TARP2- planned, but few details

With the stock market hitting record lows, the ‘stimulus’ package continues to make headlines. In an office tucked away in the Treasury Building, Timothy Geithner works on adding some specific strategies to a vague TARP2.  The original announcement of the TARP2 specifics disappointed Wall Street and has had an adverse effect on the DOW for several sessions.

A Fox Business story reports that the Treasury Department will spend ‘up to $100 billion of the next phase of TARP to help ease tight credit for consumers and businesses.’

A portion of this will go towards foreclosure prevention and the larger portion will go towards ‘new bank capital injections.’  

The TARP ‘stress-test’
More interesting information regarding TARP2 could be found in a column in Forbes.com today.  Author Liz Moyer details how many major banks are stressing out currently anticipating the ‘stress-test’ that is a component of TARP2.  The ‘stress-test’ measures the capital levels of banks.  The test is meant to separate weak banks from strong banks.

Uncertainty about the details of the plan hit banks stocks hard. Major banks were down double-digits in trading today.  The Treasury Secretary has been mute on details and Wall Street hates uncertainty.

The banks fortunate enough to pass the stress-test will get a capital injection from Treasury that will act like a bridge loan. The thinking is that the bank can use this capital as a temporary buffer until they can raise capital in the private markets.

With the failure of four more banks over the Presidents Day holiday, the regulators have their work cut out for them. They need to deal effectively with the troubled banks as soon as possible to restore confidence in the system and get the healthy banks back on a normal lending path again.

In the meantime, the other issue revolving around the TARP program is the need for accountability for the first round of expenditures.  Citigroup and Bank of America are the only two banks that have furnished the government with a detailed accounting of how they used the funds.  More on this in future posts.

Treasury department action going forward

The new administration has three approaches they can use to make best use of the remaining TARP funds. The first, I mentioned in my last posting.  The other two are promises for additional capital infusions or an offer to guarantee the value of some bank holdings. 

The idea behind guaranteeing the value of bank holdings is to put a floor on asset values by offering insurance against future losses.  The bank absorbs losses up to a point and then the government steps in to absorb further losses.  With the steep drop in bank stocks, this approach might have the effect of reducing the fears of investors that the toxic loans on a bank’s books would put the bank out of business.

The other approach would have the government buying the common stock or warrants of banks. The previous strategy had the government buying preferred stock. Again, the reasoning involves increasing the bank’s capitalization, allowing them to absorb losses and increase investor confidence in purchasing bank stock.

For those of us who own bank stock, more power to this strategy.

Despite the benefits of these two options, most experts anticipate that the ‘bad bank’ approach is most likely.  Others suggest that putting the damaged banks through bankruptcy proceedings’ would put the onus on creditors and not on taxpayers.

TARP2 expenditures

The announcement describing the use of the ‘TARP2’ funds will be made in the next couple of days. It will clarify the use of the second $350 billion and may include an announcement of the need for additional funds.  Some predictions are that a substantial amount of additional funds will be required, and because of the publicity surrounding the $820 billion stimulus package, the announcement of another drain on taxpayer money will be delayed a day or two.

In an article from FoxNews.com, there are comments from Mark Zandi, chief economist at Moodyseconomy.com.  He predicts that another $350 billion will be needed.

Many politicians would prefer to see lower mortgage rates and tax credits for homeowners as a component of any bills, beyond the bailout approach.

The Bailout has to work because the FDIC can’t continue this pace

The poor FDIC is being challenged like few times in its illustrious history.  With nine bank failures already this year and twenty-five bank failures last year, something’s got to give.  The agency was forced to approach Congress and request that it increase its line of credit substantially.  Currently, that line of credit stands at $30 billion; the FDIC is requesting an increase to $100 billion.

Recent Failed Banks

In the past several  days, two additional banks have failed in California and one more in Georgia.  Those failures have brought the price tag for the FDIC to $452 million year to date. 

