More and Growing Group of TARP Deadbeats

from WSJ:

NEW YORK (TheStreet) -- The list of TARP deadbeats continued to climb over the past few months, with 115 banks skipping dividend payments on $3.6 billion worth of borrowings from the U.S. Treasury Department.
The number has climbed from 91 payment deferrals in the previous Treasury report on the Troubled Asset Relief Program, in May, and 74 deferrals in the report in February. According to an analysis by SNL Financial, 15 companies have skipped payments five times while seven have deferred on six occasions. After half a dozen delinquencies, the Treasury holds the right to elect two directors to a bank's board, as it did with American International Group (AIG) last spring.

Banks Defaulting on TARP Repayments

Bailout Czar: TARP Has Failed

from Fox Business:
The government’s top bailout cop said Sunday that more than a year after the financial crisis hit, many of the goals of Washington’s $700 billion bank rescue program remain unmet and that policymakers still have not addressed fundamental problems that triggered the crisis, leaving the financial system vulnerable to another collapse.
In a 224-page quarterly report to Congress, Neil Barofsky, the Special Inspector General of the Troubled Asset Relief Program (TARP), acknowledged that TARP had stabilized the financial system. But he said that it has so far failed to restore consumer and business lending and to significantly prevent home foreclosure.
And in a slap at Congress and the Obama Administration, Barofsky said that “it is hard to see how any of the fundamental problems in the system have been addressed to date.”
He said the bailout “will have been for naught if we do nothing to correct the fundamental problems in our financial system and end up in a similar or even greater crisis in two, or five, or ten years’ time.”
The top Republican on the Senate Homeland Security and Governmental Affairs Committee, Sen. Susan Collins, (R-MA), said she was “deeply troubled” by the report.
“It appears that ‘too big to fail’ institutions are even larger and possibly more interconnected as a result of TARP assistance,” she said. “The market mentality now seems fixed that the U.S. government will continue to step in and bail out giant financial institutions.”
But Barofsky warned that in his view, little had changed to head off another financial crisis:
• “To the extent that huge, interconnected, ‘too big to fail’ institutions contributed to the crisis, those institutions are now even larger, in part because of the substantial subsidies provided by TARP and other bailout programs.”
•” To the extent that institutions were previously incentivized to take reckless risks through a ‘heads, I win; tails, the Government will bail me out’ mentality, the market is more convinced than ever that the Government will step in as necessary to save systemically significant institutions. This perception was reinforced when TARP was extended until October 3, 2010, thus permitting Treasury to maintain a war chest of potential rescue funding at the same time that banks that have shown questionable ability to return to profitability (and in some cases are posting multi-billion-dollar losses) are exiting TARP programs.”
• “To the extent that large institutions’ risky behavior resulted from the desire to justify ever-greater bonuses — and indeed, the race appears to be on for TARP recipients to exit the program in order to avoid its pay restrictions — the current bonus season demonstrates that although there have been some improvements in the form that bonus compensation takes for some executives, there has been
little fundamental change in the excessive compensation culture on Wall Street.”
• “To the extent that the crisis was fueled by a ‘bubble’ in the housing market, the federal government’s concerted efforts to support home prices…risk re-inflating that bubble in light of the government’s effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market.” (Fannie Mae, Freddie Mac, the Federal Housing Administration and other government agencies now insure more than 90% of all mortgages from the risk of nonpayment.)
Barofsky also said that TARP goals to increase bank lending and prevent home foreclosures “have simply not been met” – “lending continues to decrease, month after month” and “foreclosures remain at record levels (and) the TARP foreclosure prevention program has only permanently modified a small fraction of eligible mortgages.
“To the extent that the government had leverage through its status as a significant preferred shareholder to influence the largest TARP recipients to carry out such policy goals, it was lost with their exit from TARP,” he added.

from Yahoo Finance:
WASHINGTON (AP) -- The government's response to the financial meltdown has made it more likely the United States will face a deeper crisis in the future, an independent watchdog at the Treasury Department warned.
The problems that led to the last crisis have not yet been addressed, and in some cases have grown worse, says Neil Barofsky, the special inspector general for the trouble asset relief program, or TARP. The quarterly report to Congress was released Sunday.
"Even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car," Barofsky wrote.
Since Congress passed $700 billion financial bailout, the remaining institutions considered "too big to fail" have grown larger and failed to restrain the lavish pay for their executives, Barofsky wrote. He said the banks still have an incentive to take on risk because they know the government will save them rather than bring down the financial system.

