Is Repaying TARP Good for Bank of America (and Taxpayers?) « naked capitalism

Friday, December 4, 2009

Is Repaying TARP Good for Bank of America (and Taxpayers?)

The Bank of America stock offering, which will be used to repay the TARP, went off well, so surely this means the Charlotte bank is on the mend and its finances are sound, right?

Chris Whalen, who is an expert on the banking industry and has a proprietary database that measures the risk of individual banks, doesn’t buy it:

We are reaffirming our “negative” outlook on operating results for BAC….

We…look at the specific transaction proposed by BAC, we see the repayment of government TARP equity and a $20 billion reduction in the overall capital of BAC at precisely the time when the Fed is withdrawing many forms of subsidies for the largest banks. Assuming that BAC can place $18.8 billion in new securities and sell $4 billion in assets at valuations that do not generate capital losses, the consolidated entity ends up with $20 billion less capital on a consolidated basis than today.

Ahem, the point of this exercise was to make sure the banks came out sounder, and did not weaken themselves by paying back the TARP funding. Instead, the reverse is happening. A company that threw a fit to get funding from Uncle Sam early this year is now depleting its capital….so it can pay executives better than if it was on the government short leash.

Scrimping on capital to show better returns to allow for bigger bonuses is looting, and it’s what got us in this mess in the first place. But here the authorities are now enabling this process, because “paying back the TARP,” no matter what the true costs and risks are, validates Obama’s economic programs.

16 Comments:

SA says:

December 4, 2009 at 6:12 am

They managed this capital raise because investors believe that in future BoA will be bailed out of its errors by government, with no penalty to shareholders or creditors. This institutionalization of moral hazard as policy came about because regulators believe that the Street was victim rather than idiot (if so many smart people made the same mistake, well, then they must be…smart people). What Obama et. al. are risking is the political stability of the U.S. if another round of bailouts is attempted down the road.

Vinny G. says:

December 4, 2009 at 8:18 am

Sounds like they want to pay of the government so they can get back to their old tricks.

It’s amazing how more than a year after this crises began there isn’t even one bankster charged with crimes or at least being investigated.

Thanks, Oh’bama — this is the change I voted for you for. But don’t count on me in 2012.

Vinny

Moopheus says:

December 4, 2009 at 8:33 am

Given that I didn’t support the banks getting the money in the first place, I say, let them pay it back. Let ‘em crash!

Amit Chokshi says:

December 4, 2009 at 8:38 am

It’s over as far as that goes Vinny, no investigations or any punishment. Hell, Ken Lewis can probably get a LBO fund going down the road if he wants. Unfortunately there is no alternative to Obama. Can you imagine McCain/Palin in 2008? In 2012 there’s what, Palin, Huckabee, Pawlenty? It’s laughable, there is no real talent in politics, just brainwashed, proudly ignorant people willing to vote the idiots in. So to some extent, I don’t even blame the bankers for what they’ve done the pas few years.

Many on the committees they sit on are clueless about the mechanisms that they are in place to regulate. Bloomberg used to be just like CSPAN during the various hearings, teeth of the crisis, and I’d just be stunned at some of the questions and clear demonstration of ignorance by those questioning BB or Treasury.

As for BAC, I wonder if Whalen has compared credit loss provisions at BAC against the other guys and maybe the big boys in general have stocked up the cookie jar so much that they can make reversals? That would have some positive impact on BAC’s capital position. I hardly crown anyone whether it’s John Paulson or Buffett as infallible because investing is more so about risk mgmt than just picking securities but if Paulson is long BAC, that means something to me over Whalen.

The Gods Must Be Crazy « Volatility says:

December 4, 2009 at 10:27 am

[...] was supposed to help recapitalize these things, is “How will it affect my pay”. As Yves Smith said today, this is pure looting. The Bank of America stock offering, which will be used to repay the [...]

Will big banks now free of TARP’s shackles reach for yield? « naked capitalism says:

December 4, 2009 at 10:29 am

[...] Is Repaying TARP Good for Bank of America (and Taxpayers?) – 12/04/2009 – Yves Smith [...]

Eric says:

December 4, 2009 at 10:38 am

Treasury must be complicit with the repayment. The government needs to operate through the year end and is bumping up against the debt ceiling. Without the TARP repayment, I do not think federal agencies would open for business in the final two weeks of the year.

-Federal Employee

Siggy says:

December 4, 2009 at 11:33 am

B of A should be allowed to repay the TARP funds as contractually provided. Once we are repaid it should be made very clear that there will not be another bailout.

