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.