Tag Archives: TARP

What losses?

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From MS:

The table below from CBO office shows the banks have already repaid TARP in full plus interest…

Even AIG has accounts for only 10% of the total TARP “loss” outstanding.

According to the table, the government has a net profit on it’s investment in the banks.

The majority of losses are stemming from Auto industry loans of -47bln and Home Affordability Mtg Program -20bln…

Yet the government wants to impose a tax to “get their money back” from the banks for 90-120bln???

Hmm… seems to be another agenda at foot here.

CBO’s Baseline Estimates of Federal Funding for the TARP (As of mid-December 2009)(Billions of dollars)

And the funds to the banks necessarily never even went anywhere. They just sat on the fed’s books as excess reserves. The govt can’t ‘spend money’ on bank capital, it’s been and can only be thinly disguised regulatory forbearance.

Seems no one up there has a grasp on simple monetary operations. They still get QE wrong continuously at all levels.


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Citi to repay $20 billion TARP funding

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Does anyone in Washington realize any ‘profits’ govt makes reduces private sector net financial assets by that amount? Just like a tax, though a banks marginal propensity to spend is probably near 0.

And that TARP funds per se do nothing for banks, its just the change in capital ratios that matter, as the banks in question are not liquidity constrained?

And that the amount of private capital at risk was the same with our without TARP?

And that all TARP did was move that much risk of loss from the FDIC to the Tsy, which funds the FDIC in any case?

It would have been a lot simpler and burned a lot less political capital to have simply allowed Citibank and the others to operate with lower capital ratios with the TARP penalties and conditions to accomplish the identical outcome.

Bottom line: functionally all TARP did was provide regulatory forbearance in exchange for a type of tax.

Citigroup to Repay $20 Billion in Bailout Money

Dec 14 (Reuters) — Citigroup laid out a plan to repay the money it owes the U.S. government, including issuing $17 billion of stock immediately, as the bank looks to end the executive pay restrictions that came with the funds.

The deal begins to dissolve what has been a troubled relationship between Citigroup [C 3.76 -0.19 (-4.81%) ] and the government, which bailed out the bank with three rescues last year and this year but also pressured it to sell businesses and remove executives.

The government plans to start selling the roughly $30 billion of Citigroup shares it owns, and is ending its agreement to guarantee a roughly $250 billion pool of Citigroup assets against outsized losses.

The government estimates it could see a profit of $13 billion to $14 billion on its investment in the bank.


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White House Aims to Cut Deficit With TARP Cash

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Analogy-

You own a house with a mtg on it.
You sell your house and give the money to the bank at the closing.
The bank officers have a meeting and decide to use that money to pay off the mtg.

Brilliant!!!!!!!!!!!!!!!!!!!!!!!!!!

White House Aims to Cut Deficit With TARP Cash

By Deborah Solomon and Jonathan Weisman

Nov. 12 (Bloomberg) — The Obama administration, under pressure to show it is serious about tackling the budget deficit, is seizing on an unusual target to showcase fiscal
responsibility: the $700 billion financial rescue.

The administration wants to keep some of the unspent funds available for emergencies, but is considering setting aside a chunk for debt reduction, according to people familiar with the matter.

The funds do not add to the deficit until after they are spent

This is total accounting nonsense.

A remake of the Clinton plan to have a trust fund for the deficit, which never made it past the empty rhetoric stage.

It is also expected to lower the projected long-term cost of the program — the amount it expects to lose — to as little as $200 billion from $341 billion estimated in August.

A $210 billion surplus in TARP funding could be used to reduced the U.S.’s towering national deficit. WSJ’s Deborah Solomon says the move follows criticism of the Obama administration’s approach to debt. The idea is still a matter of debate within the administration and it is unclear how much impact it would have on the nation’s mounting deficit levels. Still, the potential move illustrates how the Obama administration is trying to find any way it can to bring down the deficit, which is turning into a political as well as an economic liability.

The White House is in the early stages of considering what bigger moves it might make for next year’s budget. The Office of Management and Budget has asked all cabinet agencies, except defense and veterans affairs, to prepare two budget proposals for fiscal 2011, which begins Oct 1, 2010. One would freeze spending at current levels. The other would cut spending by 5%.

OMB is also reviewing a host of tax changes. The President’s Economic Recovery Advisory Board will submit tax-policy options by Dec. 5, including simplifying the tax code and revamping the corporate tax code.

White House Chief of Staff Rahm Emanuel is pressing for substantial spending cuts to go with any tax increases to try to avoid the “tax and spend” label that has bedeviled Democrats, according to administration and congressional officials.

The possibility of announcing an exit from Afghanistan with the funds saved to pay down the deficit would be extremely popular short term and contribute to lower GDP and higher levels of unemployment over the medium term.

