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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The Congressional Oversight Panel released a great report on the AIG bailout, here.  Lots of fun stuff about the timeline of events, explanations of Maiden Lane and TARP involvement, a nice discussions of whether AIG is now solvent or not, etc.  But what I really liked was the debate on whether there were more than two options on those fateful days in September 2010. The principals contend that it was either let AIG fail or instead bail completely, the way they did, making counterparties whole.  But the COP suggests that the Treasury and NY Fed could and should have used their powers of intimidation. Let me quote the report:

“ . . .was it the role of FRBNY to attempt to use all the tools at its disposal to induce entities it regulated to do something they did not want to do in the interests of systemic stability? The Panel believes that FRBNY at that moment did not see such inducement as its role. The Panel believes that in such a crisis, with the stability of the financial system and the integrity of the regulatory system in jeopardy, that FRBNY’s role was to do just that: to ensure that those private parties that benefited from the stability of the financial system would contribute to its preservation.”


Seems like dangerous ground to me. With GM, some counterparties refused to negotiated writedowns, and the government let GM go into bankruptcy and there, with the help of a judge, writedowns were imposed with the usual rules.  In the case of AIG, the government was prepared to pay the full cost of not letting AIG go under, so any attempt to get writedowns/concessions from counterparties would be bluffs and potentially only enforced by strong-arm tactics. What if I, a private bank, was willing to risk my direct losses from an AIG bankruptcy and believed the contribution of such a bankruptcy to systemic risk/crisis was small.  Would it be appropriate for FRBNY to lean on me as my regulator to force me to take less from a private contract?  Very interesting debate.

Again from the report:

“The record appears to be clear that in the absence of outside funding AIG would have been insolvent by the end of the day on September 16, 2008. In the end, FRBNY provided immediate funding that night. Ultimately, it is impossible to stand in the shoes of those who had to make decisionsduring those hours, to weigh the risks of accelerated systemic collapse against the profound need for the financial firms that FRBNY was rescuing along with AIG to share in the costs and the risks of that rescue, and to weigh those considerations not today in an atmosphere of relative calm, but in the middle of the night in the midst of a financial collapse.”

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Economic Report of the President 2010The first Obama Economic Report of the President has just been released and is available on-line.  The focus of the Report is the “great recession” and the various policies designed to avoid depression. This focus if quite different from the usual ‘first report’ of a Presidency.  In general, ERPs have a pretty standard format: a chapter on the state of the economy (“problems due to my predecessor, but the outlook is good”), followed by chapters devoted to explaining in different areas the good economics that lie behind the Administration’s policy proposals and new programs. These areas, rather than the economic arguments, tell you whether it is written by a Democrat or Republican. For example, Republican Administrations talk about the importance of capital accumulation and innovation for growth and push tax credits for business investment and R&D credits, while Democratic Administrations push investments in human capital and accessibility of education. The economics in either case are (generally) solid, and the disagreements are really ones of degree (which is why Krugman, Mankiw, Cochrane, Romer, Bernanke etc. could all get along well in academe and discuss and praise each others’ academic work).  First ERP’s tend to lay out agendas and final ERP’s (one of which I helped to write when I was much younger), justify and rationalize and try to declare victory (“my” Reagan report was full of statements about the longest peacetime expansion and said very little about the deepest post-War recession).  In any case, this report breaks these trends.  It is significantly backward looking, discussing the crisis, recession, and policies to combat, focusing on ERRA 2009, but also discussing many of these policies pre-date the Administration. But very interesting reading.

As an aside, if there is a place where Obama has been amazingly apolitical and “crossed the aisle,” it is in the crisis response; the Administration could have relabeled programs and taken pot shots at the previous Administration’s efforts (think Bush on national security post-9/11 trying to shift the blame to Clinton). Of course, the ERP and the rhetoric in general spins the crisis/recession as evidence for the solutions that the Administration thinks are the right ones. But arguing for better policies in the future (right or wrong) is constructive where the blame game is destructive.  This shows up in the ERP, in many places like:

On October 3, Congress passed and President Bush signed the Emergency Economic Stabilization Act of 2008. This Act provided up to $700 billion for the Troubled Asset Relief Program (TARP) for the purchase of distressed assets and for capital injections into financial institutions, . . . [It] was used mainly to purchase preferred equity shares in financial institutions, thereby providing the institutions with more capital to help them withstand the crisis.


Failure of the two troubled domestic automakers (GM and Chrysler) threatened economy-wide repercussions that would have been magnified by related problems at the automakers’ associated financial institutions (GMAC and Chrysler Financial). To avoid these consequences, the Bush Administration set up the Auto Industry Financing Program within the TARP.

That said, Obama will try to get re-elected and not every voter ignores mud and appreciates economic argument.

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TARP and the Federal Reserve’s actions during the finance crisis and recession have been extensive.  Keeping track of all the policies that have been implemented has been mind boggling.  But now there is a Pew Foundation project and webpage devoted to keeping track of what businesses or investors have gotten subsidies and how big they were/are, often in terms of current or recent subsidy rates.

TARP map SubsidyScope.com

TARP Capital Purchase Program (CPP) recipient institutions by county (Source: Pew Charitable Trusts - SubsidyScope.com; click on the map to go to their site)

The subsidy rate (or cash subsidy) is based on the difference between what the government pays (and/or the market value of what it commits to pay) and the market value of what it receives in return. For example, if TARP gives money and lines of credit to AIG in exchange for an 80% ownership stake in AIG, the subsidy rate is based on the cost of the program – the money given and the market price the government would have had to pay to buy that conditional line of credit from the market – and the market value of 80% of AIG at its post-bailout value (a subsidy rate of 1 is pure gift, a negative subsidy would make money for the government). Having been involved in valuation of TARP holdings, I know first-hand how difficult it is to evaluate the direct subsidy involved in a bailout many months later.  The current AIG subsidy rate is around 60%. But what is really important for evaluating whether the cost of different programs were worth their costs are the initial subsidy rates of the programs at the time they were undertaken. (more…)

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