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Geithner Yet Again Misrepresents TARP “Performance”

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The problem with propaganda is that it is generally effective. Utter the Big Lie often enough and most people will come to believe it.

The Obama Administration has engaged in persistent misrepresentation of the outcome of the TARP equity injections, which is a manifestation of its early decision to reconstitute as much as possible, the banking industry that had just driven itself and the global economy off the cliff. Albert Einstein defined insanity as “doing the same thing over and over again and expecting different results.” The decision of the new Administration to cast its lot with an unreformed banking industry locked it into a course of action. As we noted earlier,

Thus Obama’s incentives are to come up with “solutions” that paper over problems, avoid meaningful conflict with the industry, minimize complaints, and restore the old practice of using leverage and investment gains to cover up stagnation in worker incomes. Potemkin reforms dovetail with the financial service industry’s goal of forestalling any measures that would interfere with its looting.

Yves here. One place that frequent repetitions of the Big Lie might not work so well is relative to the TARP, where the overwhelming majority of Americans were so opposed to bank bailouts with no pain inflicted on the recipients that any attempts to call the effort a success might simply serve to reopen a festering wound. But let’s not take any chances.

Today, a New York Times headline extols, “Banks Have Repaid 75% Of Bailout, Geithner Says.” Their summary:

The Treasury secretary, Timothy F. Geithner, said on Tuesday that taxpayers were recovering their investment from the financial bailouts as the program was wound down. But he acknowledged there would probably be a loss from the rescue of the insurer American International Group.

From his testimony:

We closed the Capital Purchase Program, under which the bulk of support to banks has been provided. To date, banks have repaid approximately 75 percent of TARP funds they received, and TARP investments in banks have generated taxpayers $21 billion in income from dividends, sales of warrants and stock, and fees from cancelled guarantees. We expect TARP investments in banks to generate a positive return on the whole

Yves here. Let’s debunk the two overarching messages:

1. Taxpayers got a good deal

2. “Paying back” the TARP is a sign of success of the program

Start with the “good deal” myth. Note that while Geithner does use the word “investment” from time to time, he and Obama when talking about the TARP have most often used the turn of phrase “pay back.”

Some members of the public might hear the “pay back” and assume the funding had been via debt. Instead, the Capital Purchase Program program was senior preferred stock plus equity warrants. The Treasury did build in some mechanisms to encourage return of the funds (preferred dividends increased from 5% to 9% after year 5, for instance). But there was no immediate pressure in the deal terms to lead a quick return of the funds to necessarily be a good thing.

Most important, the key metric as to whether the deal was a good deal is not the speed of repayment, as the Adminstration’s boosterism implies, but whether the deal was a good one given market conditions as of October 2008. Answer: not at all. The deal was lousy on its face, and it did NOT serve to advance what should have been the overarching objective, namely, putting the industry on sounder terms, say by using the leverage to extract key concessions. Instead, this was another manifestation that the officialdom has adopted through the entire crisis: patch the system up with duct tape and baling wire, and if it looks even remotely operational, tout it as tremendous success. We noted at the time the equity injections were announced:

But here we go, virtually no restrictions (the Bloomberg article mentions executive comp limits, but given Paulson’s stance, expect this to be cosmetic), no (a la Sweden) having a disciplined process to figure out who was worth salvaging and concentrating rescue dollars on them, and having a strategy (consolidation, liquidation, spinning bad assets off into an Resolution Trust type “bad bank” vehicle) for the ones that didn’t make the cut.

For those who may forget the details, Paulson hauled what were to be the main TARP recipients, hectored them for nearly two hours about how they were gonna take the money, then after this faux show of force, unveiled attractive terms. Not surprisingly, the banks fell into line.

But let’s turn to the even bigger issue: was it a good idea for the banks to be so quick to pay back their TARP funds? Marshall Auerback shredded that idea:

This whole line about “taxpayers to recover bailout money” is based on an accounting fraud, because accounting abuses are the primary means by which TARP recipients have repaid bailout money — putting us at greater risk. That may seem paradoxical, but the rush to repay is driven by a desire to have unrestrained executive bonuses (a very bad thing associated with far greater accounting fraud and failures — requiring future, larger taxpayer bailouts) and accounting abuses produce the (fictional) ability to repay the United States (primarily by failing to recognize existing losses). The TARP recipients weakened their financial condition, and increased moral hazard, when they rushed to repay the TARP funds. Both factors increase the risk of making more expensive future bailouts more likely.