The administration is constrained in tackling the mounting deficit, since raising taxes or slashing spending could stunt economic growth. Administration officials say the Obama economic team is especially concerned that rapid deficit reduction could hurt the economy.

On the $700 billion Troubled Asset Relief Program, the administration is considering a change that may appear to improve the fiscal situation. Agreeing not to spend a certain amount of TARP money will enable the White House, in its budget projections, to assume less money out the door and, therefore, less debt issued.

This is true, but TARP ‘spending’ on bank capital is regulatory forbearance and not ‘spending’ so it shouldn’t be ‘counted’ as deficit spending in any case.

The move would also reduce the deficit by an unknown amount since a certain level of spending and borrowing is already factored into estimated future deficits.

The Treasury Department said about $210 billion in TARP funds remains unspent, including about $70 billion returned from financial institutions. A further $50 billion is expected to be repaid in the next 12 to 18 months.

Budget experts said committing some TARP funds toward debt reduction could help calm concerns about the size and intent of the program. “I don’t necessarily want them to pull back in a huge way, because there’s a lot of uncertainty, but right now what we’ve got could turn into a $700 billion slush fund” for Congress, said Douglas Elliott, a fellow with the Brookings Institution, a liberal think tank.

The move could buy the Treasury Department time before it hits the so-called debt ceiling, which limits the amount of money the U.S. can borrow. Already, some members of Congress have said they won’t approve an increase in the $12.1 trillion debt cap unless efforts to reduce the deficit are included.

Senate Budget Committee Chairman Kent Conrad, the North Dakota Democrat who is proposing a bipartisan commission, along with Sen. Judd Gregg(R., N.H.), to examine taxes, said he won’t vote for raising the debt limit unless Congress and the administration start talking about cutting spending and increasing taxes.


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TARP not working

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It hasn’t done anything for the same reasons outlined in my initial response to the Paulson plan.

She doesn’t get it either except that it isn’t working as hoped for.

TARP is now 6 Months Old, Little Evidence of Success

by Joe Weisenthal

Apr 8 (Business Insider) — Elizabeth Warren, the TARP watchdog, has released her six month report card on the state of TARP. Yep, it’s been six months and we’re still mainly here and in one piece, so take a second to be glad for that.

As was reported a few days ago, Warren’s report calls for the government to administer tough justice to the banks, arguing that there are four keys to the success of any banking system rescue, when looking throughout history.

  • Transparency
  • Assertiveness
  • Accountability
  • Clarity (as in, a full explanation of why and what the government’s doing with taxpayer money)

The other key point, which we’re really glad Warren made, is that Tim Geithner’s strategy only works if this is a temporary, liquidity problem, rather than something more profound. That’s key. Few others in government are acknowleding that crucial point.


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Review of today’s government actions

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Two ‘bailouts’ today, the Fed asset purchase program and Citibank:

Comments on the asset purchase program:
Major theme- the answer to the housing and automobile issue is consumers with enough income to be able to afford their mortgage payments and car payments along with expanding employment prospects to ensure the ability to repay in full over time.

The Fed’s function is to set the interest rate. This is all in the realm of monetary policy. Income adjustment at the macro level is a function of fiscal policy.

Specifically on the securities purchase announcement:
They finally got it right – the Fed purchases the financial assets, not the treasury. The TARP should have been a Fed operation.

What the fed does is set interest rates. It’s about the price of money, not quantity of money.

Buying agency collateral will lower the interest rates on agency mortgages. It does not ‘pump in money’ or anything like that.

Buying other collateral will lower interest rates for those types of lending.

This is what ‘monetary policy’ is all about – setting interest rates in the economy, and not quantity adjustments.

This does not directly add to the demand for mortgages or the demand for other loans.

It does lower interest rates for those loans with the hope that the lower interest rates increase borrowing to spend on houses, cars, and other purchases.

They could have done this a year ago before it became a crisis with no ill effects if there was no crisis.

Letting the crisis happen first did not serve public purpose.

This foot dragging due primarily to not fully understanding the fundamentals of monetary operations has contributed to the crisis.

While this ‘top down’ approach does improve the operations of the financial sector, it does not give them what they fundamentally need, which is borrowers with sufficient incomes to make their payments, aka declining delinquency rates.

This is directly achievable by the likes of a payroll tax holiday where the treasury makes all FICA contributions, or direct spending via revenue sharing to the states for their operating budgets and infrastructure projects.

Comments on the Citibank bailout:
What they did right is break the pattern of taking 79.9% of any remaining shareholder equity, which has meant the government has been the hand of death for shareholders. There is enough risk priced into stocks with that questionable addition.

What they did wrong is complicate matters by doing more than buying a sufficiently large preferred equity position to accomplish exactly what the rest of the relatively complex package accomplished.

This was probably done to minimize usage of funds allocated under the TARP.

