Tuesday, June 9, 2009

Perspectives On TARP Repayment

Today several financial companies were given permission to repay their TARP crutches. The market yawned. As expected, nowhere in Geithner's prepared statement was there even a brief mention of that "other" crutch, the TLGP subsidies that banks have used over the past 6 months. And as TARP is to bank equity, so the FDIC's TLGP is to debt (Zero Hedge has written extensively about the program in the past). The debt guarantee issue is a global phenomenon: not only focused on the US. In fact, the total crutches provided by developed countries to their banking systems currently amount to roughly half a trillion dollars, so when banks succeed in paying off about 10 times more than they did today, please let us know. Unfortunately, for that to happen to S&P will likely need an invisible hand boost well in the 3-4,000 range. That's a whole lot of share recall notices that State Street and BoNY would have to issue.

For readers curious for a brief version of this underrepresented problem, The Economist has a succinct summary:
Still, there is a long way to go. Paying off the first $68 billion is a healthy start, but western governments own roughly $450 billion in banks. If markets or the economy slump again, investors’ appetite for new shares will evaporate. Of the ten banks, eight had been pressed by the government to take funds in October, amid efforts to shore up the banking system. Although some individual institutions may try to claim that they took the money unwillingly, government intervention was necessary to prevent the entire system from collapsing as banks were found to own hundreds of billions of dollars of hard-to-value assets.

Even today all banks remain plugged into government life support systems. Central banks provide generous collateral rules for borrowing, in an effort to provide banks with liquidity. Some banks have managed to issue debt without government guarantees, but the system needs to refinance some $25.6 trillion of wholesale funding by 2011: without an implicit state back stop this would be impossible. And the value of banks’ assets is being sheltered by central banks’ asset purchasing programmes and in some cases flattered by more generous accounting rules. The truth is that the West has a thinly capitalised banking system that is being allowed to earn its way back to health. Save for defence and space exploration it is hard to think of a privately-run industry more dependent on the state.
It is probably worthy to keep this information in mind as pundits try to spin today's news as something constructive. But, as with everything else with the Obama administration, this has been merely one more tactic in the chess game of confidence.

And in keeping with the script, for some internal systemic perspectives, more of the "teleprompter" variety, below is an interview conducted by Fox Business Network with Dallas Fed president Dick Fisher. Of his points, perhaps this was the most relevant: "I’m not surprised that these institutions want to re-pay the TARP money. The question is, can they repay the TARP money without putting themselves in long-term vulnerable positions? And I think you could view it as a healthy sign of those institutions that are able to raise capital to pay back the TARP money and we will again see how many of these institutions are able to do so. You also don’t want to create a permanent dependence on TARP money." In other words: the government has priced the economic environment to perfection. A slip here or there, and the avalanche could easily resume, this time with a vengeance; however, next time good luck getting the public to agree with TARP 2 for those who said their were too confident and really needed those Barney Frank-unmediated bonuses.

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