The bank in George, FirstBank Financial Services, was merged with Regions Bank.  FirstBank had $337 million in assets and $279 million in deposits. FDIC took over as receiver. The total cost to the Deposit Insurance fund was $111 million.

The California banks were Alliance Bank of Culver City and County Bank in Merced California.  Alliance, a much bigger bank than the bank in Georgia, had assets of $1.14 billion and deposits of $951 million.  FDIC arranged for California Bank & Trust to take over the failed bank.  The cost of this arrangement to the Deposit Insurance Fund; $206 million.

The other California bank, County Bank, was the largest with $1.7 billion in assets and $1.3 billion in deposits.  Another California bank, Westamerica Bank, will take over the failed banks assets and deposits.  With this arrangement in place, the cost to the Insurance Fund was $135 million.

The bailout effort supplemented by the FDIC effort

With projections of numerous bank closures during 2009, the agency is gearing up for a tough year.  The FDIC works with other stronger banks to take over the accounts and branches of a failed bank.  Through the end of this year, the FDIC also insures accounts up to $250,000. This effort is reinforcing steps taken by the Treasury Department to incent lending.

FDIC also has the very real concern that between now and 2013, there will be more than $40 billion in losses that the fund will have to cover.  This will result from current and future bank failures. The agency has had to raise the premiums they charge banks and thrifts to make up for the expected shortfall.

The agency is also is doing what it can to reignite lending between banks.  They are guaranteeing the debt so that the lending banks will have added security when lending.  According to sources, the FDIC knew of at least 171 troubled institutions as of last fall.   That is the largest number since 1995.

Stimulus bill or bailout; which gets your attention?

The stimulus bill is getting all of the press recently.  The bailout, which is still moving ahead, has been moved to the back sections and off of page one.  That doesn’t mean that the bailout has been swept under a rug.  The bailout funds have a specific purpose.  That purpose has changed, but its core purpose is to free up the frozen credit markets and that remains an important goal. The new stimulus bill is loaded with pork and special projects and does not do enough to increase employment, stimulate bank lending or return optimism to the general population.

In the meantime, sources say that the administration is asking Wall Street firms if they would be interested in participating in the bad bank proposal.  At the same time, they are requiring those firms who are getting government money, to cap executive pay. 

According to a Treasury department press release, senior executives are limited to $500,000 a year in total compensation.  Any compensation above that amount has to be in restricted stock. The restricted stock does not allow the executive to claim any value from it until after the firm has repaid the government.  

The bank bailout has not been forgotten

So, with all of the attention on the inflated stimulus bill, is there anything happening with the bailout?
A CNN Money article says that the new administration’s approach to the bank bailout will likely be three-pronged.  The article says that; ‘The plans are likely to include a program that would relieve banks of troubled mortgage assets, and may also feature promises for additional capital infusions or an offer to guarantee the value of some bank holdings.’

This sounds like a return to Paulson’s original plan.  If these approaches are implemented, then the goals of the bailout will be reinforced and live on.

What many taxpayers do not realize is that banks continue to close every week.  Every failed bank is one less source of lending in a community.  One less bank is lost jobs and even more burden on the FDIC. The FDIC’s burden is great today, with 7 bank failures already in 2009. (see my next post for more on this)

TARP funds and the three point solution

Remember that the Obama administration inherited $350 billion in TARP funds to tackle the banking and financial crisis.  One of the first courses of action will be to get the troubled assets off of the balance sheets of distressed banks.  The ‘bad bank’ concept I mentioned in a prior post is still a much-discussed option.  The net effect of this action would be to improve their health and investors concerns and to stimulate lending again.  (stay tuned for more on the other two options)

New oversight for the bailout funds

CNN reports that the new Treasury Secretary and occasional taxpayer, Tim Geithner, will put in place new rules that ‘restrict lobbying related to the $700 billion Troubled Asset Relief Program.’ (TARP) He has also taken some additional steps to strengthen oversight.

