US to Impose Conditions on TARP Repayment

The Administration is trying to look like it is not rolling over to banks’ demands on the issue of repayment of TARP money. But despite the tough-ish talk, the problem described by John Gapper remains. Whether the bank pay back the TARP or not, they and the wider world clearly know that they will not be permitted to fail, at least in their current (big and interconnected) incarnations. That in turn means they should be kept on a short leash until industry reforms and/or restructuring has taken place, since they are in effect gambling with house money, no matter what the formal balance sheet arrangements are. Keeping them in TARP is one way of addressing this conundrum; imposing other sorts of interim restrictions on “too big to fail” concerns is another approach. But Team Obama seems determined to try to restore status quo ante and not deal with any remedies that might prove inconvenient to the moneyed classes.

From the Financial Times:

Strong banks will be allowed to repay bail-out funds they received from the US government but only if such a move passes a test to determine whether it is in the national economic interest, a senior administration official has told the Financial Times.

“Our general objective is going to be what is good for the system,” the senior official said. “We want the system to have enough capital.”

Yves here. Note the turn of phrase? This crowd is fond of tests as being objective measures, when in fact they are being run by the industry on data not independently verified, through risk models shown to be unreliable in the face of extreme events. And first the official talks of “national interests” and sees that as tantamount to “what is good for the system”. That line of reasoning conveniently ignores the problem that the system we have in place, per Simon Johnson, may be diametrically opposed to our collective best interest. Back to the article:

On Sunday, Lawrence Summers, President Barack Obama’s top economic adviser, told NBC’s Meet the Press that repayments could eventually help the government provide further resources to help the sector. Such a move could also allow healthier institutions to differentiate themselves from weaker banks and free them from constraints on executive pay, and other activities, that come with bail-out money.

Yves here. Again, ideology rampant. Being “free from constraints” is seen as being aligned with the general good, when pretty much everybody except the banksters and their buddies at the Fed and Treasury think more regulation is in order. To the FT;

“Not surprisingly different banks are in different situations; they are going need different levels of assistance of taxpayers,” Mr Obama told a press conference at a summit in Trinidad on Sunday, while promising: “I’m not going to simply put taxpayer money into a black hole.”

Yves here. Ooh, and pray tell what is AIG? Oh, because it is not a bank, merely a back channel to recapitalize bank, it’s exempt from the black hole consideration. Back to the article:

The official, meanwhile, said banks that had plenty of capital and had demonstrated an ability to raise fresh capital from the market should in principle be able to repay government funds. But the judgment would be made in the context of the wider economic interest. He said the government had three basic tests. It needed first to “make sure the system is stable”. Second, to not create “incentives for more deleveraging which would deepen the recession”. Third, to make sure the system had enough capital to “provide credit to support the recovery”.

Yves again. The banks are ALREADY adding to pressures to delever by cutting consumer credit lines, In fact, if you buy Tyler Durden, banks are squeezing shorts by cutting credit even further to prime brokers, which is leading to less stock market liquidity and makes it (and other markets) more vulnerable to downturns. One of the big impetuses to goose the market would be for banks like Goldman to sell stock at more favorable prices to get out of the TARP. So if you buy argument #2, you wouldn’t let any bank who is a major prime broker (Goldman, Morgan Stanley, JP Morgan) pay back TARP proceeds,

And how much capital is needed to provide for recovery very much depends on your view of the future of securitization. Right now, it’s on government life support. Without fundamental reform, that market will not come back in a meaningful way (at least until the lessons of this disaster are forgotten and people make the same mistakes all over again). And the economics will not be anywhere near as favorable under a new regime that fixed incentives properly. For instance, requiring banks to hold enough of the paper they originate would increase costs and require better capitalized intermediaries all along the food chain. And even that didn’t succeed last go round; recall Merrill held a lot of the risky late vintage CDOs on its books when the market turned.

If the private securitization market does not come back in a meaningful way, that means either phony government diddled credit markets indefinitely, or vastly bigger balances sheets in the financial sector, since banks will originate and hold loans (probably trading some loans among themselves to create better diversification). That too argues against returning TARP funds.

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  1. Doc Holiday

    In my opinion, the thieves at Goldman are looking for a competitive advantage in playing with repayment options, options which in reality do not exist, because for one thing, TARP was a process that usurped constitutional powers from congress, by Treasury, and there really were not contractual terms to this freebie bailout bonanza — thus Goldman is trying to gain a competitive advantage in paying down its principal, before actual terms are connected to this God awful chaotic mess, which congress and every member of every ban-related committee is involved in!

