What to Make of TARP Profits?
McClatchy points out that not only are some banks repaying TARP funds, the government is making money on the deal:
The crux of the matter is that the government is being paid an interest rate on the TARP money that exceeds the rate of interest the government pays out on bonds. Now, I wouldn’t leap to the conclusion that taxpayers are going to make money on TARP overall, since the biggest loans are still outstanding and some of them—especially to Citigroup and double especially to GMAC—are unlikely to be repaid any time soon. But the important point here is that for all the complaining from both the right and the populist left about spending $700 billion on bailouts, the net fiscal cost of the $700 billion TARP program is likely to be dramatically lower. How much that net cost turns out to be will depend in part on the ultimate value of some of the stock warrants we own in all these banks, and also our common stock in Citigroup. But it is at least possible that the net cost will be zero or even negative, and pretty likely that the net cost will be pretty small.
Which isn’t to say that TARP is working perfectly. But the problem has little to do with cost. The real issue is that we’ve created for ourselves a significant forward-looking regulatory problem and I don’t see evidence that congress and the administration are prepared to solve that problem.
45 Responses to “What to Make of TARP Profits?”
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June 10th, 2009 at 1:47 pm
Sounds like the Clinton bailout of Mexico all over again.
June 10th, 2009 at 1:49 pm
Did you include the $7 billion Chrysler TARP write off?
June 10th, 2009 at 1:52 pm
What I don’t understand is where all those toxic assets (rumored to amount to more than $3 trillion) went. Are banks all OK after all?
If those assets were nearly worthless 6 months ago, how can banks be solvent today?
June 10th, 2009 at 1:55 pm
WoW:
Since the beginning of the crash in September, iirc, the banks have still been earning, and business is better now than they were then. For instance, Chase had to hire back an enormous number of employees they’d just laid off in order to handle massive numbers of re-fi mortgages, and made lots of money in fees alone.
June 10th, 2009 at 1:57 pm
If those assets were nearly worthless 6 months ago, how can banks be solvent today?
Everybody agreed to let the banks pretend that those assets aren’t actually worthless. Hence, profits.
June 10th, 2009 at 1:59 pm
Meh. The US only made a 2.5% profit on the Mexico bailout, but that’s still $675 million in today’s dollars, which is nice.
June 10th, 2009 at 2:03 pm
Since the beginning of the crash in September, iirc, the banks have still been earning, and business is better now than they were then.
Yeah but… $3 trillions! Bank profits won’t repay that before a few decades.
Was this number very wrong and the toxic assets actually sound investments?
June 10th, 2009 at 2:04 pm
What Duvall said. Mark-to-market was suspended and everyone pretended that these things were not bad after all. This is also the reason for the failure of the LLP — no one wants a price on these things.
So no, the banks are not okay. They are just in denial. Until the option ARM time bombs go off.
June 10th, 2009 at 2:06 pm
Heh:
Double heh:
June 10th, 2009 at 2:06 pm
This is a very perverse way to look at it.
The real cost of TARP and the other programs is that they continue the “business as usual” policy.
We are therefore being sucked further into a situation in which financial oligarchs make fortunes by converting public funds into their own.
Stiglitz had a good article recently: http://www.vanityfair.com/politics/features/2009/07/third-world-debt200907
June 10th, 2009 at 2:10 pm
Ah, here’s a chart showing the reset of the resets. Looks like Aug. 2011 is going to sssuuuccckkk.
June 10th, 2009 at 2:14 pm
Whoops, read the chart backwards. The peak resets will be Dec. 2009 and Aug. 2010. The overall peaks, however, are $7 bn. lower.
June 10th, 2009 at 2:16 pm
Currency is not wealth, please get it out of your colbertist head. If the government wanted to have more coupons with pictures of presidents on them, it could have forced persons to hand them over or it could have combined printing the coupons with adopting deflationary policies.
What’s wrong with the bailouts is that the next time bankers see a low probability/extremely high loss opportunity that regulators haven’t foreseen, they’ll know they can make a lot of money if the investment turns out right and be shielded from the worst effects if it turns out wrong. It gives people an incentive to take on risks that are not worthwhile.
June 10th, 2009 at 2:19 pm
What I don’t understand is where all those toxic assets (rumored to amount to more than $3 trillion) went. Are banks all OK after all?
A bunch were allowed to pay back their TARP funds but other like Citigroup weren’t and now have the big scarlet A hung around their neck.
“But the important point here is that for all the complaining from both the right and the populist left about spending $700 billion on bailouts,”
Oh no he didn’t! To be fair to the populist left everyone was guessing at the time and no one was certain. But on the other hand they were certain it was a scam.
June 10th, 2009 at 2:22 pm
Walker:
So no, the banks are not okay. They are just in denial. Until the option ARM time bombs go off.