The article talked about a poll two business college professors conducted that indicated that only 40% of respondents thought that the former Treasury Secretary was acting in the best interests of the country.
I would take issue with those results. It may be the result of a media campaign that spent more time talking about corporate abuses than the science behind Mr. Paulson’s decisions.

The bottom line is that there is a general feeling of suspicion regarding the government bailout and a demand for transparency coming from the Congress and the taxpayers.  That’s fine; it’s taxpayer’s money after all.  It may also prove to be a burden on the next generation.  It has to work as intended and the destination of every dollar has to be known.  If the purpose of the bailout is to reignite lending by banks, then that has to happen.

The remaining $350 billion of the bailout funds will surely find its way to the banks also. The FDIC chief, Sheila Bair has said that the government would create an aggregator bank to purchase the troubled assets of banks. 

Bad bank, good bank, needy bank

The new administration is likely to use the ‘bad bank’ model.  According to an article on CNBC.com, the bad bank idea is gaining momentum.  The bad bank would purchase non-performing or illiquid assets from the banks.  In this scenario, if the government can buy the assets at a bargain price, there is the possibility of repaying the taxpayer.  The government has the capability of holding the assets to maturity.

The CNBC article quotes an economist from Goldman Sachs, who says that banks worldwide have absorbed losses of about $975 billion.  The economist claims that the worst of the global credit crisis is ‘far from over.’  Another industry analyst quoted in the article states that the eight largest financial institutions need ‘up to $1.2 trillion in new common equity and that the government is the only entity that can provide bridge capital to get past the current crisis.’ 

What can we summarize from these opinions?  Much more bailout ahead.  

There is currently no guarantee that the remaining $350 billion of TARP money would be used for the ‘bad bank’ concept.  Watch for further announcements.  As a Citibank shareholder, I’m reluctant to see the banks nationalized.  There are those in influence who would like to move towards this model.  Whatever occurs, more taxpayer money is sure to be expended.

The Bailout funds may be used up before you can say $700 billion

When Congress approved the original bailout plan, they told former Treasury Secretary Hank Paulson that he could have $350 billion to do as he saw fit, but that they would have to approve release of the second $350 billion.  As it turned out, the new administration gained control of the second installment of the bailout.

The Obama administration has requested the $50 to $100 billion be directed towards the foreclosure crisis.  What exactly they plan to do with the funds is a mystery.  No additional facts or strategy were forthcoming.

According to Politico.com, ‘Politico reported earlier this week that President Obama could be forced to seek more bailout money before the President’s Day recess in mid-February. ‘  Those in the know suggest that the new administration will be asking for an additional $50 billion.

This next $400 billion in bailout funds appears to be just the tip of the iceberg.  Many experts predict that the Obama administration will be back before Congress with requests for much, much more.

The Big 3 automakers – poor sales, poorer decision

The early evidence suggests that the bailout of the Detroit automakers was nothing more than a short term fix to an escalating problem. It might be better to describe it as trying to catch a falling anchor covered in grease. 

GM just received another $5 billion, as a second installment from the government.  This coincided with the announcement that GM was no longer the leading auto manufacturer in the world, losing that title to Toyota.  GM is still eligible for yet another $4 billion in bailout money if they can show the government that they have implemented plans to change their existing business model.

Are we heading towards a nationalized domestic auto industry?  One forum writer suggested that it would only be a matter of time before the government offered ‘tax incentives to buy the cars that they produce.’  Before this all becomes a vacuum for taxpayer money, shouldn’t we just allow the bankruptcy process to take its natural course?

If the Big 3 fail, so does the supply chain

Others argue that the chain of companies that supply the Big 3 employs more people than the Big 3 does.  The argument in favor of auto bailouts says that the supplier chain is on such shaky ground already that bankruptcies of the Detroit automakers would ‘exacerbate the current recession.’

