Are Americans really benefitting from TARP repayments?

May 26, 2011

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.


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Nice article, Mr. Whalen, but the money paragraph is the last one. If I were you, I would put it first, or at least copy it and bold it before the article starts.

Posted by Weevie | Report as abusive

[…] FHA, Fannie Mae or Freddie Mac. The latest data from the FDIC notes that revenues were down … read full news Published: Thu, 26 May 2011 20:31 Tags: Are Americans really benefitting from TARP […]

Posted by Are Americans really benefitting from TARP repayments? » HIGHER PRICED MORTGAGE LOANS | Report as abusive

The Great Western Hope is to grow out of debt by a combination of inflation and expanded productivity. The fiscal stimulus sloshing around is not gaining any velocity and western fear of deflation is nixing investment. The stimulus seems to have leaked out abroad. The fear of deflation at home deepens with job creation below labor pool expansion with an aging workforce pushing out retirement. The prices are dropping while, affordability of homes is still years away.
If near zero mortgage rates can’t float the housing market have we reached an inflection point?

Posted by Spruce_gum | Report as abusive

Mr. Whalen’s cost benefit analysis seems to have missed the primary reason for the enactment of TARP. The alternative cost to doing nothing was the likely failure of the global financial system, or at least a crippling blow that would far exceed any taxpayer expenses that Mr. Whalen “guesses” would be attributable to the forced capital injections. That Mr. Geithner or Mr. Kashkari are trumpeting the return of taxpayer funds as a success is a nod to the political reality of bailouts in this age of armchair fiscal disciplinarians. Another critical nuance of that Mr. Whalen appears to have not recognized.

Posted by Tobby | Report as abusive

Why depend on governments when family and friends may help you have a better place to live. It takes knowledge and safety first to re-build some structures. No one can spend themselves wealthy and we need to pull together even more. I need some shoes that have a proper fit.

Posted by brenniewinters | Report as abusive

“requires courage not yet visible anywhere in Washington”,

Most in Washington have no clue, are led by the same whom were wrong before, put in place by those whom continue to benefit, and will only become “aware” after the fact! “Courage”??? I’m pretty sure Courage is the last thing in a long line of deficits facing those in Washington.. somewhere behind bought, paid for, misdirected, allegiance, party mongering self interest ect ect. I think Courage can only happen if those things are set aside, then and only then will Courage be seen. Till then, a lot of other things will rule the day, before Courage.

To tell the truth, I don’t believe those in Washington belive they can make a differince in these days and times and legal distinctions/interpretations. In effect, Washington is in the same shoes main street wears. No real influence on end outcomes on important maters as those matters are in the hands of commercial concerns. The courage decisions of which you speak, that you want made.. are made, and effectively,, just as always, by those whom own the vast bulk of wealth, not some Senator or other Rep..
“Courage” is for those that believe they are part of a system that needs to avoid losing.. one cannot lose by going along with the proven winners, one does not need “courage” till that choice to decide, what is losing-or not losing, for the “one” is taken away,, from the ones.. in Washington. It’s kinda like the carrot or the whip.. take away the “carrots” in Washington. Then expressions of Courage will be seen everyday!

Posted by Chivelry | Report as abusive

We have gone from a liquidity crisis to a velocity crisis. TARP did not address homeowner debt or unemployment. Most likely the Treasury and Fed believe they have restored liquidity, employment is a fiscal problem. Unfortunately we have entered a condition identified by Irving Fisher as debt deflation, where in the process of resolving debt, indebtedness increases, primarily because the value of collateral continues to collapse. With 10 million homeowners underwater, we have a velocity problem that is increasing daily while we focus on austerity measures, Medicare vouchers for the under 55 crowd, an issue ten years in the future. The only solution is to accelerate employment and keep people in their homes (and off the market), neither of which are under consideration.

