Are Americans really benefitting from TARP repayments?
Talking about the profits earned from the various rescue packages managed by the Treasury is a popular pastime under President Barack Obama. But we need to ask: Are the American people really profiting from this exercise in recovering the monies advanced by the Treasury, particularly in terms of job creation and the performance of the economy?
Preventing economic malaise or worse was and is still the justification explicitly used by Obama and Treasury Secretary Timothy Geithner when discussing the TARP bank bailout as well as the government investments in GM, Chrysler and most especially American International Group.
“Today’s announcement represents an important milestone as we continue to exit our stake in A.I.G. and wind down TARP,” said Geithner this week. But should the U.S. even be selling shares to the public from what seems a marginally solvent insurance firm? We wrote about same in The Institutional Risk Analyst in January 2011 (Zombie IPO: Is American International Group the “Blood Doll” of Wall Street?”). Media reports focus on the fact that the Treasury’s AIG share sale resulted in just a marginal profit. But the more important question we ought to ask is whether these fiscal operations by the Treasury will get the economy moving.
When Congress enacted the TARP legislation, the initial purpose was to appropriate funds to buy bad assets from banks. The banks quickly squelched this idea, however, because buying some bad assets at deep discounts to par would drive the re-valuation of all of the bad assets on bank balance sheets. That would have forced banks to restructure, including forcing bond holders to take losses or at least convert into equity.
The TARP restructuring exercise morphed into a capital injection and management protection operation, with the Fed, OCC and FDIC essentially telling the top 50 or so banks that they had to take the government shares to “boost confidence.” But there was no restructuring because the $1 trillion in TARP money appropriated so generously by Congress was insufficient to fill the proverbial hole created by the collapse of the real estate market.
Thus we muddle along. At the end of 2009, the Financial Accounting Standards Board changed the accounting rules to allow banks to hide a large portion of their losses from sight of investors and regulators. You can see the effect of the FASB machinations in the industry ratings on the IRA web site. Note the large shift in the number of banks and amount of assets from the “F” category at the end of 2009 and to better ratings buckets in Q1 2010.
So if we look at the fact that Treasury has recovered 75% of the funds advanced under TARP and other rescues, do we feel better? No. Let’s go down the list of financial and economic “costs” which must be offset against the alleged recoveries by Treasury.
First and foremost we must subtract the vast flow of subsidies that are still flowing through the income statements of banks and non-bank financial firms which participated in the government rescue program. Since 2007, the Fed has pushed the cost of funds for the banking industry down by about $100 billion annually in terms of interest expense, according to the FDIC’s Quarterly Banking Review. This includes reduced interest paid to individual savers and FDIC guaranteed debt issued by banks and the likes of General Electric.
The cost to American savers generally as well as all types of investors in non-bank financial instruments due to artificially low interest rates maintained by the Fed is a multiple of that figure annually. In other words, the cost to Americans each year in terms of transfers of wealth from individual and corporate savers to banks and large debtor corporations probably equals all the funds recovered by Treasury and the interest payments on same.
By my calculations, that puts the American people behind a couple of trillion dollars thanks to the corporate philanthropy of Tim Geithner, Hank Paulson, George Bush and Barack Obama. Indeed, so generous have Geithner and Obama been to the banks that Wall Street is already filling the Obama reelection coffers. But the real cost to the American people of the TARP bailout and related operations is a no growth economy.
If you look at the Q1 2011 earnings performance and FDIC disclosure of the top four banks, the picture is one of accelerating deflation, not renewal and growth. Because Congress did not insist on restructuring the ten or so largest banks as part of the TARP, more than half of the banking system’s assets are essentially moribund. These banks are unable to lend and they, in turn, are facing higher and higher hurdles for selling loans to the government housing agencies such as FHA, Fannie Mae or Freddie Mac.
The latest data from the FDIC notes that revenues were down significantly in the largest banks. “Of the ten largest institutions, which together hold more than half of all insured institution assets,” the agency noted this week, “six reported year-over-year declines in net operating revenue, six had declines in noninterest income and eight reported lower net interest income.”
There is a profound lack of supply of and also demand for credit in the US today, a shortfall which I believe is driving the continued deflation in the housing sector. The poor performance of housing, in turn, has broader implications. As a veteran banker from South Texas told me in the latest issue of The Institutional Risk Analyst:
The Fed does not yet understand the huge impact of the collapse of the old manufactured housing model on employment. The Fed is setting policy at every level as if they can ‘jump start’ or push start housing from the top down. They can’t. Most consumers can’t afford housing, even at drastically reduced valuations, because of a change in savings patterns. The consumer wants to get out of debt and have a nice and safe ‘savings’ of some form so it is the family back stop. That used to be housing, but they know the home ATM is no longer … and won’t be for very long time.
A couple of weeks ago at an event in Torrey Pines, CA, sponsored by the Portfolio Management Institute, I asked Neel Kashkari, the former Treasury official and Goldman Sachs banker who helped former Secretary Hank Paulson sell the TARP bailout to Congress, whether it would not have been better in terms of jobs and economic growth to tell the banks to charge-off the TARP money to cleanse bank balance sheets of bad assets? The PIMCO official did not answer my question, but he proceeded to give us a long discussion on the need for fiscal discipline.
The sharp drop in activity in the US housing market from 2008 through today is already rippling through the broader economy. The true cost of the do-nothing Obama Presidency is a low or no growth job market, which is feeding the housing market implosion. Indeed, once Americans fully appreciate that there is not going to be an appreciable bounce in the housing sector, the faulty logic of pulling the TARP money out of the banking system may start to become clear.
Geithner and Kashkari like to roam the country talking about how much of the $1 trillion or so in borrowed taxpayer money advanced to banks under TARP has been recovered by the Treasury. But neither one of these fine public servants seems to understand that their actions are actually driving deflation. Instead of forcing banks to restructure and renew, and increase their capacity for leverage, we are instead reducing their capital and also the ability of the financial sector to create and support leverage.
These same large banks are constricting their lending and, in turn, driving valuations for homes and commercial assets down and down some more. Just ask a commercial real estate investor about the terms for rolling a loan in a fully leased, Class A building in a major metro area today. In most cases, the banks are requiring the borrower to put more cash into the loan before the close. In effect, the banks are pulling even more capital out of the economy to buffer themselves against future credit defaults. Does that sound bullish to you?
Next time you hear Barack Obama or Tim Geithner or Neel Kashkari bragging about all of the money that they have made or recovered for the US taxpayer, ask them how much their pandering to the large banks is costing us all in terms of jobs and growth. My guess is that for ever dollar recovered by the Treasury since the bailout began, we have lost $10 because of the failure of leadership and even basic economic understanding by Barack Obama, Tim Geithner and, most important, the national Congress. It is not too late to begin the restructuring process in the banking sector, but doing so requires courage not yet visible anywhere in Washington.