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TARP Beneficiary Says "Sham" Bailouts Help Speculators

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The TARP elicited a firestorm of criticism at its inception, and at various points of its short existence, particularly the repeated injections into “too big to fail” Citigroup and Bank of America, plus the charade of Paulson forcing TARP funds onto banks who were eager to take them once the terms were revealed. Now, however, conventional wisdom on the program might be summarized as, “it’s flawed, but still better than doing nothing.”

That of course is a false polarity. Having the TARP, particularly given the amount of funds committed, precluded quite a few other courses of action. And the TARP was part of a strategy to avoid resolving sick banks, when the history of banking crises shows that speedy action to clean up dud banks and restructure or write off bad debt (both of the bank and to the bank) is the fastest course to economic recovery.

So far, the beneficiaries of the handouts equity injections have complained only about the Obama Adminstation’s occasional efforts to act like a substantial shareholder and exercise some influence over the companies’ affaris. We are the first to acknowledge that these too often have involved matters of appearance (executive pay) as opposed to substance (risk taking on the taxpayer dime for the benefit of shareholders and employees).

But now we have a salvo from an unexpected source: an investor who used TARP funds to buy a bank, and thinks taxpayers are getting ripped off. Mark Patterson, of MartnPatterson Advisers, used TARP matching funds to buy a Michigan bank. This by no means was a large transaction, but the point is that someone that one would expect to praise the process (after all, he benefitted from its largesse) is a pointed critic.

From the Telegraph:

“The taxpayers ought to know that we are in effect receiving a subsidy. They put in 40pc of the money but get little of the equity upside,” said Mark Patterson, chairman of MatlinPatterson Advisers…

Mr Patterson said the US Treasury is out of its depth and seems to be trying to put off drastic action by pretending that the banking system is still viable.

“It’s a sham. The banks are insolvent. The US government is trying to sedate the public because they are down to the last $100bn (£66bn) of the $700bn TARP funds. They think they’re doing this for the greater good of society,” he said, speaking at the Qatar Global Investment Forum.

Mr Patterson said it would be better for the US to bite the bullet as Britain has done, accepting that crippled lenders must be nationalised. “At least the British are not hiding the bail-out,” he said.

MatlinPatterson said private equity and hedge funds were deluding themselves in hoping to go back to business as usual after the trauma of the last 18 months.

“This is not a normal recession and there will be no V-shaped recovery. The crisis has destroyed leveraged companies. We’re going to see a catastrophic increase in the number of LBO’s (leveraged buyouts) going into default because they’re knee-deep in debt and no solution exists since they can’t refinance,” he said.

“Alpha hedge funds have been making their money by gambling with excessive leverage, so the knife that cuts off leverage is going to cut off their heads as well,” he said…

“The US government has thrown 29pc of GDP at this crisis compared to 8pc in the early 1930s. The Fed’s balance sheet has risen from $900bn to $2.7 trillion to bail out the system. America has to do it because the only way out is to debase the currency, but that is going to lead to some very high inflation three years down the road,” he said.

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12 comments

  1. Hugh

    “The TARP was better than nothing” is a line that has been used by just about every politician and official involved in the government’s response to the meltdown: Paulson, his mini-me Kashkari, Bernanke, Geithner, Summers, Obama, Dodd, Franck, etc. I agree it is a false comaparison rather like saying: doing something really stupid, expensive, and wasteful is better than doing nothing at all. How about doing something smart instead?

    TARP started out as a slush fund to buy up crap assets in Rube Goldberg reverse auction scheme but almost immediately was simplified into a straightforward slush fund, carrying around money for Paulson and now Geithner.

    It is a curious thing though that the TARP is credited with keeping the financial system from going belly up. First, because there was never enough money in it to keep this from happening. Second, what money there was dribbled out and was mostly wasted. So you really have to ask yourself how the TARP exactly saved the system.

  2. Greg Hall

    So, the system is totally broken, insolvent…and Treasury is/has been in denial. Is this news?

  3. Richard Kline

    And it’s worth noting that it’s a _Brit broadsheet_ which has those unvarineshed quotes. “Sham transaction.” “Banks are all insolvent.” A principle reason we have quasi-criminality on this side of the ocean from the powers that be is that the major media won’t cover this story as it is. Too much mutual masturbation with those in authority. Too many trails of cross ownership that might get snagged in a contretemps. Too many regulatory ‘burdens’ which have been or might be ‘eased’ but said powers that be to jeopardize with ‘negative attitudes.’ Too many oligarchs using the media for misdirection and spin rather than news and civic responsibility.

    The collapse of media responsibility is one of the great tragedies of the last generation in America. The blogospere has its points, but not enough pressure points to take up the slack scruff of our concupiscient and co-conspiratorial press.