Good News: 2 Banks Repay TARP

from NYT:

With the wiring of nearly $10 billion to the United States Treasury, U.S. Bancorp and BB&T on Wednesday became the first large financial institutions to announce that they have repaid the government in full for the preferred shares it bought last fall under the federal bailout program.

U.S. Bancorp, based in Minneapolis, said Wednesday morning it redeemed $6.6 billion in preferred stock from the Treasury. BB&T, based in Winston Salem, N.C., said that it had bought back the preferred shares for $3.1 billion plus a final dividend payment of about $13.9 million.

Later in the day, JPMorgan Chase and Morgan Stanley also announced the return of their federal aid, signaling that the nation’s top bankers are regaining their confidence after the financial crisis that shook Wall Street last fall.

Now, if the Treasury will just repay the taxpayers!

Another Copy of Patterson's Remarks

from Naked Capitalism blog:
The TARP elicited a firestorm of criticism at its inception, and at various points of its short existence, particularly the repeated injections into "too big to fail" Citigroup and Bank of America, plus the charade of Paulson forcing TARP funds onto banks who were eager to take them once the terms were revealed. Now, however, conventional wisdom on the program might be summarized as, "it's flawed, but still better than doing nothing."

That of course is a false polarity. Having the TARP, particularly given the amount of funds committed, precluded quite a few other courses of action. And the TARP was part of a strategy to avoid resolving sick banks, when the history of banking crises shows that speedy action to clean up dud banks and restructure or write off bad debt (both of the bank and to the bank) is the fastest course to economic recovery.

So far, the beneficiaries of the handouts equity injections have complained only about the Obama Adminstation's occasional efforts to act like a substantial shareholder and exercise some influence over the companies' affaris. We are the first to acknowledge that these too often have involved matters of appearance (executive pay) as opposed to substance (risk taking on the taxpayer dime for the benefit of shareholders and employees).

But now we have a salvo from an unexpected source: an investor who used TARP funds to buy a bank, and thinks taxpayers are getting ripped off. Mark Patterson, of MartnPatterson Advisers, used TARP matching funds to buy a Michigan bank. This by no means was a large transaction, but the point is that someone that one would expect to praise the process (after all, he benefitted from its largesse) is a pointed critic.

From the Telegraph:

“The taxpayers ought to know that we are in effect receiving a subsidy. They put in 40pc of the money but get little of the equity upside,” said Mark Patterson, chairman of MatlinPatterson Advisers...

Mr Patterson said the US Treasury is out of its depth and seems to be trying to put off drastic action by pretending that the banking system is still viable.

“It’s a sham. The banks are insolvent. The US government is trying to sedate the public because they are down to the last $100bn (£66bn) of the $700bn TARP funds. They think they’re doing this for the greater good of society,” he said, speaking at the Qatar Global Investment Forum.

Mr Patterson said it would be better for the US to bite the bullet as Britain has done, accepting that crippled lenders must be nationalised. “At least the British are not hiding the bail-out,” he said.

MatlinPatterson said private equity and hedge funds were deluding themselves in hoping to go back to business as usual after the trauma of the last 18 months.

“This is not a normal recession and there will be no V-shaped recovery. The crisis has destroyed leveraged companies. We’re going to see a catastrophic increase in the number of LBO’s (leveraged buyouts) going into default because they’re knee-deep in debt and no solution exists since they can’t refinance,” he said.

“Alpha hedge funds have been making their money by gambling with excessive leverage, so the knife that cuts off leverage is going to cut off their heads as well,” he said...

“The US government has thrown 29pc of GDP at this crisis compared to 8pc in the early 1930s. The Fed’s balance sheet has risen from $900bn to $2.7 trillion to bail out the system. America has to do it because the only way out is to debase the currency, but that is going to lead to some very high inflation three years down the road,” he said.

Hedge Fund Beneficiary of TARP Calls It a "Sham"

from Zero Hedge blog:

The chairman of $7 billion distressed Private Equity firm and TARP beneficiary MatlinPatterson calls a spade a spade and in the process exposes the entire Geithner plan for the complete sham that it is. His comments before the Qatar Global Investment Forum were captured by the Daily Telegraph's Evans-Pritchard earlier, and Zero Hedge republishes the piece in its entirety as it presents every nuance of our predicament with masterful simplicity.

***

US 'sham' bank bail-outs enrich speculators, says buy-out chief Mark Patterson

The US Treasury’s effort to stabilise the banking system through the TARP programme is a hopelessly ill-conceived policy that enriches speculators at public expense, according to the buy-out firm supposed to be pioneering the joint public-private bank rescues.