Yves here. Technically, the accounting isn’t fraudulent, since the banks have gotten so many variances (it’s called regulatory forebearance). But the profits and equity levels banks are reporting are more than a tad misleading.

Extend and pretend is rampant. Not only are asset values inflated by super cheap funding, which is not going to be with us forever, but there is considerable evidence that banks are making assets at utterly indefensible levels. We’ve pointed repeatedly to Mike Konczal’s quick and dirty analysis of second mortgages, which suggests the four biggest banks are overstating their equity by roughly $150 billion. We have also had readers who work at dealer banks tell us of wildly unrealistic marks on CMBS. And the big banks, per Chris Whalen, are reporting unrealistic earnings and equity levels due to taking insufficiently low loan loss reserves.

But Geithner would have you believe all is well in bank-land. Paulson discovered he could not kick the can down the road to the next Adminsitration. Team Obama believes he will be re-elected, and it presumably does not think it can paper over problems for another six years. Thus it appears they are unable to distinguish between mere cosmetics and real progress. Scary indeed.

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18 comments

  1. Doc Holiday

    You may getting over your cold, but FASB gave me chronic Hives!

    ==> November 5, 2008

    Accounting Guidance Smiles on Banks

    “”The accounting authorities, as expected, have rendered a favorable opinion with respect to the classification of these warrants,” tax expert Robert Willens told CFO.com. Willens, who heads tax consultancy Robert Willens LLC, cites an Oct. 24 letter sent by SEC deputy chief accountant James Kroeker and FASB technical director Russell Golden, as evidence that the two agencies “will register no objections” if the warrants are classified as permanent equity under U.S. generally accepted accounting principles.”

    By classifying the warrants as permanent equity rather than as derivatives, on the balance sheet, the banks can avoid measuring the instruments at fair value. In practical terms, that means that any resulting gains or losses are not recognized in earnings, contends Willens.

    > Previous quote: Alexander Solzhenitsyn: “In our country the lie has become not just a moral category but a pillar of the State.”

  2. patterson

    There is another famous and apt Solzhenitzyn quote:

    “Don’t believe them, don’t fear them, don’t ask anything of them.”

  3. attempter

    “Extend and pretend” is clearly the only mechanism of the Bailout. The TARP, ZIRP, embezzlement via the GSEs, and other Bailout vehicles, are all based on fraudulently propping up bubble valuations already refuted by reality, which clearly demands deflation and will inevitably have its way, one way or another.

    Meanwhile the goal of the Bailout, the reason for setting up the mechanism in the first place, is simply to escalate the looting and prolong it as long as possible.

    So there we have the Bailout in a nutshell – accounting fraud and robbery. It’s a world-historical version of the same crime committed by a two-bit embezzler.

    The NYT in articles like this commits the dual lie of both playing Geithner’s stenographer (although it does also give an anodyne caveat from Warren; that seems to be her designated role) when he tells specific lies about the TARP, as well as implicitly propagating the Big Lie that TARP = Bailout.

    This is the same businsess page which often reports on the Bailout as laundered through Fannie and Freddie. I wonder if they have an editorial policy forbidding writers from calling GSE MBS buys at above-market prices a “bailout”. (As Dean Baker has often written, if the GSEs lose money, which they always do, by definition that means they paid the banks too much for MBS. Then they turn around and request more taxpayer funding, in order to repeat the looting process.)

    Meanwhile the NYT doesn’t make as big a deal about a more TARP-skeptical piece like this:

    http://www.breakingviews.com/2010/06/17/tarp.aspx?sg=nytimes

    Technically, the accounting isn’t fraudulent, since the banks have gotten so many variances (it’s called regulatory forebearance). But the profits and equity levels banks are reporting are more than a tad misleading.

    By now there’s not much point in making this distinction, other than to explain how organized crime works at the governmental level. In a kleptocracy where the law has been rigged and/or hijacked, and where it’s consistently used for the benefit of the rackets, the measure of accounting fraud isn’t what the “law” says is fraud. That’s just “fraud”.

    So the people have to fall back on morality, common sense, and what a real law with integrity used to say (if it ever existed) or would say. And that’ll have to be the applied legal constitution if by some miracle we ever could convene a new Nuremburg.