    Did I mention that Treasury does not have constitutional authority to engage in the commerce and witchcraft which Paulson breed?

    Did I mention That I’m pissed off about the antitrust violations that FTC overlooked in this give away, or did I mention the antitrust abuse which will occur if Goldman is able to jump the gun, by not paying a penalty? Did I mention the fact that The Department Of Justice is not only blind by fuc-ing retarded and that Department of Labor went along for the ride with pension obligations that were morphed into hedge fund bullshit which was blessed by SEC…. perhaps I strayed there, but WTF! This mess seriously needs an army of honest accountants which I will find at local community colleges, who will then be given rewards from bounties — after they sort out this piracy!

    I’m so sick of this, but it feels so friggn good to vent! What was the topic?

  2. Leo Kolivakis

    The main impetus behind this repayment is to free themselves up of government interference so they can go on "compensating" their "top" talent with outrageous packages.

    Wolf Blitzer interviewed Bill Cohan, author of house of Cards, yesterday on CNN. here is a link to the transcript:

    I quote:

    "BLITZER: What's the most important lesson we need to learn as a result of the collapse? In your book "House of Cards" you talk about this amazing collapse of Bear Stearns. Who would have ever believed that could happen? But what's the most — single most important lesson that all of us need to learn?

    COHAN: Well, the single most important less is that number one and so I'll say two, number is that people make decisions that result in problems like this, not you know, myths, not tsunamis. That's number one.

    And number, unfortunately on Wall Street, where greed is a driving and powerful force, banks like Lehman, like Bear Stearns, like Merrill engaged in what was borrowing short, borrowing overnight, and creating assets that were long dated assets. This created a very, very difficult situation. When the confidence was lost at the end in those ten days in March at Bear Stearns, the overnight lenders were able to say we don't want to do business with you anymore. And that is a very, very dangerous situation, should never have been allowed to happen.

    Now they were in a situation where maybe they had fewer choices, but they should never have been in that situation in the first place. And that's what did them in, that loss of confidence.

    BLITZER: And you tell the story really in amazing detail how Bear Stearns was about to announce that they had profits of $115 million…

    COHAN: Right.

    BLITZER: …in the first quarter of last year, they had $17.3 billion supposedly in cash in the bank ready to use. And then within 10 days of all of that, they announced, you know what? No more Bear Stearns, it's over.

    COHAN: I didn't matter. The fact that they had a first quarter profit, the fact that they had, you know, $17 to $18 billion of cash on their balance sheet, since they were rolling over every night, needed to borrow every night close to $75 billion in this short term financing market, it didn't matter that they had $18 billion in cash. It sounds like an incredible amount of money. And it is.

    But if you need $75 billion and you only have $18 billion, then it doesn't matter. And the overnight lenders said we're not going to lend you that $75 billion. They never should have been in a position in the first place where they were relying on the overnight market for these loans, giving lenders like Fidelity or Federated a vote every night on Bear Stearns continued existence. Lehman did the same thing, Merrill did the same. It's not wise. Unfortunately, it's just a terrible tragedy. It did not need to happen.

    BLITZER: And here's…

    COHAN: That's the sad thing.

    BLITZER: Here's how you put it in the "House of Cards". "The demise of Bear Stearns and the financial calamities it set off in the world cannot be explained just by the events of March 2008. The roots of the firm's problems are found deep in its unique corporate culture, which developed over decades."

    And here's the question. Has the corporate culture today a year later changed?

    COHAN: Well, Bear Stearns is obviously…

    BLITZER: Forget about Bear Stearns, because that's history.

    COHAN: Okay.

    BLITZER: But the other financial giants right now?

    COHAN: Oh, goodness, I mean, you think that every time one of these things happens that firms would be chastened, the culture will change, people will reflect on this and never let it happen again.

    Unfortunately, this is like the fourth or fifth crisis we've had since the mid '80s. I would like to believe that this will never happen again. There's really no more securities firms as we used to know them. They've become bank holding companies like Morgan Stanley and Goldman Sachs.

    But you see Goldman Sachs now, a profitable first quarter, a little sleight of hand by not including the December month in their first quarter results. And now they want to pay back the TARP money.

    And I can't say I blame them. But they want to pay it back so they'll be free of government oversight or less scrutiny by government in terms of what the can pay people, and who they can recruit and pay them. And I don't blame them for wanting to do that, but that says to me they want to return to the status quo, you know, which is fine.

    Goldman didn't do this overnight financing to the same extent that other firms did. They were less profitable as a result. And they did a much better job. But nevertheless, some of these incentives need to change. Accountability needs to change. We need to change and learn from this. And by immediately going back to the status quo so quickly, I'm afraid we may forget again.

