September 19, 2009

Big Bank Bailout Payback Bamboozle

The Big Bank Bailout Payback Bamboozle

June 14, 2009

Mother Jones - Last week was a milestone for US treasury secretary Tim Geithner. He finally got to play the hero. The morning of June 9, Treasury notified 10 financial institutions, including JPMorgan Chase, Goldman Sachs, Morgan Stanley, US Bancorp, and Capital One Financial, that they were "eligible to complete the repayment process" for the capital they received under the Troubled Assets Relief Program (TARP).

In other words, they would be allowed to pay back $68.3 billion. Even though they really owe $229.7 billion. That we know of.

But Geithner didn't mention that last bit.
Instead, he professed that "these repayments are an encouraging sign of financial repair," with the caveat that "we still have work to do."
The "we" he refers to is himself and Wall Street, both of whom are getting a good deal out of this fractional payback scheme. The agreement frees the banks from restrictions on executive pay or, worse, their general practices, but it still allows them to keep the cash they've received through non-TARP venues like the FDIC Temporary Liquidity Guarantee Program— or the massive sums the banks recovered from AIG (thanks to its own federal bailout) to cover their losses on credit derivatives. Not to mention any cash provided by the mother of all cheap loan programs—the Federal Reserve.

Geithner, for his part, gets to convey the message that things are looking up.
"These repayments follow a period in which many banks have successfully raised equity capital from private investors," stated the press release. "Also, for the first time in many months, these banks have issued long-term debt that is not guaranteed by the government."
Well, of course certain banks have raised some money on their own: Firms have a tendency to look a whole lot better when they're backed by government capital and have cheap federal loans sitting on their books. Private investors notice that sort of thing. But more troubling than the misplaced praise is the fine print that accompanied the announcement:
"These repayments," the department noted, "help to reduce Treasury's borrowing and national debt. The repayments also increase Treasury's cushion to respond to any future financial instability that might otherwise jeopardize economic recovery."
This statement belies some accounting sleight of hand.

First off, it conveniently ignores the fact that TARP accounts for a fraction—about $700 billion—of the government's $13 trillion banking stabilization scheme. At some point, investors are going to balk at buying up federal debt (Treasury bonds), thereby forcing the government to pay higher interest rates, which will wipe out much of the TARP payback benefit. The second sentence is more ominous: It suggests that if banks need that money back, it'll be waiting for them right there at the Treasury Department.

On the day of his announcement, Geithner acknowledged to the Senate Appropriations Committee that "while we see some initial signs of economic improvement and the financial system is beginning to heal, our country faces very substantial economic and financial challenges." Indeed, the banking sector has not gotten substantially better lately. According to a report compiled by the Investigative Reporting Workshop and MSNBC, the number of delinquent or defaulting bank loans grew by 22 percent during the first quarter of 2009—six out of ten banks were, in fact, even less prepared to absorb further losses than they had been during the last, abysmal quarter of 2008.

While the treasury secretary conveyed to the senators some understanding of the plight of the rest of us, this show was all about Treasury and the banking sector. Geithner praised the government for pulling off stress tests of the 19 largest financial institutions last month.
"The clarity and transparency provided by the tests," he said, "has helped improve market confidence in the banks, making it possible for them to collectively raise nearly $90 billion through private equity offerings, bond issuances without government guarantees and sales of business units."
But Tim's not playing it straight. The fact that most of these banks passed their stress tests would only have mattered if the tests had any value. As I discussed when the tests were first unveiled, these tests were designed in tandem with the banks, the evaluations were provided by the banks, and some of the assumptions they were based upon—such as where unemployment would be—had been exceeded before the test results were released.

In fact, the stress tests have little to do with anything, but two other sources of capital for banks do. The main one is the Fed, which loans money to banks at stupidly low rates through a variety of facilities and loan-guarantee programs that total $7.9 trillion. In return, the banks can post as collateral an assortment of complex assets that no one but the Fed has any record of.

