Someone clearly slept through economics. Lending curves, principle of diminishing returns, default assumption benchmarks. These things are useful.
Projecting TARP profits based on a couple of early payouts is simply bad accounting. Even moreso when we consider where much of the money these banks used to pay out of TARP came from in the first place. You know, things like TALF, mark to market reform, 0% interest loans from the Fed for trash collateral, etc. TARP is the only bailout with a modicum of oversight built in, limited as it may be. Of course some banks would choose to get out from under the government's rules as quickly as possible once they had no-strings-attached access to taxpayer funds.
What should really send chills up your spine is the fact that so many banks are still unable to make TARP payments, despite the myriad bailouts and newly allowed accounting trickery. This continued weakness is a serious problem, as Krugman elucidated yesterday:
You may recall that earlier this year there was a big debate about how to get the banks lending again. Some analysts, myself included, argued that at least some major banks needed a large injection of capital from taxpayers, and that the only way to do this was to temporarily nationalize the most troubled banks. The debate faded out, however, after Citigroup and Bank of America, the banking system’s weakest links, announced surprise profits. All was well, we were told, now that the banks were profitable again.
But a funny thing happened on the way back to a sound banking system: last week both Citi and BofA announced losses in the third quarter. What happened?
Part of the answer is that those earlier profits were in part a figment of the accountants’ imaginations. More broadly, however, we’re looking at payback from the real economy. In the first phase of the crisis, Main Street was punished for Wall Street’s misdeeds; now broad economic distress, especially persistent high unemployment, is leading to big losses on mortgage loans and credit cards.
And here’s the thing: The continuing weakness of many banks is helping to perpetuate that economic distress. Banks remain reluctant to lend, and tight credit, especially for small businesses, stands in the way of the strong recovery we need.
And now some actual facts on TARP:
Ethisphere TARP Index Still Down $148.2 Billion Overall as of June 19According to the Ethisphere TARP Index, when markets closed on Friday, June 19, 2009, the government’s Troubled Asset Relief Program (TARP) investment was down approximately $148.2 billion. Created by the Ethisphere Institute, a non-partisan research think-tank, the Ethisphere TARP Index tracks the U.S. Federal Government’s return on its investments under the capital purchase portion of TARP and the government’s accompanying loan guarantees provided to Bank of America and Citigroup. With ten of the nation’s leading banks now having paid back their TARP funds, these investments stand at $510.7 billion. To date, each taxpaying household has lost $1,233.
“The $68 billion pay back of TARP funds caused a drop in the bottom line of the Ethisphere TARP Index, but the overall percent decline didn’t see much change,” said Stefan Linssen, Managing Editor of Ethisphere Magazine and one of the lead research analysts behind the Ethisphere TARP Index. “Aside from the large asset guarantees of Citigroup, the last big heavyweights in the Index now are Bank of America, AIG, Citigroup’s CPP money and Wells Fargo, and unfortunately, they are still weighing down the Index. However, with the pay back of TARP money this past week, taxpaying households did see a decrease in the losses they have suffered under TARP, going from $1,361 to $1,233.”
34 Banks Miss TARP Dividends and Almost No One NoticesI will confess I missed a post opportunity Thursday AM, when an alert reader sent a link to a USA Today story, “34 banks don’t pay their quarterly TARP dividends, ” but I decided to return to it precisely because it has gotten little attention:
The U.S. taxpayers’ investments in smaller banks are increasingly at risk.
In a sign that more banks are under great pressure from the recession, 34 financial institutions did not pay their quarterly dividends in August to the Treasury on funds obtained under the Troubled Asset Relief Fund (TARP). The number almost doubled from 19 in May when payments were last made, and also raised questions about Treasury’s judgment in approving these banks as “healthy,” a necessary step for them to get TARP funding.
“The banks are not paying their dividends because they are worried about preserving capital,” says Eric Fitzwater, associate director of research at SNL Financial.
Of the 34 miscreants, two are pretty large, namely AIG and CIT, But the next on the list is First Bancorp, which received a mere $400 million from the TARP. Probably more important than the number is the trend, since the number of institutions that skipped dividends nearly doubled. In a supposedly improving economy and with a steep yield curve (at least until very recently), things appear to be getting worse rather than better.
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