    BLITZER: I hope we don't. William Cohan is the author of "House of Cards: A Tale of Hubris and Wretched Excess on Wall Street." William, thanks very much for coming in.

    COHAN: Thanks for having me, Wolf. It's a pleasure.

    BLITZER: Thank you."

    >>I happen to think Cohan was too kind to Goldman. They had plenty to do with this fiasco.



  3. don

    The “healthy” megabanks:

    These are the megabank(s) that want to pay back TARP funds, and want STest results made public.

    The megabanks that don’t publicly state their desire to pay back TARP and don’t want the STest to be revealed . . . will be understood to be the unhealthy banks.

    The first question to be asked is whether the desire to pay back TARP and to reveal STest results is genuine or public posturing to create the desired perception, and whether it really matters one way or the other. The perception may be as suitable as the ‘reality’ in serving the end result.

    In either case, the end result is the same: we know who is the strong vs. the weak, resulting in the “healthy” getting private investments and the not so healthy getting no interest from investors – for who would wish to place their money in the hands of the weak.

    But this is the opposite of the intended purpose of the private investment/taxpayer PPIP: for private capital (joined at the hip with public funds), will go to the megabank(s) that need it the least. Perhaps this is the real intent?

    Perhaps the real desire is to get public/private capital to shore up the “healthy” banks and not the weak. Doing so would fast forward the process of consolidation of megabanks into just a couple, since it is now clear that the concentration of capital becomes more evidentially necessary to reach “stability”. Much of this has already occurred (even though having not been part of any master plan), as BS, Merrill, etc. have been absorbed, thus addressing the glut of megabanks. At this point, it might be that further consolidation/concentration serves a necessary evolution; by facilitating the dispersal of toxic assets from weak bank to public coffers, and in the process supporting the strong megabanks – who are now shed of their weakly cousins contaminating the strong by association with the weak.

    Paying back TARP and whether the STest should be made public are more or less public posturing. What will be permitted will be determined by what will most effectively move consolidation/concentration further along. On this basis, it will eventually be revealed to the ‘masses’ not only what is in our best interest . . . but that what leads to consolidation/concentration is best for megafinance, and thus what is best for all of us. Eventually we will be informed as to who is the weak and who is the strong, so that the the ‘good’ and ‘bad’ banks can be separated from each other with the former eating the later. Once established, then all that remains is the “healthy” propped up with public funds, at which point we call all really celebrate the conclusion of the financial crisis.

  4. don

    What I write above is pure conjecture, of course.

    When will we know that it is more than that? When we are informed that it is in the public interest to “invest” in the strong rather than the weak, representing another reversal of Obama policy. In a sense, then, we get nationalization in another name.

  5. Jim

    All in all there is no evidence that the Administration has any will to change the supercharged financial casino model. And there’s precious little evidence that the legislative branch will do anything either.

    Only option seems to be to abandon the casino. Dow 50,000 will be GS partners trading with each other and won’t even make the front page of any business sections.

    They have killed the markets, both equities and bonds, rendering them too hazardous to enter.

    Look at the Dow now…800 million shares of C doing quant fund diaper dances while no other stock does 100 million. It’s a disgusting farce.

    IBM’s the biggest stock on the Dow, chugging along in a vapor trail of fading revenue. No one even mentions it.

    Big question is…how do we close down the bond markets as they now exist and replace them with more stable wealth preservation vehicles for pension and insurance?

    Wall Street is simply not up to the job, nor is Washington DC.

    Maybe China can take this on for us. Or the UN (:^O)… Otherwise we might as well just disband global finance, haircut all pensions and insurance 50% (to be charitable), and save at the local post office box like the Japanese.

    It really is clear that the system is gone, there is no system, but a whole lot of savings vehicles falling toward the Earth like fragments of the Shuttle….

    –Jim in MN

  6. kackermann

    Hold up there! Slow down…

    I don’t just want my money back, I want damages too.

    The banks whined, and cried, and lobbied, and threatened for lax regulation and no oversight because they said they would behave responsibly.

    Well that didn’t happen, and 6 million people want their jobs back, and their investments given the same consideration that bondholders are getting now.

    I also want CDS’s torn up in all cases where the notional value is above the value of the writer.

    They never offered me compensation or any consideration as a 3rd party in the contracts, and I’m ultimately the party assuming the most risk.

    I’m being played for a chump. Are you?