  4. Doc Holiday

    TARP Example:

    ==> On December 23, 2009, Valley repurchased from the U.S. Treasury the final 100,000 shares of its Fixed Rate Perpetual Preferred Stock, thus ending Valley’s participation in the TARP Capital Purchase Program. Valley repurchased the other 200,000 additional shares of preferred stock earlier in 2009. Accordingly, Valley is no longer subject to the prohibitions against increasing dividends and redeeming its common stock and trust preferred securities, and the compensation-related limitations associated with the Capital Purchase Program. At February 26, 2010, the warrant remains outstanding to the U.S. Treasury. We have calculated an internal value for the warrant, and are currently negotiating the redemption with U.S. Treasury. However, if an agreement can not be reached with the U.S. Treasury, the warrant will be sold at public auction. We do not currently have a time frame in which the negotiations will be completed.

    ==> Then, the magic wand swishes about the fish bowl, which is filled with BP oil…

    The Treasury Department says it will auction 2.53 million warrants it received from Valley National Bancorp in the government’s latest move to recoup costs from the $700 billion financial bailout.

    The Treasury says the warrants for the bank, headquartered in Wayne, N.J., would be auctioned on Tuesday. A minimum bid price is set at $1.70 per warrant. A warrant is a financial instrument that allows the holder to buy stock at a fixed price.

    Financial institutions have been eager to cut all ties to the bailout program, known as the Troubled Asset Relief Program, or TARP, to escape various restrictions imposed on the banks receiving support including limits on executive compensation.

    The government received the warrants as part of the compensation for providing support to banks during the financial crisis.
    Neil Barofsky, the special inspector general for the bailout fund, issued a report last week that found Treasury had failed to keep minutes or notes from phone calls with banks that received TARP money. He said there had been undocumented conversations in which billions of taxpayer dollars were at stake.

    The Valley National warrant auction will follow auctions held in recent weeks for Comerica Inc. and PNC Financial Services Group Inc. The auction of 16.9 million PNC warrants raised $320.3 million while the auction of 11.5 million Comerica warrants raised $181.1 million.

    http://www.nj.com/business/index.ssf/2010/05/treasury_department_plans_to_s.html

    Oh wait???? The Valley National warrants sold for $2.20 per warrant. Treasury had set a minimum bid price of $1.70 per warrant.

    The government received the warrants as part of the compensation for providing support to banks during the financial crisis.

    Neil Barofsky, the special inspector general for the bailout fund, issued a report last week that found Treasury had failed to keep minutes or notes from phone calls with banks that received TARP money.

    He said there had been undocumented conversations in which billions of taxpayer dollars were at stake.

    The Valley National and the Wells Fargo warrants auctions this week followed auctions held in recent weeks for Comerica Inc. and PNC Financial Services Group Inc.

    The auction of 16.9 million PNC warrants raised $320.3 million while the auction of 11.5 million Comerica warrants raised $181.1 million.

  5. Doc Holiday

    Treasury Department Announces Public Offering of Warrants to Purchase Stock of Wells Fargo & Company

    http://www.ustreas.gov/press/releases/tg708.htm

    ==> The warrants are being offered pursuant to an effective shelf registration statement that has been filed by the Company with the Securities and Exchange Commission (the “SEC”). A preliminary prospectus supplement related to the offering will be filed by the Company with the SEC and will be available on the SEC’s website at http://www.sec.gov. Copies of the final prospectus supplement relating to these securities may be obtained, when available, from Deutsche Bank Securities Inc.

    ==> So, I take a walk over to SEC, and where do I find this mafia payoff?

    Ahhh shit, that was tuff..

    ==> 110,261,688 Warrants
    Each to Purchase One Share of Common Stock
    Wells Fargo & Company

    The United States Department of the Treasury (referred to in this prospectus supplement as the “selling security holder” or “Treasury”) is offering to sell 110,261,688 warrants, each of which represents the right to purchase one share of our common stock, par value $1-2/3 per share, at an exercise price of $34.01 per share. Both the exercise price and the number of shares that will be acquired upon the exercise of a warrant are subject to adjustment from time to time in the manner described in this prospectus supplement. We will not receive any of the proceeds from the sale of the warrants being sold by the selling security holder. The warrants expire on October 28, 2018.

    ==> Now what I’m fuzzy on is this: ” On December 23, 2009, we redeemed the preferred stock issued to Treasury. We are registering the warrants (and the shares of common stock issuable upon exercise of the warrants) offered by this prospectus supplement and the accompanying prospectus on behalf of Treasury as the selling security holder.”

