The Great TARP Myth

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There’s been much talk about the big banks paying back the TARP money.  Treasury Secretary Geithner has said that 75% of the government’s money has been returned and that the government is on pace to earn a “healthy profit” from the program.  This reminds me of a debtor who consolidates five loans by putting it all on one credit card and claims that he has reduced his debt by 80%.




There is no question that JP Morgan, Morgan Stanley, Goldman Sachs, Bank of America, Wells Fargo and even Citi have paid back their TARP money.  We can argue about why they did it, but lets be honest…this was all about paying bonuses (below, I’ll mention President Obama’s comment about the bonuses).




These banks were saved not only by the emergency infusion of capital, but also by the stabilization of the bond market, and in particular, the mortgage backed securities market (bonds backed by mortgages).  The MBS market was saved by four factors:




1. the Fed’s purchase of $1 trillion of MBS

2. the bailout of Fannie and Freddie to support te MBS market

3. the bailout of AIG (and the credit default swaps that were written on MBS)

4. the housing credit that is helping to stabilize home prices




When the government bought more than $1 trillion of mortgage backed securities, it did three things:

1. allowed banks to make loans without risk

2. kept interest rates low (favorable for banks)

3. allowed banks to earn trading profits, as the government signaled their huge purchase

We have no idea what this portfolio will ultimately cost us.




In addition, the government is effectively insuring Fannie, Freddie and AIG.  (Fannie and Freddie own or guarantee $5.5 trillion of the $11 trillion of US residential mortgage debt.) By supporting these entities, the government is subsidizing all MBS investors — including banks.




Interestingly, while the banks are supposedly getting healthier, Fannie and Freddie’s regulator (Fed’l Housing Finance Agency) is considering asking for an increase in their $400 billion government credit line.  The rumor is that this is going to be doubled to $800 billion ($400 billion per company)!  So far, they have used $111.6 billion.   Over the last nine quarters, Fannie has lost $120.5 billion and Freddie has lost $67.9 billion.




Does it surprise you that the banks have become so smart and yet AIG, Fannie and Freddie have not become profitable?  Ultimately, what we’re seeing is a debt consolidation.  Our problems didn’t go away — they are being consolidated in a handful of entities.  We are being asked to believe that the problems are being solved and it’s just not true.  When you think about it this way, it’s truly outrageous to think about the bonuses that are about to be paid.




Regardless of my outrage, I still think that President Obama needs to apologize for his comment. Last week, Obama said, “I did not run for office to be helping out a bunch of fat cat bankers on Wall Street.”  The President should realize that his comment was degrading to fat cats.

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