"US to Impose Conditions on TARP Repayment
From the Financial Times:
Strong banks will be allowed to repay bail-out funds they received from the US government but only if such a move passes a test to determine whether it is in the national economic interest, a senior administration official has told the Financial Times.
“Our general objective is going to be what is good for the system,” the senior official said. “We want the system to have enough capital.”
Yves here. Note the turn of phrase? This crowd is fond of tests as being objective measures, when in fact they are being run by the industry on data not independently verified, through risk models shown to be unreliable in the face of extreme events. And first the official talks of "national interests" and sees that as tantamount to "what is good for the system". That line of reasoning conveniently ignores the problem that the system we have in place, per Simon Johnson, may be diametrically opposed to our collective best interest. Back to the article:
On Sunday, Lawrence Summers, President Barack Obama’s top economic adviser, told NBC’s Meet the Press that repayments could eventually help the government provide further resources to help the sector. Such a move could also allow healthier institutions to differentiate themselves from weaker banks and free them from constraints on executive pay, and other activities, that come with bail-out money.
Yves here. Again, ideology rampant. Being "free from constraints" is seen as being aligned with the general good, when pretty much everybody except the banksters and their buddies at the Fed and Treasury think more regulation is in order. To the FT;
“Not surprisingly different banks are in different situations; they are going need different levels of assistance of taxpayers,” Mr Obama told a press conference at a summit in Trinidad on Sunday, while promising: “I’m not going to simply put taxpayer money into a black hole.”
Yves here. Ooh, and pray tell what is AIG? Oh, because it is not a bank, merely a back channel to recapitalize bank, it's exempt from the black hole consideration. Back to the article:
The official, meanwhile, said banks that had plenty of capital and had demonstrated an ability to raise fresh capital from the market should in principle be able to repay government funds. But the judgment would be made in the context of the wider economic interest. He said the government had three basic tests. It needed first to “make sure the system is stable”. Second, to not create “incentives for more deleveraging which would deepen the recession”. Third, to make sure the system had enough capital to “provide credit to support the recovery”.
Yves again. The banks are ALREADY adding to pressures to delever by cutting consumer credit lines, In fact, if you buy Tyler Durden, banks are squeezing shorts by cutting credit even further to prime brokers, which is leading to less stock market liquidity and makes it (and other markets) more vulnerable to downturns. One of the big impetuses to goose the market would be for banks like Goldman to sell stock at more favorable prices to get out of the TARP. So if you buy argument #2, you wouldn't let any bank who is a major prime broker (Goldman, Morgan Stanley, JP Morgan) pay back TARP proceeds,
And how much capital is needed to provide for recovery very much depends on your view of the future of securitization. Right now, it's on government life support. Without fundamental reform, that market will not come back in a meaningful way (at least until the lessons of this disaster are forgotten and people make the same mistakes all over again). And the economics will not be anywhere near as favorable under a new regime that fixed incentives properly. For instance, requiring banks to hold enough of the paper they originate would increase costs and require better capitalized intermediaries all along the food chain. And even that didn't succeed last go round; recall Merrill held a lot of the risky late vintage CDOs on its books when the market turned.
If the private securitization market does not come back in a meaningful way, that means either phony government diddled credit markets indefinitely, or vastly bigger balances sheets in the financial sector, since banks will originate and hold loans (probably trading some loans among themselves to create better diversification). That too argues against returning TARP funds.
Me:
Don said...
I'm having a hard time understanding what people are proposing. I do not believe that we can seize the banks at the present time. It would certainly be a mess. I guess if you believe that we can, all this seems silly to you. I too would rather have an FDIC seizure, but I don't see how this can be done with creating an enhanced FDIC or new agency, like the RTC, first.
If you can't do that, I'm assuming that people want us to get stock from the banks and, possibly, even get controlling interest in the banks. That has problems like the following:
http://www.nytimes.com/2009/04/20/business/20bailout.html
"The Treasury would also become a major shareholder, and perhaps even the controlling shareholder, in some financial institutions. That could lead to increasingly difficult conflicts of interest for the government, as policy makers juggle broad economic objectives with the narrower responsibility to maximize the value of their bank shares on behalf of taxpayers.
Those are exactly the kinds of conflicts that Treasury and Fed officials were trying to avoid when they first began injecting capital into banks last fall. "
And:
"Each conversion of this type would force the administration to decide how to handle its considerable voting rights on a bank’s board.
Taxpayers would also be taking on more risk, because there is no way to know what the common shares might be worth when it comes time for the government to sell them."
In other words, as I said, all the hybrid problems would remain, and the international problems would be worse.
Finally, Stiglitz said the following:
"Rather than continually buying small stakes in banks, weaker banks should be put through a receivership where the shareholders of the banks are wiped out and the bondholders become the shareholders, using taxpayer money to keep the institutions functioning, he said....
“You’re really bailing out the shareholders and the bondholders,” he said. “Some of the people likely to be involved in this, like Pimco, are big bondholders,” he said...."
Legally, I'm not sure what he's proposing, but the largest holders of these bonds, as I've pointed out before, are:
1) Pensions
2) Insurers
3) Foreign Governments
4) Foreign Investors
1 and 2 are bailouts waiting to happen, and 3 and 4 are very bad news going forward.
As Inner Workings has pointed out:
http://blog.atimes.net/?p=901
"Reminder: why the Treasury needs the banks to look better
April 14th, 2009
By David Goldman
The next sector to collapse would be the insurers: as I’ve said here again and again, the big pyramid scheme in the US financial system is that the insurers own the bottom of the capital structure of the banks. Bank preferreds, trust preferreds, hybrids, etc. were the favorite repast of yield-hungry insurance portfolio managers.
The big insurance companies all are trading like junk, still. Here is the cost of five-year credit protection on two of the biggest:
It’s cheaper to refloat the banks than to go in and bail out insurers after public confidence collapses."
All the recent stories about pensions, insurers, and annoyance with the dollar are related to this. I'm just having a hard time understanding what some people are actually proposing.
Don the libertarian Democrat
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