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The Smell Of Rotting TARP

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September 16, 2010

I never liked the TARP program.  As we approach the second anniversary of its having been signed into law by President Bush, we are getting a better look at how really ugly it has been.  Marshall Auerback picked up a law degree from Corpus Christi College, Oxford University in 1983 and currently serves as a consulting strategist for RAB Capital Plc in addition to being an economic consultant to PIMCO.  Mr. Auerback recently wrote a piece for the Naked Capitalism website in response to a posting by Ben Smith at Politico.  Smith’s piece touted the TARP program as a big success, with such statements as:

The consensus of economists and policymakers at the time of the original TARP was that the U.S. government couldn’t afford to experiment with an economic collapse.  That view in mainstream economic circles has, if anything, only hardened with the program’s success in recouping the federal spending.

Marshall Auerback’s essay, rebutting Ben Smith’s piece, was entitled, “TARP Was Not a Success —  It Simply Institutionalized Fraud”.  Mr. Auerback began his argument this way:

Indeed, the only way to call TARP a winner is by defining government sanctioned financial fraud as the main metric of results.  The finance leaders who are guilty of wrecking much of the global economy remain in power – while growing extraordinarily wealthy in the process.  They know that their primary means of destruction was accounting “control fraud”, a term coined by Professor Bill Black, who argued that “Control frauds occur when those that control a seemingly legitimate entity use it as a ‘weapon’ to defraud.”  TARP did nothing to address this abuse; indeed, it perpetuates it.  Are we now using lying and fraud as the measure of success for financial reform?

After pointing out that “Congress adopted unprincipled accounting principles that permit banks to lie about asset values in order to hide their massive losses on loans and investments”, Mr. Auerback concluded by enumerating the steps followed to create an illusion of viability for those “zombie banks”:

Both the Bush and Obama administration followed a three-part strategy towards our zombie banks:  (1) cover up the losses through (legalized) accounting fraud, (2) launch an “everything is great” propaganda campaign (the faux stress tests were key to this tactic and Ben Smith perpetuates this nonsense in his latest piece on TARP), and (3) provide a host of secret taxpayer subsidies to the systemically dangerous institutions (the so-called “too big to fail” banks).  This strategy is the opposite of what the Swedes and Norwegians did during their banking crisis in the 1990s, which remains the template on a true financial success.

Despite this sleight-of-hand by our government, the Moment of Truth has arrived.  Alistair Barr reported for MarketWatch that it has finally become necessary for the Treasury Department to face reality and crack down on the deadbeat banks that are not paying back what they owe as a result of receiving TARP bailouts.  That’s right.  Despite what you’ve heard about what a great “investment” the TARP program supposedly has been, there is quite a long list of banks that cannot boast of having paid back the government for their TARP bailouts.  (Don’t forget that although Goldman Sachs claims that it repaid the government for what it received from TARP, Goldman never repaid the $13 billion it received by way of Maiden Lane III.)  The MarketWatch report provided us with this bad news:

In August, 123 financial institutions missed dividend payments on securities they sold to the Treasury Department under the Troubled Asset Relief Program, or TARP.  That’s up from 55 in November 2009, according to Keefe, Bruyette & Woods.

More important —  of those 123 financial institutions, seven have never made any TARP dividend payments on securities they sold to the Treasury.  Those seven institutions are:  Anchor Bancorp Wisconsin, Blue Valley Ban Corp, Seacoast Banking Corp., Lone Star Bank, OneUnited Bank, Saigon National Bank and United American Bank.  The report included this point:

Saigon National is the only institution to have missed seven consecutive quarterly TARP dividend payments.  The other six have missed six consecutive payments, KBW noted.

The following statement from the MarketWatch piece further undermined Ben Smith’s claim that the TARP program was a great success:

Most of the big banks have repaid the TARP money they got and the Treasury has collected about $10 billion in dividend payments from the effort.  However, the rising number of smaller banks that are struggling to meet dividend payments shows the program hasn’t been a complete success.

Of course, the TARP program’s success (or lack thereof) will be debated for a long time.  At this point, it is important to take a look at the final words from the “Conclusion” section (at page 108) of a document entitled, September Oversight Report (Assessing the TARP on the Eve of its Expiration), prepared by the Congressional Oversight Panel.  (You remember the COP – it was created to oversee the TARP program.)  That parting shot came after this observation at page 106:

Both now and in the future, however, any evaluation must begin with an understanding of what the TARP was intended to do.  Congress authorized Treasury to use the TARP in a manner that “protects home values, college funds, retirement accounts, and life savings; preserves home ownership and promotes jobs and economic growth; [and] maximizes overall returns to the taxpayers of the United States.”  But weaknesses persist.  Since EESA was signed into law in October 2008, home values nationwide have fallen.  More than seven million homeowners have received foreclosure notices.  Many Americans’ most significant investments for college and retirement have yet to recover their value.  At the peak of the crisis, in its most significant acts and consistent with its mandate in EESA, the TARP provided critical support at a time in which confidence in the financial system was in freefall.  The acute crisis was quelled.  But as the Panel has discussed in the past, and as the continued economic weakness shows, the TARP’s effectiveness at pursuing its broader statutory goals was far more limited.

