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Archive for the ‘TARP’ Category

The Congressional Oversight Panel for the Troubles Asset Relief Program released their final report, here.  The document is a critical overview of TARP and recommendations for better administration next time (gulp).  It provides a nice overview of the programs.  As opposed to the taxpayers view of the cost of the bank bailouts, this critical review states: “Most of the TARP programs hold at least the potential for the taxpayers to make a profit. So far, those programs have earned a profit, net of losses, of $30.3 billion.”  Now of course, the occasional lottery ticket is a great investment. When the investments were made, they had large subsidies when evaluated at market prices.  If those prices were “right,” then we earned a high return that covered these subsidies because we took risk are we were lucky the bad outcome did not happen. If those prices were not right (stressed markets, fire sale prices, etc.), then we the government/taxpayer faced a win-win opportunity: a good investment that at the same time stabilized our financial system.  Questions dodged by the COP, but of central interest to economists and policymakers.

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Citi-zen Bank

Citi bank was returned to the private sector by the final sale of Citi stock held by TARP.  In the crisis, the initial TARP investment in Citi – the ten billion given to a dozen major banks — was quickly seen to be insufficient.  Citi was deemed a systemically-important failing institution, and not only given tens of billions more in TARP aid, but also was allowed to exchange preferred stock investments for common stock, reducing the cash that Citi had to pay out but exposing the government to more risk.  When I was involved in valuing the investments a year and few months ago, our model and market prices implied that the government was unlikely to recoup its investments.  Now, the government has sold the last of the stock and locked in $12 billion in profits – ie. in lower future taxes or higher future government resources for you and me.  The initial investment was $45 billion, so this is about a 13% annual rate of return, which seems like a good deal for the taxpayers, at least ex post (at least ignoring the other Federal and Fed interventions).  But ex ante?  Was it a bet that we won with fair odds, or were the odds stacked in our favor?  Did the government’s size and deep pockets create an opportunity in the face of “stressed” markets?  We may never know for sure, but winning big is some evidence in favor of the argument that the odds were in out favor.

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TARP Costs Re-re-estimated

The CBO has just released its estimate of the total cost of the TARP as of today, here.  The $770 billion in spending authority, spent on banks, automobile producers, AIG and other failing big banks, is estimated to have cost $25 billion.  Pretty good deal, at least ex post.

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TARP, year 2

The Office of Financial Stability has issues it’s annual report for fiscal year 2010 (http://www.financialstability.gov/docs/2010%20OFS%20AFR%20Nov%2015.pdf).  This end of year report, two years after TARP was created, gives a nice overview of TARP goals and financial performance (I worked on the 2009 version of this document). The bottom line or headline numbers?  That TARP housing related programs will cost roughly 50 billion, the Capital Purchase Program and investment in the large banks look like money makers at current valuations, but the bailout of AIG and the auto companies still look like money losers, although only on the order of 50 billion given current prices.  And reasonable assumptions about expected payouts (not risk-adjusted) implies that the expected value of TARP except for housing assistance may make a tiny positive ex post return for the taxpayer. So, nothing like the loss of the $770 billion of initial TARP spending authority.

One very interesting question in all of this accounting — and one that we may never answer completely — is whether the bank bailouts were profitable investments in an ex ante sense.  They were not if one marked the investments to market (the average subsidy rate was huge – on the order of 25%).  But, when the investments were made, were markets prices not reflecting the future state prices of the taxpayers?  Were markets “stressed” enough that informed or sophisticated investors did not have the capital to take advantage of these profitable investments? If we were a very large player with the ability to borrow, how would we know when we could make profitable “systemic” investments, and when would we want the government (including the Fed) to have that mandate?  If you answer that we should never do this at all, remember that, done successfully, this would reduce taxes.  And remember that we do this all the time, in a small way.  The Fed decides where in the US Treasury yield curve to trade in order to making the highest trading profits, and the Treasury decides what maturities to issue.

Of course TARP was not undertaken to be profitable, but to stabilize the system.  Still a hard question, perhaps more interesting, but a distinct question from the issue of profitability.

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AIG update

The saga or AIG and the taxpayer continues, but with some surprising good news for the taxpayer.  The Treasury reports here that AIG may actually be able to pay back the NY Fed and the Treasury for all the money poured into the firm to keep it afloat during the crisis.  This surprises me to no end, given how bleak things looked for the firm in the summer and fall of 2009.

One could make the case that the foolish AIG insurance in the mid-2000’s caused the subprime crisis in that AIG nearly singlehandedly supported the price of the bonds by writing this insurance. It supported the mortgage machine despite some smart investors who were aware of the low expected payout of many of these assets.  (more…)

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The Treasury released their end of TARP report, here.  And the GAO released a summary of the lessons learned from the Capital Purchase Program, here.  I hope to read both soon . . .

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The Congressional Oversight Panel has released a report on the eve of the expiration of TARP. The report summarizes the state of TARP.

First, TARP is likely to make money (even making money on what I thought was the worse investments from a return perspective). Of course, as TARP accounting has focused on all along, the ex ante costs were substantial because of the risks. And we will be debating for a long time to what extent the TARP investments were “good deals,” only available to an informed investor with deep pockets and not the average (or low income) tax payer. But making money was not the raison d’etre for TARP.

Second, the report asks

How is the American Economy Performing in the Wake of the TARP, Particularly those Sectors – Financial Markets, Housing, Autos – that have been the Specific Target of TARP Assistance?

Well, the recession is over, spreads that spiked up are down, and the labor market is not losing jobs but is also not generating many new ones (on net). But how about the effect of TARP on the financial system? Here the report relies on opinions (not facts) from four academics – good reading : see pages 91-108. The reports has few answers but many provocative criticisms and topics for future research.

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