|TARP Was a Bernanke Cover for Citibank Insolvency||06.09.09|
The Big PictureBarry Ritholtz
SummaryThe rush to repay TARP monies gives us another opportunity to consider why the hell this absurd financial giveaway ever happened in the first place. A close inspection suggests some dishonesty on the part of the prior Treasury Secretary.
From its inception, the TARP never made much sense. Forcing banks that did not need money to accept government bailouts was simply irrational. The basis for the TARP went through several differing rationales - it began as a recapitalization of the major money center banks, then came the explanation of removing toxic assets, then it moved to freeing up credit and making banks lend again.
Its was $700 billion dollar pile of money in search of a justification for its existence.
Most people still look at TARP the wrong way. When trying to discern what the true basis of it was, we eliminated what made no sense whatsoever, and what was left were a few strange ideas. When you eliminate the impossible, what's left, no matter how improbable, becomes the best explanation.
What was that explanation? In Bailout Nation, we discuss the possibility that The TARP was all a giant ruse, a Hank Paulson engineered scam to cover up the simple fact that CitiGroup (C) was teetering on the brink of implosion. A loan just to Citi alone would have been problematic, went this line of brilliant reasoning, so instead, we gave money to all the big banks.
Bailout Nation excerpt:
"Shortly after the TARP was passed, Paulson added to its original intent-to use the funds to buy toxic debt from the banks-with a mishmash of programs and schemes, including:
- Injection of $250 billion into the nation's banks.
- The U.S. government would guarantee new debt issued by banks for three years; this was designed to prompt banks to resume lending to one another and to customers.
- The FDIC offered unlimited guarantees on bank deposits in accounts that don't bear interest-usually those of small businesses.
- The Treasury took preferred equity stakes in the nation's largest banks (Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Bank of New York Mellon, and State Street).
Beyond those massive expenditures, Uncle Sam was to "temporarily guarantee $1.5 trillion in new senior debt issued by banks, as well as insure $500 billion in deposits in noninterest-bearing accounts, mainly used by businesses."
All told, the costs of the "bailout package came to $2.25 trillion, triple the size of the original $700 billion rescue package."
Now for the punch line: It was all an elaborate ruse, a coverup of the fact that Citigroup was busted.
As of October 2008, the other banks, while somewhat worse for wear, neither wanted nor needed the capital injection. None of them were in the same trouble as Citi. Even Bank of America's problems via Merrill Lynch wouldn't become acute until December 2008. Washington Mutual, the most troubled on the list, had already been put into FDIC receivership the month before.26 JPMorgan bought WaMu from the FDIC for under $2 billion, and Wachovia was swept up by Wells Fargo for about $15 billion. Thanks to a change in the tax law, Wells Fargo got to shelter $74 billion in profits from taxation. Instead of the FDIC absorbing a few billion in losses from Wachovia's bad assets, the taxpayers lost 35 times that amount.
The hurry to repay this cheap cash confirms that the fix was in. If this banks were really in the basd shape Paulson suggested, they would hold onto this cheap source of credit. Instead, they want to throw the yoke of government monies off as soon as possible.The desire to return to their old compensation packages for executives cannot be the only factor.
Return to 5W