I see your point about mark-to-maket but the fact they many banks to pay back their TARP money makes me suspect you’re wong. It all depends on whether the economy falls of a cliff again.
June 10th, 2009 at 2:24 pm
A portion of the TARP money is being repaid by relatively healthy banks because of limits on executive compensation. All the other indirect support to the banks from treasury and the fed remains. They remain weak and are making money only because the government is on the hook for massive amounts of liabilities and because the government is effectively directly or indirectly subsidizing their operations.
June 10th, 2009 at 2:25 pm
We are therefore being sucked further into a situation in which financial oligarchs make fortunes by converting public funds into their own.
Stiglitz had a good article recently: http://www.vanityfair.com/politics/features/2009/07/third-world-debt200907
Which is why it’s amazing President Obama had Stiglitz and Krugman over for dinner. The real question is what the financial regulations will look like as Matt writes.
June 10th, 2009 at 2:28 pm
OK, so a white supremacist just walked into the Holocaust Museum and opened fire.
That’s all we’re going to be talking about for a while.
Damn. Stupid effing world. Why in the …
No, I’ll stop.
June 10th, 2009 at 2:29 pm
Can someone point me in the direction of discussion of this point:
Thanks.
June 10th, 2009 at 2:39 pm
What I don’t understand is where all those toxic assets (rumored to amount to more than $3 trillion) went. Are banks all OK after all?
If those assets were nearly worthless 6 months ago, how can banks be solvent today?
It’s not that they were worthless. It’s that nobody had any idea what their worth was, due to how many times over they sliced and repackaged and leveraged mortgages. So if your bank is facing a liquidity crisis and you have these assets that are worth something but that nobody will buy because their worth isn’t known, you can’t sell them and your bank collapses because it can’t get operating money from assets like these. The idea of the PPIP was that by putting a price on them, this problem goes away. It seems nobody actually bought into it, though, and the problem instead went away because they were able to raise enough private capital from other sources to not have to depend on these assets to stay solvent.
June 10th, 2009 at 2:40 pm
Noting, of course, that the reason these banks were able to raise so much private capital is because of the clear guarantee that the government won’t let the banks go under. It makes for a pretty good investment if you know the company you’re investing in is too big to fail and that the government will just keep giving it money instead of nationalizing it if shit hits the fan. Which is the real problem here.
June 10th, 2009 at 2:54 pm
Paulson was worried that if they just gave money to Citigroup, the taint would be a self-fulfilling prophecy. So, TARP money was given to everyone. These other banks didn’t mind, because they thought the terms were ok. But then AIG made Congress put on compensation limits. Now, the terms of that money is not so good. So they are paying it back. If JPM has $25 BB laying around, they probably didn’t need it.
Are the banks all of a sudden solvent? Doubtful. But there are many banks that got funds, and not all of them were insolvent at the time. Since all the banks are not paying back funds, then all the banks are not now solvent.
Further, solvency is not the same as liquidity. Even citi can meet its cash demands, it is liquid (unlike GM). Solvency is a different issue and is more of an accounting construction. All the slick accounting in the world will not give you a dime to pay an actual bill or interest payment.
June 10th, 2009 at 3:03 pm
The real issue is that we’ve created for ourselves a significant forward-looking regulatory problem and I don’t see evidence that congress and the administration are prepared to solve that problem.
I’m honestly not sure why Matt wrote this. It has been widely reported that the Administration will be coming out with a plan for a regulatory overhaul very soon (June 17 was the last I heard), and the relevant senior Democrats in the House and Senate have suggested they intend to pass something by the end of this year. Of course it remains to be seen what they actually come up with, but I would say this at least counts as evidence that they are trying to address these issues.
June 10th, 2009 at 3:30 pm
It’s not that they were worthless. It’s that nobody had any idea what their worth was, due to how many times over they sliced and repackaged and leveraged mortgages. (…) the problem instead went away because they were able to raise enough private capital from other sources to not have to depend on these assets to stay solvent.
I duno, again we’re talking about trillions of toxic assets, not worthless but rumored to be worth less than 30% of their face value.
It seems to me we are in the situation described by Krugman at the time of ‘zombie banks’, insolvent but allowed to survive thanks to government guarantees. A few billions in profits or private capital doesn’t change that.
Either they are insolvent today, or that panic last year was irrational and the financial sector didn’t need the hundreds of billions of taxpayers’ money it received.
June 10th, 2009 at 3:33 pm
Banks were able to make ever more loans because they could package loans into a bond (securitize them), sell the bonds to investors and then be free to make more loans against their reserves.
Some of the largest banks (e.g. Citi,UBS) were making so much money from MBSs that they kept the highest quality, AAA tranches for themselves. They didn’t hedge those because that would have reduced profit. Besides, house prices never go down!