  7. Don

    I’m having a hard time understanding what people are proposing. I do not believe that we can seize the banks at the present time. It would certainly be a mess. I guess if you believe that we can, all this seems silly to you. I too would rather have an FDIC seizure, but I don’t see how this can be done with creating an enhanced FDIC or new agency, like the RTC, first.

    If you can’t do that, I’m assuming that people want us to get stock from the banks and, possibly, even get controlling interest in the banks. That has problems like the following:

    “The Treasury would also become a major shareholder, and perhaps even the controlling shareholder, in some financial institutions. That could lead to increasingly difficult conflicts of interest for the government, as policy makers juggle broad economic objectives with the narrower responsibility to maximize the value of their bank shares on behalf of taxpayers.

    Those are exactly the kinds of conflicts that Treasury and Fed officials were trying to avoid when they first began injecting capital into banks last fall. “


    “Each conversion of this type would force the administration to decide how to handle its considerable voting rights on a bank’s board.

    Taxpayers would also be taking on more risk, because there is no way to know what the common shares might be worth when it comes time for the government to sell them.”

    In other words, as I said, all the hybrid problems would remain, and the international problems would be worse.

    Finally, Stiglitz said the following:

    “Rather than continually buying small stakes in banks, weaker banks should be put through a receivership where the shareholders of the banks are wiped out and the bondholders become the shareholders, using taxpayer money to keep the institutions functioning, he said….

    “You’re really bailing out the shareholders and the bondholders,” he said. “Some of the people likely to be involved in this, like Pimco, are big bondholders,” he said….”

    Legally, I’m not sure what he’s proposing, but the largest holders of these bonds, as I’ve pointed out before, are:

    1) Pensions
    2) Insurers
    3) Foreign Governments
    4) Foreign Investors

    1 and 2 are bailouts waiting to happen, and 3 and 4 are very bad news going forward.

    As Inner Workings has pointed out:

    “Reminder: why the Treasury needs the banks to look better
    April 14th, 2009
    By David Goldman

    The next sector to collapse would be the insurers: as I’ve said here again and again, the big pyramid scheme in the US financial system is that the insurers own the bottom of the capital structure of the banks. Bank preferreds, trust preferreds, hybrids, etc. were the favorite repast of yield-hungry insurance portfolio managers.

    The big insurance companies all are trading like junk, still. Here is the cost of five-year credit protection on two of the biggest:

    It’s cheaper to refloat the banks than to go in and bail out insurers after public confidence collapses.”

    All the recent stories about pensions, insurers, and annoyance with the dollar are related to this. I’m just having a hard time understanding what some people are actually proposing.

    Don the libertarian Democrat

  8. Yves Smith


    I will confess I have not done a bank-by-bank analysis. However, based on what I have read, for every bank ex perhaps Cit and the smaller ones that are gonersi, if you had wiped out stockholders in seriously impaired banks and made the bondholders convert to equity, there’d be enough equity to cover the remaining losses AND no need for all the rescues. And that could have been done en masse over a weekend. You could then leave reregulation/forced restructuring (say by imposing capital charges so high on banks over a certain size they’d be uncompetitive and forced to figure out on their own how to restructure) for a second act.

    But now that we’ve spend so much money on a bad Plan A, it will be hard to do a bondholder cramdown, in whole or in part.

  9. Jim

    I am just past the point of thinking that there is any salvation for the wreckage of what the ordinary investor–scaling from a middle class household to a medium sized government–once thought of as a ‘normal’ stock index fund or a bond fund. It’s over.

    Neither equity ‘index baskets’ nor bond funds, as opposed to actual bonds held to maturity, are good for anything now. They are just chew toys for maniacal robots. Throw in the vaporization of a trillion a year in ordinary American income and investment, and it is full stop for the very insurance and pension entities that The Policy is supposed to ‘save’.

    Hint: Saving the zombie banks and their captive insane robot casinos, as the only strategy to save the nest eggs held hostage, is not going to cut it in the midst of deleveraging and destructon of the real economy.

    So my proposal is: stop assuming real returns at all and just assume one can somehow remain at par relative to inflation. Only concrete savings now count towards retirement, and all insurance vehicles eventually have to raise premiums to make up for lost investment returns. Real net savings need to increase about, oh 10% or thereabouts.

    Above all, wealth so set aside must be protected from the zombie banks and their insane robot casinos.

    So if you run a corporate or state pension fund, or an insurance company, the question becomes how to remove all financial ties to the TARP lunacy and any risk infection associated with it. In other words, exit the markets they have contaminated.