The argument against a bankruptcy option says that the Big 3 owe suppliers nearly $3 billion currently. The suppliers are operating on a shoe string budget, with the lowest profit levels since 1992. The bailout would prevent a domino effect.  When does it all end?

The bailout from Oct. 3 to today; a retrospective

According to a Reuters report, the ‘adult industry’ will ask the government for a $5 billion bailout.  Say it isn’t so.

Members of the Financial Stability Oversight Board, which is the group overseeing the bailout, admitted recently that they have no way of knowing for sure how the bailout money is being used.  They also admitted that it is difficult to isolate the effects of the bailout. 

The government is also considering providing money to suppliers of the domestic auto industry on a ‘case-by-case’ basis. 

A report issued by the Financial Stability Oversight Board stated; ‘We have made significant progress, but there is no single action the federal government can take to end the financial market turmoil and the economic downturn.’  ‘We are confident we are pursuing the right strategy.’  Because there are some very smart people who make up the board, I will give them the benefit of the doubt.

It’s not like learning Yahtzee

It took a rather complex set of events to plunge us into a recession, and addressing each variable while determining the order in which to address each variable, cannot be an easy task.  Our economy has gone through phases beyond the normal cycles it goes through, and with new drivers and an evolution away from manufacturing and into technology, it is quite different than the thirties.

We didn’t have the same trading partners then.  We didn’t make markets in every security in the blink of any eye.  We didn’t have robots taking an active part in building cars. We didn’t all have a dozen credit cards in 1934.  It’s hard to look at old economic models and apply them to America in 2009.

With $250 billion going to banks, the AP found that most of the funds are not accounted for.  The original idea, and don’t forget, the original plan with the bailout was to inject money into the credit markets to get banks to make loans again.  Are banks loaning their new found funds?  Nobody knows.

So with taxpayer money going to banks, Citigroup, the Big3 and potentially the porn industry, are we better off than we were three months ago?  It’s anyone’s guess.

Everyone’s hands are out for bailout money

A rehashing of the events that led up to the government bailout and its original mission would certainly have everyone focus on mortgages and banks.  After all, the economic problems that the bailout sought to address were firmly rooted in the subprime and adjustable mortgage crisis and the problems wrought by derivative securities.

Now, months later, the bailout has morphed into something no one recognizes.  The auto industry became a benefactor of the bailout and now the states are jumping on the gravy train.

You heard right, the states, faced with mounting budget shortfalls, are after the money that was meant to solve the mortgage crisis.  The hard-up states are asking for $1 trillion over two years.  That ‘T’ word keeps coming up and the cost to the U.S. balance sheet is staggering after a while.

The states are in line just behind the automakers

Five Democratic governors are asking the Obama administration for the money.  How this will help the mortgage crisis is anybody’s guess.  The states have a duty to their citizens to keep their checkbook balanced.  The same could be said of domestic automakers, who needed to keep labor costs within a range that would allow for a reasonable profit on a competitively priced automobile.

The states asking for the bailout funds are Wisconsin, Massachusetts, New Jersey, New York and Ohio.  No doubt that Michigan and Arizona cannot be far behind with their growing financial problems. Some fiscal leadership may have been a nice alternative to more taxpayer money redirected from its original intent and an ever-growing national deficit.

Can you wrap your mind around what a trillion really is?

Originally, taxpayer money was going to bailout the financial industry, hurt by mortgage-backed assets. Next came the Detroit automakers with loan requests because of their own mismanagement, and finally we are seeing the states begin to line up.  The original $700 billion bailout is going to seem like a tolerable dream at some point soon.

With unemployment projected to reach nearly 10% by next year, some targeted bailout money needs to stop the bleeding.  This, combined with funds to get the credit markets flowing again, will benefit Americans and small business owners the most. If we are to have a bailout, it should get to the very core of your problems and prevent additional misery.

Throwing money at those who simply made fiscal mistakes is the wrong direction for a bailout; especially when taxpayer dollars are a stake.