“The taxpayers ought to know that we are in effect receiving a subsidy. They put in 40pc of the money but get little of the equity upside,” said Mark Patterson, chairman of MatlinPatterson Advisers.

The comments are likely to infuriate Tim Geithner, the US Treasury Secretary, because MatlinPatterson took advantage of the TARP’s matching funds to buy Flagstar Bancorp in Michigan. His confession appears to validate concerns that the bail-out strategy is geared towards Wall Street.

Under the convoluted deal agreed earlier this year, MatlinPatterson has come to own 80pc of the shares while the US government has ended up with under 10pc.

Mr Patterson said the US Treasury is out of its depth and seems to be trying to put off drastic action by pretending that the banking system is still viable.

“It’s a sham. The banks are insolvent. The US government is trying to sedate the public because they are down to the last $100bn (£66bn) of the $700bn TARP funds. They think they’re doing this for the greater good of society,” he said, speaking at the Qatar Global Investment Forum.

Mr Patterson said it would be better for the US to bite the bullet as Britain has done, accepting that crippled lenders must be nationalised. “At least the British are not hiding the bail-out,” he said.

MatlinPatterson said private equity and hedge funds were deluding themselves in hoping to go back to business as usual after the trauma of the last 18 months.

“This is not a normal recession and there will be no V-shaped recovery. The crisis has destroyed leveraged companies. We’re going to see a catastrophic increase in the number of LBO’s (leveraged buyouts) going into default because they’re knee-deep in debt and no solution exists since they can’t refinance,” he said.

“Alfa hedge funds have been making their money by gambling with excessive leverage, so the knife that cuts off leverage is going to cut off their heads as well,” he said.

Like many bears, Mr Patterson expects the great crunch to end in deliberate inflation, deemed a lesser evil than outright depression.

“The US government has thrown 29pc of GDP at this crisis compared to 8pc in the early 1930s. The Fed’s balance sheet has risen from $900bn to $2.7 trillion to bail out the system. America has to do it because the only way out is to debase the currency, but that is going to lead to some very high inflation three years down the road,” he said.

Matlin Patterson, however, has missed the Spring rebound, the most powerful rise in equities in over 70 years. “We shorted the equity rally because we thought it was lunatic. We’ve kept adding positions seven times, and we’re still holding,” he said. Ouch!

Now Mega-Insurers Get TARP

from FT:

At least four US insurers won approval on Thursday to raise billions of dollars through the government’s bank bail-out plan, the US Treasury Department said.

Hartford Financial , the No. 4 US insurer and beset by worries about capital, got preliminary approval to raise $3.4bn via the Troubled Assets Relief Program, known as Tarp.

We've become a "bailout" nation! This is certain to end very ugly! Prudential, Hartford, Lincoln National, Ameriprise Financial, Principal Financial, and Allstate are included. Is the government going to take over them now, too? Why wouldn't they?

More Socialism Headed Our Way

By Dick Morris

Posted: 04/21/09 05:21 PM [ET]

President Obama showed his hand this week when The New York Times wrote that he is considering converting the stock the government owns in our country’s banks from preferred stock, which it now holds, to common stock. This seemingly insignificant change is momentous. It means that the federal government will control all of the major banks and financial institutions in the nation. It means socialism. The Times dutifully dressed up the Obama plan as a way to avoid asking Congress for more money for failing banks. But the implications of the proposal are obvious to anyone who cares to look. When the Troubled Asset Relief Program (TARP) intervention was first outlined by the Bush administration, it did not call for any transfer of stock, of any sort, to the government. The Democrats demanded, as a price for their support, that the taxpayers “get something back” for the money they were lending to the banks. House Republicans, wise to what was going on, rejected the administration’s proposal and sought, instead, to provide insurance to banks, rather than outright cash. Their plan would, of course, not involve any transfer of stock. But Sen. John McCain (R-Ariz.) undercut his own party’s conservatives and went along with the Democratic plan, ensuring its passage. But to avoid the issue of a potential for government control of the banks, everybody agreed that the stock the feds would take back in return for their money would be preferred stock, not common stock. “Preferred” means that these stockholders get the first crack at dividends, but only common stockholders can actually vote on company management or policy. Now, by changing this fundamental element of the TARP plan, Obama will give Washington a voting majority among the common stockholders of these banks and other financial institutions. The almost 500 companies receiving TARP money will be, in effect, run by Washington. And whoever controls the banks controls the credit and, therefore, the economy. That’s called socialism. Obama is dressing up the idea of the switch to common stock by noting that the conversion would provide the banks with capital they could use without a further taxpayer appropriation. While this is true, it flies in the face of the fact that an increasing number of big banks and brokerage houses are clamoring to give back the TARP money. Goldman-Sachs, for example, wants to buy back its freedom, as do many banks. Even AIG is selling off assets to dig its way out from under federal control. The reason, of course, is that company executives do not like the restrictions on executive pay and compensation that come with TARP money. It is for this reason that Chrysler Motors refused TARP funds. With bank profits up and financial institutions trying to give back their money, there is no need for the conversion of the government stock from preferred to common — except to advance the political socialist agenda of this administration. Meanwhile, to keep its leverage over the economy intact, the Obama administration is refusing to let banks and other companies give back the TARP money until they pass a financial “stress test.” Nominally, the government justifies this procedure by saying that it does not want companies to become fully private prematurely and then need more help later on. But don’t believe it. They want to keep the TARP money in the banks so they can have a reason and rationale to control them. The Times story did not influence the dialogue of the day. People were much more concerned with the death of 21 horses at a polo match. Much as we will miss these noble animals, we will miss our economic freedom more.