    I am afraid that doesn’t leave much investment space to work in. Cash, bonds held to maturity and hard assets with painful valuation assumptions may be about it. But that is Japan, again.

    Kind of a bummer, but that’s what once-in-a-century financial disasters are all about, wot?

    –Jim in MN

  10. Cat

    What’s amazing to watch is GS and the other “strong” banks leveraging their influence to get first crack at eating the “weak” banks. Strong or weak is determine more by influence at this point. In some ways, the USG is going to let lose these dogs of acquisition knowing full well that in the aftermath the remaining banks will be so enormous they might constitute independent state entities. All that would be left is for GS to raise a private army of mercenaries to prosecute the rest of their bold plan for profitability.

    That would be interesting to watch, actually.


  11. DownSouth

    Thanks Leo Kolivakis for the Cohan interview. Here’s a quote from Reinhold Niehbur’s Moral Man & Immoral Society that is germane. Remember this was published in 1932, and it appears almost nothing has changed since then:

    Thus, for instance, a laissez faire economic theory is maintained in an industrial era through the ignorant belief that the general welfare is best served by placing the least possible political restraints upon economic activity. The history of the past hundred years is a refutation of the theory; but it is still maintained, or is dying a too lingering death, particularly in nations as politically incometent as our own. Its survival is due to the ignorance of those who suffer injustice from the application of this theory to modern industrial life but fail to attribute their difficultities to the social anarchy and political irresponsibility which the theory sanctions. Their ignorance permits the beneficiaries of the present anarchic industrial system to make dishonest use of the waning prestige of laissez faire economics. The men of power in modern industry would not, of course, capitulate simply because the social philosophy by which they justify their policies had been discredited. When power is robbed of the shining armor of political, moral and philosophical theories, by which it defends itself, it will fight on without armor; but it will be more vulnerable, and the strength of its enemies is increased.

    When economic power desires to be left alone it uses the philosophy of laissez faire to discourage political restraint upon economic freedom. When it wants to make use of the police power of the state to subdue rebellions and discontent in the ranks of its helots, it justifies the use of political coercion and the resulting suppression of liberties by insisting that peace is more precious than freedom and that its only desire is social peace. A rational analysis of social facts easily punctures this pretension also. It proves that the police power of the state is ususally used prematurely; before an effort has been made to eliminate the cause of discontent, and that it therefore tends to perpetuate injustice and the consequent social disaffections. Social intelligence may, in short, eliminate many abortive means to socially approved ends, whether they have been proposed honestly or dishonestly, and may therefore contribute to a higher measure of social morality. If psychological and social scientists overestimate the possibilities of impoving social relations by the development of intelligence, that may be regarded as an understandable naivete of rationalists, who naturally incline to attribute too much power to reason and to recognise its limits too grudgingly. Men will not cease to be dishonest, merely because they have discovered their own deceptions. Whenever men hold unequal power in society, they will strive to maintain it. They will use whatever means are most convenient to that end and will seek to justify them by the most plausible arguments they are able to devise.

  12. DownSouth

    Since Niebuhr wrote his book prior to Postmodernism becoming an important cultural force, he did no critique of overly pessimistic rationalists. He did, however, do a critique of overly pessimistic religionists, and it is most intriguing to see how similar they are in their beliefs to their secular first cousins–the equally pessimistic modern day libertarians–who also worship at the altar of the imperial self:

    Nevertheless the tendency of religion to obscure the shades and shadows of moral life, by painting only the contrast between the white radiance of divine holiness and the darkness of the world, remains a permanent characterisitic of religious life.

    This tendency has more than one dubious effect. It certainly tends very readily to a moral, social and political indiffrentism. The individual, and more particularly society, are regarded as too involved in the sins of the earth to be capable of salvation in any moral sense. Ususally the individual is saved by the grace of God, while society is consigned to the devil; that is, the social problem is declared to be insoluble on any ethical basis. Thus Augustine concludes that the city of this world is “compact of injustice,” that its ruler is the devil, that it was built by Cain and that its peace is secured by strife. That is a very realistic interpretation of the realities of social life. It would stand in wholesome contrast to the sentimentalities and superficial analyses, current in modern religion, were it not marred by a note of defeatism. That note creeps easily into all rigorous religion, with its drift toward dualism. The injustices of society are placed into such sharp contrast with the absolute moral ideal, conceived by the individual conscience, that the religiously sensitised soul is tempted to despair of society. Religion thus degenerates into an asocial quest for the absolute. The soul seeks the perfection of God in either quietistic absorption or ascetic withdrawl from the world; and in each case perfection is defined and experienced in purely individualistic terms.

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