    Warren issued this: In October 2008, we issued to Treasury a warrant to purchase 110,261,688 shares of our common stock together with shares of our preferred stock…

    Then: Treasury acquired the warrant and shares of our preferred stock as part of the Troubled Assets Relief Program (“TARP”).

    Then: The warrants currently are exercisable for 110,261,688 shares of our common stock, which represent approximately 2.1% of our common stock outstanding as of March 31, 2010.

    So, like WTF is going on with the preferred stock, I keep getting mixed up with that crap …. does Warren have the preferred stock, or did that go under a different shell?

    See???: Conversion and Exchange

    If any offered debt securities are convertible into preferred stock, depositary shares or common stock at the option of the holders or exchangeable for preferred stock, depositary shares or common stock at our option, the prospectus supplement relating to those debt securities will include the terms and conditions governing any conversions and exchanges.

    ?? hares of our common stock are equity interests in us and do not constitute indebtedness. As such, shares of our common stock will rank junior to all of our indebtedness and to other non-equity claims against us and our assets available to satisfy claims against us, including in our liquidation. Additionally, holders of our common stock are subject to the prior dividend and liquidation rights of holders of our outstanding preferred stock. Our board of directors is authorized to issue additional classes or series of preferred stock without any action on the part of the holders of our common stock. Furthermore, our right to participate in a distribution of assets upon any of our subsidiaries’ liquidation or reorganization is subject to the prior claims of that subsidiary’s creditors, including holders of any preferred stock. As of March 31, 2010, we had $199.9 billion of outstanding long-term debt, the aggregate liquidation preference of all our outstanding preferred stock was $9.5 billion and the aggregate liquidation preference of the preferred stock authorized and which may be issued in the future pursuant to certain stock purchase contracts entered into in connection with the issuance of preferred purchase securities by certain of our wholly owned trust subsidiaries was $6.75 billion. Our common stock will also be subordinated to our short-term debt. The terms of each of our outstanding series of preferred stock prohibit us from paying dividends with respect to our common stock unless all accrued and unpaid dividends for all completed dividend periods with respect to that preferred stock have been paid.

    ==> Screw it, I’m going to bed, but when I get up, can someone figure this out for me …. please!

    http://www.sec.gov/Archives/edgar/data/72971/000119312510126208/d424b5.htm

  6. RueTheDay

    “Today, a New York Times headline extols, “Banks Have Repaid 75% Of Bailout, Geithner Says.” ”

    I’m getting sick and tired of the MSM conflating TARP with bailout.

    Let me know when the Fed has unloaded the $1.3 Trillion of garbage MBS it bought from the banks. Let me know when we re-instate mark to market accounting. Let me know when the Fed is no longer letting banks borrow from the government at 0% and loan it back to the government at 4%.

  7. Jackrabbit

    More propaganda: increased capital levels will make the banks safer. Geithner and the administration tell us that new international capital requirements are sufficient to curtail bank risk.

    This is akin to “making driving safer” by mandating safety features. Car buyers pay more but, hey the safety is worth it. The increased safety is then used as an excuse to raise average driving speed (formally and informally). Then along comes cell phones.

  8. RSDallas

    Yves,

    I get a since that as everyday passes there are more and more Americans that are figuring this scam out. I really think that 2011 and 2012 will prove to be a period in History wherein Americans take back America, somewhat. Along with this however will come a period of pain for all to endure. This pain will prove to be positive in the long run. It is the pain of debt default and repayment. The Fed’s gun is empty.

    Ben and Tim can’t cover this outright thievery up any longer. This is evidenced by the direction the rest of the world is headed. Never before have we seen a world wide coordinated effort like what has transpired to transfer banking losses to the taxpayer. Be it in America or Zimbabwe. I refuse to believe that the American Citizenry is as stupid as our government officials believe them to be.

    America needs to listen intensely and deeply consider the response of the Obama administration in regards to the courts overturning of the oil drilling moratorium. The words “it would immediately appeal the judge’s ruling”. America, you have to listen to your heart when considering this response. This is not a response from an administration based on pro democracy. You must consider what the impact would be if a drilling moratorium was actually enforced. Millions of innocent Americans will be crushed. This is the most blatant attack on your freedoms ever voiced by an administration. This regime MUST be dismantled. I realize this last paragraph is a bit off topic, but America, PLEASE tell everyone you know to vote this regime out of power in this upcoming election.

