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.