They then belatedly discovered that they owned all these unhedged “safe” bonds (called “super senior”), rated AAA by the ratings agencies, that were declining in value just like housing prices.
They now have massive amounts of bonds carried at 100% that will bring 40-60% if sold now. If they sold them now, they would have to recognize huge losses.
So they have opted to hold them until they can sell them off without declaring insolvency. The big problem is that there is little reason to expect those bonds to ever bring more than 40-60% – ever.
So we the people have the honor of propping up these banks for the next several years while they slowly leak these “toxic” assets off their books.
Lucky us!
June 10th, 2009 at 3:34 pm
Also, what are the advantages for banks of giving the TARP money back as soon as possible, except to make sure bonuses in 2009 won’t be regulated by the government? We are supposed to trust those guys again to do the right thing?
June 10th, 2009 at 3:44 pm
It is also worth mentioning that the TARP funds were meant to increase lending.
As soon as the TARP funds are returned, banks’ ability to lend decreases by about 8 times the amount returned.
June 10th, 2009 at 3:46 pm
Either they are insolvent today, or that panic last year was irrational and the financial sector didn’t need the hundreds of billions of taxpayers’ money it received.
That is really a false dichotomy. The aggressive injection of public capital was designed to help unfreeze the credit markets. And the logical consequences of that happening, when conjoined with other federal programs, was that profits from lending would improve and new private capital would be attracted to the banks. And we were always hoping that once conditions improved, the banks would be able to return most of the public capital.
So really, none of this is unexpected. The only somewhat surprising thing is that it has happened pretty fast for some of the banks, but revenues have indeed been good and private capital has indeed been stepping up to the plate. And, of course, we still have a lot of money out there–this is just the initial wave of paybacks, and it may take substantially longer for many banks.
Also, what are the advantages for banks of giving the TARP money back as soon as possible, except to make sure bonuses in 2009 won’t be regulated by the government?
Well, of course they don’t have to make any further dividend payments. But probably the biggest thing these first-wave banks are getting is the perception that they are in relatively good shape.
June 10th, 2009 at 3:48 pm
As soon as the TARP funds are returned, banks’ ability to lend decreases by about 8 times the amount returned.
Not necessarily–that depends on whether the banks can then replace the TARP funds with other new capital.
June 10th, 2009 at 3:51 pm
Yes necessarily.
June 10th, 2009 at 3:55 pm
Yes necessarily.
Please explain.
Bank has $X in TARP funds. Bank pays back $X in TARP funds. Bank raises $X in additional new capital.
How has Bank’s ability to lend decreased?
June 10th, 2009 at 4:00 pm
So really, none of this is unexpected. The only somewhat surprising thing is that it has happened pretty fast for some of the banks, but revenues have indeed been good and private capital has indeed been stepping up to the plate.
I would be more confident if we had more than those two sources to assess how solvent those ‘profit-making’ banks really are:
1. their word
2. the secret stress tests of the government
For all we know, JP Morgan Chase, Morgan Stanley and Goldman Sachs are still sitting on hundreds of billions of nearly worthless assets, and their relatively small profits are a drop in the ocean. Oh well, at least the bonuses will keep flowing until the next crisis and bailout.
June 10th, 2009 at 4:02 pm
Bank has $X in TARP funds. Bank pays back $X in TARP funds. Bank raises $X in additional new capital.
How has Bank’s ability to lend decreased?
Compare:
Bank raises $X in private capital and keeps $X in TARP funds.
June 10th, 2009 at 4:11 pm
Gee whiz Matty! This is so suckycessful that it is all the guvment should be doing!
Jes wooky at all da money de be makin!
Except of course none of this takes account of AIG (was that 170 billion$ at last count?) or Fanny or Funny and all that money went to guess who?
Oh yeah, to lots of banks on that list!
Not to mention all the other hundreds of billion$ transferred to Wall Street through other bailouts.
If in fact Matty the bailouts had been limited to TARP and TARP alone, a paltry 700 billion$, well I would still have yelled but not screamed at the top of my fucking lungs.
Now tell me again how 68 billion$ in repayments makes the trillion$ down the black hole a fucking grrrreat deal for us peons?
June 10th, 2009 at 4:21 pm
How has Bank’s ability to lend decreased?
Because they have less capital than otherwise.
My real point was that allowing the return of TARP funds runs counter to their contention that more lending is needed.
June 10th, 2009 at 4:32 pm
I would be more confident if we had more than those two sources to assess how solvent those ‘profit-making’ banks really are.
I’m always in favor of more information, but I think it is worth noting that the people claiming lots of banks were insolvent were basically just guessing. In that sense, I don’t think you should assume the banks are insolvent until proven otherwise.
Bank raises $X in private capital and keeps $X in TARP funds.