Could TARP Lose Money? It Already Has!

from Businessweek:

A research firm says the U.S. lost $104 billion on the ownership stakes it took in financial companies in return for TARP funds. Losses could mount

While the U.S. government keeps doling out taxpayer money in a frenzied effort to save the financial system, more scrutiny is being paid to what the government is getting in return for its bailouts—and how big a loss taxpayers are likely to suffer in the end.

Elizabeth Warren, who heads the Congressional Oversight Panel responsible for keeping tabs on the Troubled Asset Relief Program (TARP), estimates that $590.4 billion of the total $700 billion approved by Congress has been spent or committed over the past six months. But economic stabilization efforts that have relied on the Federal Reserve's balance sheet have "permitted Treasury to leverage TARP funds well beyond the funds appropriated by Congress," the panel said in its Apr. 7 oversight report.

Although the Treasury has been taking stock and warrants in companies in exchange for TARP funds, from the start the value of assets it has received has been much less than the TARP money it has doled out. For every $100 of TARP money disbursed, the government has gotten stock and warrants worth just $66 at the time of issuance, Warren said in an Apr. 15 interview with Jon Stewart on The Daily Show. The value of those assets has deteriorated further since being issued, she said.

More Bad (Citi) Bank

from Baseline Scenario:

It’s a beautiful day today, and after Goldman and JPMorgan, I don’t feel like diving deep into Citigroup’s earnings release. But judging from the Bloomberg article, it’s a similar story, just not as good.

1. All the good news was in fixed income trading: $4.7 billion in fixed income trading revenues; falling revenues in credit cards, consumer banking, and private client.

2. Assets continue to deteriorate: $5.6 billion in new writedowns in trading accounts; $3.1 billion in charge-offs and reserves for bad credit card debt.

3. Accounting fictions save the day (the new bit): $0.6 billion in losses that don’t have to be classified as other-than-temporary (and therefore affect the income statement) thanks to FASB; $2.5 billion in “profits” because of the fall in the value of Citigroup’s own debt. The theory behind the latter is that Citi could go into the market and buy back all of its distressed debt, which would be cheaper than paying it off at 100 cents on the dollar. Also: $0.4 billion in litigation expenses avoided (previously reserved) and tax benefits from an IRS audit.

Point 3 adds up to $3.5 billion, which dwarfs Citi’s $1.6 billion profit. Why is everyone so optimistic about banks these days?

Government Suggests It May Refuse TARP Repayments, Exchange for Common Stock Instead

This news is also not reassuring the market today. This smells like a de facto nationalization! It stinks!

From Baseline Scenario:

The New York Times is reporting that the administration is thinking of stretching its TARP funds further by converting its preferred shareholdings to common stock.

The change to common stock would not require the government to contribute any additional cash, but it could increase the capital of big banks by more than $100 billion.

I hope this is one of those trial balloons they float and later think better of. Most importantly, it makes no sense. That is, there’s nothing fundamentally wrong with converting preferred for common, but it doesn’t create anything of value out of thin air. I wrote a long article about preferred and common stock a while back, but here are some of the highlights.