Banks can also borrow cheaply if they have an FDIC guarantee—and then use that cheap money to do things like pay TARP back, which explains why their stocks have gone up. The government opened this door on October 14, 2008, with the FDIC's Temporary Liquidity Guarantee Program. The idea was that it would prompt banks to start lending to their customers again. But that didn't happen. Instead, cunning institutions used the new program to raise cheap capital for their own needs. By changing its status to a bank holding company, Goldman Sachs was able to secure $29 billion of that FDIC-backed debt; Morgan Stanley raised nearly $24 billion.

The banks paying back the TARP funds aren't doing any better than their peers. In the first quarter of 2009, JPMorgan Chase's troubled asset ratio—the ratio of bad loans to the cash a bank has set aside to cover them—increased by nearly 16 percent, US Bancorp's by 21 percent, and Capital One's by 17 percent, numbers that put them in the same ballpark as many banks that are holding their TARP money.

In the meantime, average Americans, who don't have a $13 trillion federal insurance policy to fall back upon, have fared poorly. Over the past three months, unemployment has hopped a full point, to 9.4 percent—nearly double what it was one year earlier. For the third straight month, home foreclosures have broken the 300,000 mark, with the defaults reaching well into the prime loan turf, and home prices are still falling.

Considering the true size of the bailout, the continued loan deterioration, and the weakness in the overall economy and job market, the economic signs simply aren't that positive. For Geithner to pretend that a few banks paying back federal money with other federal money is an encouraging sign is to miss all of them.

The Bailout Propaganda Begins

September 1, 2009

Matt Taibbi - It was inevitable that the same people who pushed through the multi-trillion-dollar bailout of Wall Street would come out later on and tell us what a great idea theirs turned out to be, in retrospect and under the light of evidentiary examination. And we’re getting that now, with a pair of reports, the above one in the New York Times and another in the Financial Times, telling us the bailout is working because the government has made some money on TARP. They came to this conclusion by quoting Fed officials, who apparently calculated how much interest the Fed earned on TARP investments above what it would have earned on T-bills. The amount so far, according to these worthy gentlemen: $14 billion.

This is sort of like calculating the returns on a mutual fund by only counting the stocks in the fund that have gone up. Forgetting for a moment that TARP is only slightly relevant in the entire bailout scheme — more on that in a moment — the TARP calculations are a joke, apparently leaving out huge future losses from AIG and Citigroup and others in the red. Since only a small portion of the debt has been put down by the best borrowers, and since the borrowers in the worst shape haven’t retired their obligations yet, it’s crazy to make any conclusions about TARP, pure sophistry. Moreover, a think tank set up to analyze TARP, Ethisphere, calculated in June that TARP was still $148 billion down overall, a debt of over $1200 per American. To start talking about what a success TARP is now is beyond meaningless.

The other reason for that is that it’s only a tiny sliver of the whole bailout picture. The real burden carried by the government and the Fed comes from the various anonymous bailout facilities — the TALF, the PPIP, the Maiden Lanes, and so on. The losses from the Fed’s purchase of distressed/crap Bear Stearns assets (Maiden Lane I) and AIG assets (MaidenLanes II and III) alone were as recently as late July calculated in the $8.6 billion range, and even that number is very conservative. Then there’s the trillion or so dollars that the Fed used on buying up mortgage-backed securities and Treasuries; we don’t know what their market value is now. And there are untold trillions more the Fed has loaned out in the last 18 months and which we are not likely to find out much about, unless the recent court ruling green-lighting Bloomberg’s FOIA request for those records actually goes through.

In light of all this, the Fed’s decision to brag publicly about a few loans that are actually performing is sort of scary — it speaks to a level of intellectual desperation and magical-thinking unusual even for a banker in the subprime/MBS era. Don’t be surprised if you hear more of this sort of thing in the coming years.

More Bogus Bailout Reporting: “As Big Banks Repay Bailout Money, U.S. Sees a Profit”

August 31, 2009

Naked Capitalism - CClearly, the spin is in. As a post earlier today discusses, the Financial Times is running a story that claims that the Fed made money on its rescue programs, then slips in all the tidbits in the body of the article to let discerning readers know that the reporter understands that the analysis is utter rubbish while looking like it is not crossing the Fed.

In a simply remarkable coincidence of timing, the New York Times running a story with the very same message, namely that bailouts are good for taxpayers because the Treasury has made money on the TARP.