The above-quoted passage, as well as these final words from the Congressional Oversight Panel’s report, provide a  greater degree of candor than  what can be seen in Ben Smith’s article:

The TARP program is today so widely unpopular that Treasury has expressed concern that banks avoided participating in the CPP program due to stigma, and the legislation proposing the Small Business Lending Fund, a program outside the TARP, specifically provided an assurance that it was not a TARP program.  Popular anger against taxpayer dollars going to the largest banks, especially when the economy continues to struggle, remains high.  The program’s unpopularity may mean that unless it can be convincingly demonstrated that the TARP was effective, the government will not authorize similar policy responses in the future.  Thus, the greatest consequence of the TARP may be that the government has lost some of its ability to respond to financial crises in the future.

No doubt.



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Turning Up The Heat

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December 21, 2009

By now you should be aware of the fact that for his 56th birthday, Federal Reserve chairman Ben Bernanke was named Time magazine’s “Person of the Year”.  Were the folks at Time so arrogant as to believe that this honor would insure the confirmation of Bernanke to a second term as chairman of the Federal Reserve?  More than a few commentators expressed the view that Time’s “Person of the Year” award might actually jeopardize Bernanke’s chance at confirmation.  For example, take a look at what Mike Shedlock (a/k/a Mish) had to say:

That Bernanke is on the cover of Time Magazine means one thing “Bernanke’s Time Is Limited” He is on his way out.  And that is good news.

*   *   *

The quicker this blows up, the quicker we can recover.  And knowing what we know about Time Magazine, Central Banking will blow up sooner rather than later.  Moreover, Bernanke will not be part of the solution, and that is a good thing.

I thank Time Magazine for the information and their kiss of death warning. However, I must also remind readers that Stalin made the cover twice, so immediate results just might be expecting too much.

When Bernanke was grilled by the Senate Banking Committee during the confirmation hearing on December 3, Senator Jim Bunning of Kentucky gave him a magnificent pummeling, most notable for the assertion:  “You are the definition of a moral hazard!”  My only criticism of Bunning’s diatribe was that he should have said:  “You are the personification of a moral hazard” or “You are the epitome of a moral hazard”  —  otherwise, it was perfect.  If that weren’t enough, Senator Bunning demanded that Bernanke answer seventy written questions submitted by Bunning himself.  Those of you who have ever been a party to a lawsuit might recall having to provide signed answers to written interrogatories.  Most jurisdictions place a limit on the number of such interrogatories to the extent of approximately 35.  Senator Bunning propounded twice that many to Bernanke and the nominee answered all of them.  Don Luskin of Smart Money analyzed one of these answers in a way that underscored the necessity of removing Bernanke from the Fed chairmanship.

On December 18, Victoria McGrane reported for Politico that the Bernanke nomination “could be in more trouble than previously thought”.  Although the Senate Banking Committee voted to confirm the nomination, ultimately the entire Seante must vote on the matter.  The fact that six Republicans and one Democrat from the Banking Committee voted against the nomination was portrayed as an ominous signal, casting doubt on the likelihood of confirmation.  Ms. McGrane discussed the reaction to the confirmation hearings expressed by Brian Gardner, a bank analyst for Keefe, Bruyette and Woods:

Two aspects of the two-hour debate that preceded the committee vote struck Gardner as worrisome for Bernanke:  the unenthusiastic — even apologetic — tone from some of the senators who voted yes and a dispute over the Fed’s refusal to release documents about the bailout of insurance giant American International Group to senators on the committee.

The article explained that the AIG bailout documents were available for review by “some banking committee staffers” although the documents have been withheld by the Fed from individual senators and the public, based on the Fed’s claim that the documents are “protected”.

This is apparently an assertion by the Fed that there is some sort of privilege protecting the AIG bailout documents from disclosure.  Nevertheless, if the fight over these records ever gets before a court, it is likely that production of the documents would be compelled, since any claim of privilege was waived once the Fed allowed the “banking committee staffers” to review the items.

The Politico report noted the significance of this matter:

That spat could have legs, Gardner said, and if it resonates with a public already fuming at the Fed, it could sway the votes of yes-leaning senators.

The battle over the AIG bailout documents was also the subject of an opinion piece in the December 19 edition of The New York Times, written by Eliot Spitzer, Frank Partnoy and William Black.  Here’s some of what they had to say:

No doubt, some of the e-mail messages contain privileged conversations among lawyers.  Others probably include private information that is irrelevant to A.I.G.’s role in the crisis. But the vast majority of these documents could be made public without legal concern.  So why haven’t the Treasury and the Federal Reserve already made sure the public could see this information?  Do they want to protect A.I.G., or do they worry about shining too much sunlight on their own performance leading up to and during the crisis?

What will these e-mails reveal about the actions of Ben Bernanke and “Turbo” Tim Geithner during the AIG bailout phase of the financial crisis?  Were laws violated or do they simply exhibit some poor decision-making and cronyism?

Most of us are now getting ready for the coldest month of the year – but for Ben Bernanke, the heat is being turned up  —  full blast.



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