  9. steelhead23

    But, but, but, Yves, here we are, two years into this fantasy and the ball just keeps rolling. Today’s Bloomberg says housing sales are at an all-time low. Values, while down 20% or so, are still well above what wages can sustain. The dollar is clobbering damn near every currency but the yuan. It sure looks like Bernanke is the Sorcerer and Geithner his Apprentice. There is magic in the air.

    No, of course I don’t believe the above, but from all appearances, there are many who do. Perhaps this is not the forum for such discussion, but many people, some of them quite bright, believe, truly believe in the magic of the market, that excessive governmental interference with this magic is foolish, and they believe the magicians. You have appeared on TV trying to bring rationality to true believers. They shun you. Decartes would be flabbergasted.

    Above I said that Bernanke is a Sorcerer. A more accurate description would be Wizard, as in the Wizard of Oz.

  10. Tom Crowl

    This series of bi-partisan, multi-decade ‘mistakes’ won’t be fixed without a revolutionary change in mindset. Changing parties isn’t enough.

    The technologies of money and politics are both thoroughly broken and corrupted.

    Its critical to remember that they are technologies built to address human decision in a social context. And they are very imperfect and incomplete inventions.

    Our behavior in social contexts has constraints related to our evolutionary roots.

    Many of our natural drives and perceptions are shaped by a long history as hunter-gatherers. While self-interest (as a drive) scales very easily, biological altruism does not.

    This is because this drive is has a relationship to ‘natural human community size’ (Dunbar’s Number). And impulses related to the “Commons” are tied to this more limited collective identity.

    But in a society larger than those of our hunter-gatherer foundations co-ordination for “Commons-oriented” purposes especially is extremely difficult and facilitating individual participation requires technical assists.

    Build the tools necessary.
    Facilitate the citizen’s ability in the public square.

    Technical systems can and must allow for the same kind of scaled response to Commons oriented issues which organized corporate (private) interests enjoy.

    Mechanisms for organization and action in the Commons are a central (but not only) critical need.

    Evolution requires tools.
    Revolution only requires inertia.
    (So far inertia is way ahead.)

    How Would Hunter-gatherers Run the World? (Psst… They DO!)
    http://culturalengineer.blogspot.com/2009/11/how-would-hunter-gatherers-run-world.html

    Credit Creation and the Building of Sustainable Economic Ecologies http://culturalengineer.blogspot.com/2010/02/credit-creation-and-building-of.html

    Personal Democracy: Disruption as an Enlightenment Essential
    http://culturalengineer.blogspot.com/2010/06/personal-democracy-disruption-as.html

    Demo http://www.Chagora.com

  11. Scott Brown

    >You must consider what the impact would be if a drilling moratorium was actually enforced. Millions of innocent Americans will be crushed. This is the most blatant attack on your freedoms ever voiced by an administration. This regime MUST be dismantled. I realize this last paragraph is a bit off topic, but America, PLEASE tell everyone you know to vote this regime out of power in this upcoming election.

    The moratorium is/was on EXPLORATORY drilling. All producing wells are unaffected. Corporations are running the government and you’re complaining about government power? Stop watching Fox News.

    1. RSDallas

      Scott,

      And you really think that the ban would ever be lifted after it was imposed. That’s where the millions come into play. It is yet another way for this fascist regime to put yet another strangle hold on America.

      “Corporations are running the government” You are an idiot in this case. Plain and simple. What corporations benefit from sky rocketing fuel prices? This is another attempt for this regime to further its efforts at achieving Obama’s tax and steal carbon scam.

  12. NOTaREALmerican

    The peasants believe it tho. At least the ones I work with.

    The real problem is uh, well, the economy isn’t uh the recovery is… isn’t enough recovery now but getting better. Look, we need the banks, right?

  13. Francois T

    Question for you Yves,

    Say you’re the top gun at a big institutional investor that has no geographic limitation as to where it can invest. You read high quality research, blogs and independent experts who pretty much tells you what this blog is telling its readers about the US financial markets, ie. lack of transparency, unaccountable management, excessive pay and bonuses, government in total cahoot with CEOs and big corps.

    Given all the above, what would motivate said institution to still invest in the US? Is it just done by default because it is worse elsewhere?

    What say ye?

  14. John

    BP should not show there head anytimein the near future.
    I tried to do service, but did not catch up with John.

    Respond to orders.

    John I. Umpleby
    Attorney At Law

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