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Monday, December 14, 2009

TARP Funds Coming Back

Big news this morning on the financial front is that Citi has finished negotiations with the Treasury and has a plan put together to repay $20 billion in funds received from the Troubled Asset Relief Program (TARP). As you may recall TARP was the initial government reaction to the current economic cycle. Put together in October 2008 by the Bush Administration, Treasury Department and Congress it allocated $700 billion to assist troubled financial institutions to prevent their collapse.

TARP was (and is) the centerpiece of discontent for many Americans who feel that the government should have just let troubled banks fail. One can imagine the size and depth of the ensuing recession had that occurred. More criticism was heaped on TARP when the Obama Administration used some of the TARP funds to prop up General Motors and Chrysler.

Through TARP the Federal government was able to add restrictions to recipients policies and procedures, mandate capital requirements and restrict lending practices. In several cases the Treasury, on behalf of the American people, became shareholders in banks receiving funds on a preferred stock basis. The largest of these stock holdings became Citi where the U.S. Government retained stock worth 31% ownership in the bank.

Last week, within hours after Treasury Secretary Tim Geithner testified on TARP before a House Committee last week, Bank of America announced it has repaid $45 billion of TARP funds it received and has repurchased all preferred stock owned by the government. This morning's announcement that Citi has reached an agreement to repay its $20 billion in funds and repurchase government's holdings also stated that through the TARP period Citi paid $3.1 billion to the government in dividends and interest. By June Citi will have repurchased all preferred shares held by the Federal Government.

Of the big banks and firms that received TARP funds Wells Fargo is left with no announcement of a plan to repay the $25 billion received. Since Wells did not visit the TARP well twice it has been operating without many of the restrictions, including compensation limits, imposed on other institutions, as such it may not be in as big of a hurry to shove $25 billion in capital out the door.

When enacted TARP had a price tag of $700 billion. To date Secretary Geithner indicates $550 billion of the funds have been allocated and that by December 2010 $175 billion will have been repaid. Somehow through these numbers, $550 billion spent and $175 billion repaid, Geithner told Congress that the cost to the taxpayer has been recalculated from $341 billion to $140 billion. Where the gap of $135 billion gets made up ($550B spent $175B collected leaves $375B uncollected) I don't know.

The biggest question for me on this phase of TARP, repayment, is where will the repaid funds go? With Citi's announcement coming on the heels of Congress slamming through a $1.1 Trillion spending bill this weekend and Obama and Congressional Democrats talking about another $200-500 billion in "stimulus-but-don't-call-it-stimulus" funding and the on going multi-Trillion dollar debate on health care restructuring, I am a little skeptical the repaid TARP funds will be used to pay down debt or go back in the general fund.

While not perfect, thus far it appears the TARP investment in several of America's major financial institutions was a good bet. While GM and AIG are still out there to remind us that no investment is without risk, Bank of America, Citi, Wells Fargo and Chase have shown the infusion of funds kept them open and able to acquire weaker, troubled institutions, saving taxpayers, investors and depositors hundreds of billions, possibly trillions. They are not out of the woods yet however and face significant future risks and challenges, not the least of which will be whatever final legislation comes out of Congress on financial regulations and restrictions. This Congress and Administration has so far shown the ability to be over-reactive to issues and problems restricting markets and future growth, if this happens with banking credit will tighten further. Also on the horizon is the commerical paper on the banks' books, while the focus the past few years have been on residential foreclosures the other shoe is commerical loans that are coming due or facing major rate adjustments through their notes.

Hopefully the health of our lending institutions has recouped enough to withstand coming challenges and restore America's faith in the institutions that hold and protect their hard earned money.

1 comment:

Bob Schilling said...

We do agree on one thing. It turns out that the TARP effort was smarter than a lot of people thought at the time. The banks didn't collapse, and the economy appears to be leveling out. I assume that since you don't want the TARP money to be promptly raided by an election-year Congress, you're not going to scald them for slow job growth. There's no such thing as an elected fiscal conservative. It's not in their interest to save money. They get paid -- literally -- by constituents, in votes and in cash, when they spend it.

If you hate that, join the voices calling for electoral reform designed to eliminate the legalized bribery we call campaign contributions.