraq’ and ‘that much money could better spent elsewhere’. Unfortunately for the US economy, this supposed addition to the deficit is likely to negatively impact future spending, perhaps at the time when it’s needed most to support demand.

I recall something like this happened in 1937, when revenues collected for social security weren’t ‘counted’ as part of the Federal budget, and the millions collected to go into the new trust fund
were in fact simply a massive tax hike. Unemployment went from something like 12% to maybe 19% (and stayed about that high until WWII deficit spending brought unemployment down to near zero). After that happened much was written regarding public vs private accounting and the cash flow from social security and other programs was subsequently counted as part of the federal budget calculation, as it is today, and for the same reason.


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Congressional confusion

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Congress seems confused over who are the bad guys that need to be punished.

They seem to be leaning towards punishing shareholders if their management decides to accept any form of federal assistance under the new plan.

This puts management in a bind: sell a few securities to the Treasury and let shareholders lose value to the government, or muddle through and don’t dilute the shareholders.

Management is likelty to do what’s best for management, and sell securities to the Treasury and sell the shareholders up (down?) the river. Just like they do when they issue a convert when stock prices fall, to shore up capital.

But Congress also thinks management needs to be punished with some form of salary and bonus caps. This would discourage management from utilizing whatever new facilities Congress comes up with. Which also makes shares less valuable.

Looks like a lose/lose for the shareholders?

It seems to me if Congress finds anyone at fault (whatever that means) it would be managers rather than shareholders.

What have shareholders done wrong, even in theory? It’s a stretch to come up with anything.

And who are the shareholders? Pension funds, ira’s, individuals? Why are they the objects of Congressional wrath?

With each government intervention, shareholders have been a favorite target to justify the utilization of ‘taxpayer money’ (whatever that means with an asset purchase).

Congress isn’t looking at who’s at fault, they are only looking to minimize risk to ‘taxpayer money’, even if that means taking funds from innocent shareholders.

Congress can be counted on to do what they think is best for them politically. So with something like 75% of the voters owning shares, it seems odd that they are the target.

And, of course, none of this address aggregate demand which is the key to output and employment (the drivers of corporate prosperity) and share holder value.


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