  4. Juan

    So true Richard and in my mind had to do with the institutionalized irresponsibility of what became a rentier culture. I seem to recall a CJR article or two during the 1980s and 90s that tried do deal with this but from the perspective of declining importance given to fact checking.

  5. John Liberty

    tarp matching funds are for toxic assets, how did he use them to buy an entire bank?

  6. wintermute

    The unfolding crisis in boom-time leveraged buyout funding may yet take scalps. Goldman Sachs are meant to be exposed to $65bn of LBOs. Much of which will be rolling over in the next few years – or already non-performing debt “marked-to-fantasy”

  7. B. Mull

    The MatlinPatterson purchase of Flagstar was contingent on Flagstar getting $250 million in TARP funds.

    And… the TARP funds were contingent on Flagstar getting $250 million from MatlinPatterson.

    Mind you this was pre-PPIP, but the idea is eerily similar.

    (For the record, Patterson is significantly short on equities, so he’s not just a good samaritan.)

  8. Snoring Beagle

    Richard so true. Where does the fault lie?

    With the Sheeple or the Shepards?

    It seems to me the overwhelming majority of the public wants little to do with the intricacies of the FIRE economy.

    Is the MSM pandering to or just giving them what the sheeple want? Or…is it more sinister?

  9. carol765

    ¨But now we have a salvo from an unexpected source¨

    Not sure

    From zerohedge: ¨Matlin Patterson, however, has missed the Spring rebound, the most powerful rise in equities in over 70 years. “We shorted the equity rally because we thought it was lunatic. We’ve kept adding positions seven times, and we’re still holding,” he said.¨ (B. Mull above also mentioned this)

    In this day and age, with great uncertainty (e.g. the inflation/deflation debate) and volatility (S&P from 900+ down to 666 up to 900+ in a matter of only 16 weeks), it is necessary to know the investment position, if any, of the commentator, as some people view the world based on their investment position (investment capture!!).

    Patterson has speculated that the banking system will not get enough (future) taxpayers´ subsidies from WashCD to allow them to survive, and aid the economy to positive territory. This may influence his vision. I recall an article earlier this week about someone (Bill Miller) who strongly disagreed with Meredith Whitneys statements on CNBC (NC linked to her interview). Well surely: the man is very heavily long in US banks.

    I can not prove that they only speak their books, but one has to consider the possibility.

  10. LeeAnne

    Massive funds and linguistic talent are applied aggressively and relentlessly to enhancing public ignorance and disinformation by TPTB and MSM.

    Until the passive investor is burned, interest in finance is limited; the economy (people) are busy doing other things. Investors are required to hand over discretionary authority to finance professionals presumably qualified to manage money responsibly under the law. Individual financial counselor services for anyone with less than multi millions in discretionary assets has been eliminated by the consolidation of the TBTF. Finance was properly 7% or less of the economy, a decent enough tax on real production; now its 40% and rising.

    When TPTB decide to change the name of crap ‘taxic assets’ to ‘legacy assets,’ and ‘torture’ to ‘enhanced rendition’ while EVERYONE caves in, we are participating in corruption of the language right now -here and lobotomized -intentionally rendered by the government/finance/corporation/media complex incapable of discussing the subject. ‘Now tell me again -what’s the difference between torture and enhanced rendit -or whatever you call it?’ and legacy what?

    This is criminal.

  11. dd

    If the banks are insolvent so too is the unregulated “shadow” banking system, including PE and hedge funds. The last decade of reported profit was a mathematical modeling mirage of unrealized gains that existed in a technological reality that produced no real economic gains in the US.
    At best the “innovation” deconstructed or pooled traditional financial instruments and repackaged them into unregulated instruments with a modeled valuation.
    CDS for example purport to separate out the default component from the bond pricing and transfer that “risk” to a third party. If that is true, then the bond market mechanism of pricing is now faulty as the bond pricing does not capture actual default risk; so effectively the bond market is destabilized and probably overprices the bonds (but that would be a feature not a bug).
    As for the CDS itself it is priced at a modeled value and no doubt funds do the pricing to reflect profit.
    So, virtual profits existed for moments in time based on the modeled valuations but those valuations vastly overstated real economic gains and functioned as a wealth transfer mechanism.
    So Peterson’s logic ought apply to any financial entity in the chain and on the traceable receiving end of government funding (yet another wealth transfer mechanism from taxpayers to designated winners).
    That the Fed and Treasury were active participants in the “innovation” boom means the nation will continue on the current course as the same pilots are still at the controls.

  12. S Benard

    Everyone print this — quick — while you still can. I suspect it won’t last long in cyberspace!

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