But paying back the $X in TARP funds may be necessary in order to get the $X in private capital. In other words, those TARP funds remove potential returns to non-TARP capital from the pool, so paying back the TARP funds may, and indeed should, make it easier for the firm to attract new non-TARP capital.
June 10th, 2009 at 4:37 pm
Because they have less capital than otherwise.
Again, this simply isn’t true if they can replace the TARP funds with new private capital.
My real point was that allowing the return of TARP funds runs counter to their contention that more lending is needed.
Well, it certainly runs counter to the contention that public capital is necessary for more lending. One more time, though, if you believe the firm will be able to replace the TARP funds with private capital, then there is no reason to believe the firm’s lending will be any less as a result of repaying the TARP funds.
June 10th, 2009 at 4:40 pm
I don’t think you should assume the banks are insolvent until proven otherwise.
So, keep trusting Wall Street until the next financial meltdown. Mmm…
June 10th, 2009 at 5:11 pm
So, keep trusting Wall Street until the next financial meltdown. Mmm . . .
That is not a logical deduction from what I wrote. First, I didn’t say you should assume they are solvent, and certainly I didn’t say you should just take their word on their financial health. Second, in recognition of the fact that it can actually be quite difficult to determine the true financial health of banks, I have long advocated strict, direct, and coercive regulation of banks. History proves that is the only reasonable chance we have of preventing excessive systemic risk.
June 10th, 2009 at 5:17 pm
Sure… they let you name the value of your own assets, and all the sudden you’re doing great.
Matt proves that rich people really are very different from everyone else. Nobody else would think that living in a la-la make belief faerie land was a sustainable way of living. But the wealthy have too much cash to insulate themselves from reality. The problem is, that only lasts for so long. How long do you guys really think an economy based on perpetual consumner debt can really last?
June 10th, 2009 at 7:30 pm
[...] about spending $700 billion on bailouts, the net fiscal cost of the $700 billion TARP program is likely to be dramatically lower.” However, CNBC’s crack economic team isn’t buying it, and spent a segment today [...]
June 10th, 2009 at 8:19 pm
When – uh huh, “when,” that’s right – the federal government runs a much smaller than projected deficit because of TARP repayments, we can expect the Republicans to say that this phony deficit reduction, because it’s resulting from one-time TARP repayments.
Will this cause them to draw the obvious conclusion, and cease fear-mongering about the country going bankrupt because of the FY2009 deficit caused by one-time TARP outlays?
No, of course not. What am I thinking?
June 10th, 2009 at 9:45 pm
Hate to say I told you all so a million times. But I told you all so a million times.
As for bailing out those uni…I mean car companies…who thinks that we’re going to make money (or even get our money back) on that one?
June 11th, 2009 at 8:11 am
MY “The real issue is that we’ve created for ourselves a significant forward-looking regulatory problem”
We have. More importantly, in the interim period between possible future regulation and the system we have now, Wall Street remains susceptible to short seller attacks and another meltdown.
Remember, short sellers attacked two US banks and crashed both of them, the second successful attack, on Lehman Brothers, crashed the whole system.
Bear Stearns was assaulted on March 11, 2008 by naked short sellers. 55,000 Bear puts were purchased on that day. Some unknown group of investors made a bet that a seemingly very strong bank would collapse within seven days -the equivalent of betting that 25 airliners would fall out of the sky simultaneously- and then made it happen by short selling Bear stocks.
In the wave of the attacks Bear’s stock price plummeted from $65 to pennies in the span of about 72 hours. Short sellers killed Bear Stearns, made it look easy, and made a fortune doing so.
Lehman Brothers was assaulted by naked shorters all during the spring and early summer of ‘08. As its stock price fell, the SEC put a ban on naked short selling in early July. Lehman began to rally but, incredibly, the SEC lifted the ban 17 days later. The short sellers remounted their attacks and pounded Lehman all throughout August. On Sept 9th thru the 12th, they delivered the knockout blow, Lehman collapsed and the world financial meltdown followed.
What protections have been put into place since? As far as I know, none. Do we really want to release the bailout banks into the wild, before regulations have been enacted?
There seems to be a consensus that Wall Street was a house of cards before the meltdown. Has anything changed? Should we put these fragile banks back out into the firing line, where they undoubtedly will be attacked? And what does this say about the executives of these banks, who know their institutions can be destroyed by short sellers in a matter of days, given the right conditions.
Are bank executives that pathetic that they would willing put their institutions at risk just so they can reconstitute their bonus infrastructure? Did I just ask a rhetorical question?
June 11th, 2009 at 9:52 am
You use the terms such as financial XYZ took or accepted TARP funds. When was it ever an option? Some banks tried to refuse the funds and ultimately the Feds said “that is not an option”.