• If you don’t give a bank any more money, it doesn’t have any more money. By converting preferred into common, you haven’t changed the chances of the bank going bankrupt, because its assets haven’t changed, and its liabilities haven’t changed. If it had enough money to cover its liabilities, but it couldn’t buy back its preferred shares from Treasury, it’s not like the government would have forced it into bankruptcy anyway.
• If you accept the idea that converting preferred into common creates new capital, then you are implying that those preferred shares weren’t capital in the first place. From a capital perspective, then, the initial TARP “recapitalizations” did nothing, and nothing happens until the conversion. You can’t say that JPMorgan got $25 billion of capital last fall and it’s going to get another $25 billion now just by virtue of the conversion.
• Tangible common equity and Tier 1 capital are just two ways of measuring the health of a bank. Taking money that wasn’t TCE and calling it TCE doesn’t serve any economic purpose. There is a minor benefit to the bank because now it doesn’t have to pay dividends on the preferred. But otherwise you’ve just shuffled together the claims of the last two groups of claimants - the preferred and the common shareholders. You’ve made things look better from the perspective of the common shareholders as a group, because they no longer have preferred shareholders standing in front of them, but the total amount available to all shareholders hasn’t changed.

Recklessness Fought With More Recklessness

from John Hussman, Phd.-

Last week saw a continuation of the impenetrably misguided policy response to this financial crisis, which seeks to address the downturn by encouraging more of what got us into this mess in the first place. The U.S. Treasury's toxic assets plan, for instance, looks to "leverage" public funds (with the FDIC providing the "6-to-1 leverage") in order to defend the bondholders of mismanaged financials who took excessive leverage. At the same time, the Treasury plans to limit the "competitive bidding" to a few hand-picked "managers" who will be encouraged to overpay thanks to put options granted at public expense. This is a recipe for the insolvency of the FDIC and an attempt to bail out bank bondholders using funds that have not even been allocated by Congress. The whole plan is a bureaucratic abuse of the FDIC's balance sheet, which exists to protect ordinary depositors, not bank bondholders.

On Thursday, the stock market cheered a move by the Financial Accounting Standards Board (FASB) to relax FAS-157 (the "mark-to-market" accounting rule), allowing nearly insolvent financial companies to use more discretion in the models they use to assess fair value. Of course, the irresponsibly rosy assumptions built into these models have been a large contributor to this near-insolvency, because they virtually ignored foreclosure risks.

Notably, the one thing policy-makers have not done is to address foreclosure abatement in any serious way. The only way to get through this crisis without enormous collateral damage to ordinary Americans is by restructuring mortgage obligations (ideally using property appreciation rights), restructuring the debt obligations of distressed financial companies (ideally by requiring bondholders to swap a portion of their debt for equity), and abandoning the idea of using public funds to purchase un-restructurable mortgage debt ("toxic assets").

Look. You can play hot potato with the toxic assets all day long, and only outcome will be that the public will suffer the losses that would otherwise have been properly taken by the banks' own bondholders. You can tinker with the accounting rules all you want, and it won't make the banks solvent. It may improve "reported" earnings for a spell, but as investors who care about the stream of future cash flows that will actually be delivered to us over time, it is clear that modifying the accounting rules doesn't create value. It simply increases the likelihood that financial institutions will quietly go insolvent. I recognize that the accounting changes may reduce the immediate need for regulatory action, since banks will be able to pad their Tier 1 capital with false hope. But we have done nothing to abate foreclosures, and we are just about to begin a huge reset cycle for Alt-A's and option-ARMs. As the underlying mortgages go into foreclosure, it will ultimately become impossible to argue that the toxic assets would be worth much even in an "orderly transaction."

Meanwhile, in a bizarre convolution of reality reminiscent of Alice in Wonderland, the Financial Times reported last week: "US banks that have received government aid, including Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan Chase, are considering buying toxic assets to be sold by rivals under the Treasury's $1,000bn plan to revive the financial system." And why not? They can put up a few percent of their own money, and swap each other's toxic assets financed by a bewildered public suddenly bearing more than 90% of the downside risk. The "investors" in this happy "public-private partnership" keep half the upside while ordinary Americans take the downside off of their hands. Some partnership.

Oppenheimer's Meredith Whitney: TARP Funds Used Up By Write-Downs

In a report released this morning, famed analyst Meredith Whitney is saying the the TARP funds injected into America's banks are likely to be used up in write-downs ($44 billion in the 4th Quarter alone) and reserve requirements rather than lending.

Here's the Bloomberg article.

More bad loans to come, apparently! Were the taxpayer bailouts premature? Does this mean all those funds injected into the banks were wasted, if all they did was provide the banks with funds to write off more bad debt? And does it mean the taxpayers will be on the hook to pay all those bad debts -- with interest -- now that that debt has been transferred to the Federal balance sheet? Sure looks that way!