They are also perhaps starting to acknowledge that a substantial part of Citibank’s difficulties are due to the failure of government to sustain reasonable levels of output and employment.

Assets that were not problems a year ago have become problems today as the economy has deteriorated due to a lack of aggregate demand.

This might be a good first step towards government fessing up and taking responsibility for the collateral damage of its own fiscal and monetary policies, and stop blaming the victims by putting them to death when they require assistance. In fact, if I were Obama I would take this approach.

The government already gets 30% of all earnings through the corporate income tax. If they want more, they can raise that tax rather than demand a percentage of the outstanding shares.


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Where do we go after these toxic assets problem?

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Seems at this late hour the payroll tax adjustment is about all that can get the job done to immediately support demand.

Yes, the banking model is to make loans to individuals and business that become illiquid assets and match that with liabilities that are not at risk either.

So if markets put a discount on bank assets due to liquidity, implied is a premium on the liability side of banking due to its unlimited ability to fund itself.

And yes, it’s when, via securitization, for example, relatively illiquid assets are not ‘match funded’ to maturity, liquidity risk is there.

This same liquidity risk is also there when banks are not provided with secure funding due to errant institutional structure that misses that point regarding the banking model.

Beyond that is the risk of default which is a separate matter.

In the banking model this is determined by credit analysis, rather than market prices.

This is a political decision, entered into for further public purpose, and requires regulation and supervision of asset quality, capital requirements, and other rules to limit risks banks can take with their government-insured deposits.

When banks are deemed insolvent by the FDIC due to asset deterioration, they shut them down, reorganize, sell the assets and liabilities, etc.

When it’s due to excessive risk due to a failure of regulation, regulations are (at least in theory) modified. It’s all a work in progress.

I see this crisis differently than most.

We had two thing happening at once.

First, by 2006 the federal deficit had once again become too small to support the credit structure as financial obligations ratios reached limits, all due to the countercyclical tax structure that works to end expansions by reducing federal deficits as it works to reverse slowdowns by increasing federal deficits.

At the same time, while the expansion was still under way, delinquencies on sub prime mortgages suddenly shot up and it was discovered that many lenders had been defrauded by lending on the basis of fraudulent income statements and fraudulent appraisals.

Substantial bank capital was lost due to the higher projected actual losses reducing the present value of their mtg based assets. This is how the banking model works. The banks were, generally, able to account for these losses due to projected defaults and remain solvent with adequate capital.

Outside of the banking system (including bank owned SIV’s – one of many failures of regulation) market prices of these securities fell, and unregulated entities supported by investors (who took more risk to earn higher returns) failed as losses quickly exceeded capital. And with this non-bank funding model quickly losing credibility, all of the assets in that sector were repriced down to yields high enough to be absorbed by those with stable funding sources – mainly the banking system.

But the banking system moves very slowly to accommodate this ‘great repricing of risk’, and all the while the fiscal squeeze was continuing to sap aggregate demand. The fiscal package added about 1% to gdp, but it hasn’t been enough, as evidenced by the most recent downturn in Q3 GDP, which is largely the result of individuals and businesses petrified by the financial crisis.

So yes, there are both issues: the financial sector stress and the lack of demand. While they were triggered by two different forces (loan quality deteriorating due to fraud and the budget deficit getting too small), it is the combination of the two that is now suppressing demand.

The TARP may eventually alleviate some of the lending issues but only addresses the demand issue very indirectly and even then with a very long lag. Just because a bank sells some assets (at relatively low prices) doesn’t mean it will suddenly lend to borrowers who want to spend. Nor does it mean they will want to fund euro banks caught short USDs that have no fiscal authority behind their deposit insurance and bank solvency, and now appear to be in a worse downward spiral than the US. The slowing US economy has reduced the world’s aggregate demand, which was never sufficient to begin with due to too small budget deficits, via reduced exports directly or indirectly to the US.

In other words, I don’t see how the TARP will restore US or world aggregate demand in a meaningful way.

Yes, the US budget deficit has been increasing, but not nearly enough. It’s only maybe 3% of GDP currently, while the US demand shortfall is currently maybe in excess of 6% of GDP.

Cutting the payroll taxes (social security and medicare deductions, etc.) is large enough (about 5% of GDP) and returns income to the ‘right’ people who are highly likely to immediately support demand as they spend and also make their payments on their mortgages and other obligations to thereby support the financial sector in a way the TARP can’t address.

It is the ‘silver bullet’ that immediately restores output and employment. But we all know what stands in the way – deficit myths left over from the days of the gold standard that are now inapplicable with our non-convertible currency.

The line between economic failure and prosperity is 100% imaginary.

And not to forget that if we do restore output and employment (without an effective energy policy) we increase energy consumption and quickly support the forces behind much higher energy prices, which reduces are real terms of trade and works against our standard of living.


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