The policy that needs to be adhered to is that the Taxpayer will nolonger provide sustenance to the financial community. Tarp is a program that should never have come into existence. Would that have triggered a depression? Quite probably. Would that event have been the end of the world? Probably not!

The season of moral hazard needs to be ended. The longer we delay in eliminating it the further we shall be toward a catacylismic collapse of our economy and world trade. All of which will bring very close to war.

Hu Flung Pu says:

December 4, 2009 at 2:50 pm

So BofA is damned if they do and damned if they don’t. If they don’t pay back the TARP, Naked Capitalism bitches and moans that they have TARP. If they pay back the TARP, Naked Capitalism bitches and moans that it’s all a fraud, so they should just keep it because they need the capital.

I think BofA is a big ole pile of crap. But… if they want to pay back the TARP and can raise new capital to do so (for the most part), then as a taxpayer I say, “Thank you for the check new shareholders.” Under the condition – as Siggy mentioned above – that they don’t get any more capital in the future.

But, net/net, this must be a good thing. Any time the capital markets are going to repay we taxpayers, I think we should accept the money and be glad we received it.

Anonymous Jones says:

December 4, 2009 at 3:25 pm

Exactly. BofA *is* damned if they do and damned if they don’t. The company shouldn’t even exist in its present form and certainly shouldn’t be operating under the current (lack of effective) regulations, and any present or future actions such as repayment of the TARP funds should only occur at the whim and judgment of the taxpayers who spared BofA its rightful death.

Edward Harrison: Is repayment of TARP money good for taxpayers? | News from: The Huffington Post - Breaking News and Opinion says:

December 4, 2009 at 2:53 pm

[...] The quantity of capital at all of the big banks is now quite good. But, if the management of any of these institutions harbours doubts about the quality of their capital base, then they have every reason to take on risk. Something to think about in light of Yves’ question Is Repaying TARP Good for Bank of America (and Taxpayers?). [...]

Hugh says:

December 4, 2009 at 3:30 pm

BAC doesn’t need reserves because the government will backstop it as a TBTF. This is about cash flows, speculation and customer gouging, which can be maximized (along with corporate bonuses) once BAC is out from under the TARP.

Hu Flung Pu has it exactly wrong. We will have an undercapitalized, badly behaving bank which as a TBTF taxpayers will end up having to bail out again probably when the second dip of the recession hits.

Market Talk » Blog Archive » Links 12/4/2009 says:

December 4, 2009 at 3:57 pm

[...] BofA repaying TARP funds maybe isn’t such a good [...]

SocketInPocket says:

December 4, 2009 at 10:09 pm

Anonymous Jones said:
“Exactly. BofA *is* damned if they do and damned if they don’t. The company shouldn’t even exist in its present form and certainly shouldn’t be operating under the current (lack of effective) regulations, and any present or future actions such as repayment of the TARP funds should only occur at the whim and judgment of the taxpayers who spared BofA its rightful death.”

The problem started with the Liberal agenda as pushed by Clinton to loan money to those who otherwise would not qualify. That regulation that was in part the cause of the present situation. Would there have been as many foreclosures if the lending standards had not been lowered by government mandate? A “regulated free market” is an oxymoron. Bank of America did want to go through with their deal with Merrill Lynch once they smelled a rat, but was forced to by government arm-twisting, and was given the extra money to soften the blow. So BofA gets it coming and going.

I speak as one who was laid off from BofA recently. I worked in a position quite far down the totem-pole, and had no input into how things went. I obviously did not want to loose my job, but harbor no ill feelings for a company doing what it had to do in order to survive.

Americans should be proud to have a man of Ken Lewis’ caliber at the helm of Bank of America. He has endured national scrutiny and lambasting at a phenomenal level, all for doing the best he could to comply with government regulations.

With the proposed cap in wages, good luck finding anyone who would want the job of CEO with BofA, let alone one who could wear Mr. Lewis’ shoes.

Darren Broadbent says:

December 6, 2009 at 8:18 pm

CNBC reports that the bank is extremly well capitalized and repaying the TARP will allow them to keep top talent at the Bank and Meryl Lynch. This was a great time to pay back the TARP and keep the government out of reach. That will allow for explosive growth and put them back on par with the Chases of the world.

Around the Dial – Dec. 8 | South By North Strategies, Ltd. says:

December 8, 2009 at 4:09 pm

[...] Naked Capitalism wonders if Bank of America is gaming the taxpayers. [...]

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