Posted by Ransomexx | Report as abusive

I didn’t read the article – I don’t think I need to. Basically, something went marginally okay for the Obama administration and so the right-wing has to spin the news or change frame-of-reference to try and tear it down. I get it, and it’s such a bloody waste one wonders how you sleep at night. I don’t scorn you for having different economic ideologies, but for using distasteful and disreputable tactics to undermine public trust. As far as I can tell, there hasn’t been a single scandal from Obama that could even come close to several incidents under Bush2 or Clinton (ie the first time in 16 years)… and frankly Reagan’s administration was fraught with scandal as well. Is that why opponents of Obama have to invent facts to try and bring him down?

All I will say is that you drag Obama down for not reigniting the economy fast enough, but in the same breath complain that he didn’t smash the economy and rebuild it from scratch, causing depression not just in America but likely all over the world. Pick one and roll with it, don’t be so hypocritical

Posted by CDN_Rebel | Report as abusive

The author is right,it requires courage and understanding on the part of political leaders to have ensured that the public loans to save the financial institutions from imminent collapse came with a strong mandate to restructure and reform.Instead the ‘too big to fail’ even have gotten bigger.Emboldened to use the largesse to save their hides and then to speculate to get out of the mess they have put themselves and the rest of us in.But the mess seems to be not easily mend able even after printing and putting trillions of dollars at the markets disposal.

Posted by cosmicinsight | Report as abusive

The American people have NOT benefited from the TARP, or the Obama Stimulus money, it is us who paid it! We are far worse off! The Obama stimulus money went to political payoffs for Obama…unions, donors, supporters…not the business people who could have put it to the use it was promised…more hypocrisy and lies from our spinner-in-chief.

Al Barrs, A Herman Cain Supporter
Bascom, Florida

Posted by AlBarrs | Report as abusive

TARP disrupted a vicious cycle that threatened every corporation, every industry, every nation. TARP was costly. But in any such article which seeks a thorough accounting for every possible penny spent, whether real or in future earnings, the fact that we are not talking about the Second Great Depression right now is most attributable to one program: TARP, with the stimulus bill a distant second.

TARP didn’t come close to giving us a shiny new economy. It did keep the battered one we had from driving straight off a cliff. That’s another huge success for government rescuing feckless businesses and greed drunk markets, a narrative some ideologues can’t accept under any circumstances. Not even it’s their rich behinds which where saved most.

Posted by BajaArizona | Report as abusive


This is a very enlightening piece. Have you done any work that suggests that charging the banks merchant banking rates on what was essentially mezzanine financing would have caused the money center banks to try to produce higher returns on capital and thereby stimulate the loan market?

What is the current state of the FDIC loans that never get media attention? It seems that the bankers paid themselves first, 2009 bonuses, and then went into an interest rate and commodities trading and arbitrage mode and are now hoarding capital and hoping for growth while preparing for the inevitable.

If the banks were forced to keep the capital unless and until they could pay back the taxpayers at commercial IRR’s would this have forced some discipline and growth?

Also, how does the FED fit into the picture now? Is the FED required to send back to the Treasury the near 100 billion dollars in profit it will likely make this year, or will this spread income be used to make additional purchases in a QE3 lite? How is the FED & Treasury regulated in this regard?

Posted by kruk | Report as abusive

Would I be considered an objective bobble-head if I believed in the prophet Ayn?

Posted by 1stspock | Report as abusive

Hey wait, doesn’t Chris work at AIG? Didn’t AIG get TARP money? Of course he’d write an article saying that they shouldn’t pay it back.

Posted by ohyeah23 | Report as abusive

My reaction is “Are Americans really benefiting from George Whalen’s analysis of TARP”?

He factually mistates the size of the TARP authorization. See 010/10/04/do-tarp-re-payments-reduce-the -deficit/ to understand how the authorization has evolved. It ultimately became less than half the 1 trillion dollars he quotes in the blog above.

He asks has America benefitted by selling TARP related assets to which I reply how would America be better off if the assets were not sold to recover our money.

Finally he conflates Fed policy with a specific legislative act (TARP) and arrives at the conclusion that TARP is bad because Federal Reserve policy has hurt Americans (arguably a good point but not relevant for a TARP discussion)

Posted by Syzygy | Report as abusive

Good article Chris.

Posted by Laster | Report as abusive

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