If you believe that, I have a bridge in Brooklyn I’d like to sell you. The fact that we have such patent garbage running as a front page New York Times story says either the reporter and his editors lack the ability to think critically (or find sources who could do that for them) or that we have a controlled press. Given that subscriber-driven Bloomberg has even fallen in line, I am inclined to the latter view, but I am still curious as to how this has been achieved. Is this the price of access journalism, or is something more pernicious at work?

Now to the intellectually bankrupt New York Times story. Here is how it determined the TARP was making money:
The profits, collected from eight of the biggest banks that have fully repaid their obligations to the government, come to about $4 billion, or the equivalent of about 15 percent annually, according to calculations compiled for The New York Times.
Help me. Credit 101 is that your best borrowers repay first (unless you gave them overly generous terms, of course, then they might hang on to the proceeds). A quick but not conclusive search suggests that only a small portion of the TARP has been retired, so it is wildly premature to declare victory.

In fact, another source looked at the TARP as of June and estimated that it had lost $148 billion, and had lowered loss total as a result of the repayments. Now bank stocks have rallied since then, but the biggest contributors to the red ink, namely AIG and Citigroup, are not in any better shape fundamentally than they were then. Indeed, the fact that new AIG CEO Robert Benmosche has in a remarkable show of hubris, effectively told the US taxpayer to stuff it, AIG has the dough and is in no particular hurry to return it, nor does it care what the public or Treasury wants, its demands are unreasonable. I wouldn’t hold my breath about having the loans repaid.

Moreover, the piece contains a huge canard:
But the real profit came as banks were permitted to buy back the so-called warrants, whose low fixed price provided a windfall for the government as the shares of the companies soared
Roger Ehrenberg already dispatched this goofy idea with admirable zeal:
The US taxpayer has been systematically looted out of hundreds of billions of dollars….Goldman Sachs is posting record earnings and will invariably be preparing to pay record bonuses, not nine months after the firm was in mortal danger? Whether anyone will admit it or not, without the AIG (read: Wall Street and European bank) bail-out and the FDIC issuance guarantees, neither Goldman nor any other bulge bracket firm lacking stable base of core deposits would be alive and breathing today.

Goldman is a great firm with a stellar culture, and in most circumstances it’s risk management and funding practices have been second to none. Except when the crisis hit. It stood with the rest of Wall Street as a firm with longer-dated, less liquid assets funded with extremely short-dated liabilities….In exchange for giving the firm life (TARP, FDIC guarantees, synthetic bail-out via AIG, etc.), the US Treasury (and the US taxpayer by extension) got some warrants on $10 billion of TARP capital injected into the firm….. Lloyd Blankfein smartly paid the full $1.1 billion requested. He looked like a hero for doing so, a true US patriot repaying the US Government in full for its lifeline, thanking the US taxpayer in the process. $1.1 billion… $1.1 billion…Hmm…something doesn’t seem right. You know why it doesn’t seem right? BECAUSE THE US TREASURY MIS-PRICED THE FREAKING OPTION.

There is not a Wall Street derivatives trader on the planet that would have done the US Government deal on an arms-length basis. Nothing remotely close. Goldman’s equity could have done a digital, dis-continuous move towards zero if it couldn’t finance its balance sheet overnight. Remember Bear Stearns? Lehman Brothers? These things happened. Goldman, though clearly a stronger institution, was facing a crisis of confidence that pervaded the market. Lenders weren’t discriminating back in November 2008. If you didn’t have term credit, you certainly weren’t getting any new lines or getting any rolls, either. So what is the cost of an option to insure a $1 trillion balance sheet and hundreds of billions in off-balance sheet liabilities teetering on the brink? Let’s just say that it is a tad north of $1.1 billion in premium. And the $10 billion TARP figure? It’s a joke. Take into account the AIG payments, the FDIC guarantees and the value of the markets knowing that the US Government won’t let you go down under any circumstances. $1.1 billion in option premium? How about 20x that, perhaps more. But no, this is not the way it went down….
But no, if you subscribe to the world according to the New York Times, you’d think we the long suffering taxpayer got a really good deal. By extension, we should be really happy if financial firms throw themselves off the cliff again en masse, since that will give us all the opportunity to make even more money by rescuing them!
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