TARP – ‘Troubled ASSET RELIEF Program’? Are Banks the ‘Troubled Asset’?

Posted on October 31st, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

More TARP anger and confusion is surfacing every day. The blow back with respect to it looking nothing like what originally was sold to American tax payers is getting heavy. Even the name TARP (Troubled Asset Relief Program) makes no sense any longer, unless the banks themselves are the troubled assets to which the acronym refers.

The TARP bailout went from a 2 1/2 page $700 billion blank check for Paulson to a 400+ page porked-up money grab like none other in history – it’s still a blank check but now for the banks as well. I was told one bank is putting the funds to use buying energy-related Bonds.  Many, including myself, knew that while spending vast amounts of money strategically was needed, this was a rushed deal with so few specifics it can’t be trusted.

Within two weeks, the program has become vastly different from what the politicians begged American’s every day on TV to support and what Paulson and Bernanke stood up under oath and testified to.  That is, ‘our financial system is melting down and there is a very strong chance we will go into a depression unless we can buy troubled assets from financial institutions balance sheets, hold them for longer than the institutions can and magically make money in the future.  If we give this money to the Treasury, the banks will begin to lend to businesses and consumers once again and the system will be saved’.

During vote week, the media did all they could to get this bill passed. Every news station in the nation was showing small business owners saying that they are having to close shop because they could not get credit. It was sad but the sad reality is Missy’s Upscale Cat Grooming Boutique would have likely failed anyway due to terrible economic conditions.  The same goes for all of those auto dealers showed shutting doors on local news channels. Perhaps having credit locked saved these businesses a ton of money by hastening the inevitable.

All of a sudden now, everyone is standing up saying ‘WTF happened here?. I still can’t get credit and most of the first round $350 billion is already earmarked as investments in banks’.

Just a few weeks into this as the first decisions are being made, their first order of business was to chose nine banks to which to hand $125 billion in below market rate capital.  Heck, freaky Uncle Warren got a vastly better deal that the US Government. The second order of business will be giving $250 billion to other banks, so reported later last week.

Other media reports talk about bailing out insurance companies, auto makers and gigantic private equity/hedge funds with Cerberus already asking for money.

“GMAC LLC, the big lender co-owned by General Motors Corp. and investor group Cerberus Capital Management LP, is seeking to become a bank holding company, a move that would allow it to gain access to a piece of the government’s $700 billion financial rescue plan, according to people familiar with the talks.” Source: Wall St Journal

As many feared, the banks look to be using the money for what I would use the money for if I were CEO of a bank – to acquire distressed banks for pennies on the dollar for their foot print and deposits.

I would also use the money to batten down the hatches so I am around several years out when the skies clear. The last thing a responsible CEO would do is start aggressively lending during the largest asset revaluation and de-leveraging period in history. Who cares about returns and share price at this point, its all about survival.

And that is exactly what is happening at least at Chase according to NY Times reporter Joe Nocera who has the smoking gun.

So, When WIll Banks Give Loans?


Christmas came early at JPMorgan Chase.

The JPMorgan executive who was moderating the employee conference call didn’t hesitate to answer a question that was pretty politically sensitive given the events of the previous few weeks.

Given the way, that is, that Treasury Secretary Henry M. Paulson Jr. had decided to use the first installment of the $700 billion bailout money to recapitalize banks instead of buying up their toxic securities, which he had then sold to Congress and the American people as the best and fastest way to get the banks to start making loans again, and help prevent this recession from getting much, much worse.

In point of fact, the dirty little secret of the banking industry is that it has no intention of using the money to make new loans. But this executive was the first insider who’s been indiscreet enough to say it within earshot of a journalist.

(He didn’t mean to, of course, but I obtained the call-in number and listened to a recording.)

“Twenty-five billion dollars is obviously going to help the folks who are struggling more than Chase,” he began. “What we do think it will help us do is perhaps be a little bit more active on the acquisition side or opportunistic side for some banks who are still struggling. And I would not assume that we are done on the acquisition side just because of the Washington Mutual and Bear Stearns mergers. I think there are going to be some great opportunities for us to grow in this environment, and I think we have an opportunity to use that $25 billion in that way and obviously depending on whether recession turns into depression or what happens in the future, you know, we have that as a backstop.”

Read that answer as many times as you want — you are not going to find a single word in there about making loans to help the American economy. On the contrary: at another point in the conference call, the same executive (who I’m not naming because he didn’t know I would be listening in) explained that “loan dollars are down significantly.” He added, “We would think that loan volume will continue to go down as we continue to tighten credit to fully reflect the high cost of pricing on the loan side.” In other words JPMorgan has no intention of turning on the lending spigot.

Even Dodd, one of the largest proponent of this bill is trying to save his skin.

“If it turns out that they are hoarding, you’ll have a revolution on your hands. People will be so livid and furious that their tax money is going to line their pockets instead of doing the right thing. There will be hell to pay.”

This week Cuomo got into the act over banks using tax payer money for bonuses.

Cuomo Seeks Information on Wall Street Bonuses

October 29, 2008 3:41 PM EDT

New York Attorney General Andrew Cuomo sent a letter to Citigroup (NYSE: C), JP Morgan (NYSE: JPM), Wells Fargo (NYSE: WFC) and others banks that received money from the TARP, asking for information on bonuses.

In the letter Cuomo said, “Obviously, we will have grave concerns if your expected bonus pool has increased in any way as a results of your receipt or expected receipt of taxpayer funds from TARP.”

Other banks that received money from the TARP include, Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), Bank of America (NYSE: BAC)/Merrill Lynch (NYSE: MER), State Street (NYSE: STT), Bank of New York (NYSE: BK).

Reuters reports that even the banks are confused as to standard protocol over TARP participation.

US Banks Again Urge Treasury to Clarify Cash Plan

-WASHINGTON, Oct 30 (Reuters) – U.S. banks on Thursday reiterated pleas to the Treasury Department to clarify the purpose of its $250 billion capital infusion program.

-The American Bankers Association, which represents banks of all sizes, also urged the Treasury Department to extend the deadline to apply for the capital beyond Nov. 14.

-“Bankers across the country are under a very tight time frame, with roughly two weeks left to make the very important decision of whether to participate in the (program),” ABA Chief Executive Edward Yingling said in a letter addressed to Treasury Secretary Henry Paulson.

-Wells Fargo said on Thursday in a filing that it also had issued Treasury a warrant to purchase 110.26 million shares of common stock with an exercise price of $34.01.

-ABA’s letter said there is great anxiety about participating in the program and said that the Treasury has not made clear that it is designed to provide cash to healthy banks.

-The letter highlighted a list of issues that have yet to be ironed out. Those include proposals to restrict compensation, prohibit dividends, and explicit lending requirements.

-“It is completely unfair to ask thousands of banks across the country — and they are being explicitly asked by their regulators – to participate in a program when the impact of the program on those banks is unknown,” said Yingling.

-ABA sent a similar letter about two weeks ago asking the Treasury and banking regulators to quickly clarify the purpose of the program.

Senator Schumer is getting into the game because he feels they slipped a fast one by them in the bill that could potentially cost tax payers another $140 billion on top of the $700 billion approved.

Schumer Questions IRS Rule Aiding Wells Fargo – Wachovia

By Jonathan Stempel

NEW YORK, Oct 30 (Reuters) – A new tax ruling that could make it easier for bank mergers such as Wells Fargo & Co’s (WFC.N: Quote, Profile, Research, Stock Buzz) planned purchase of Wachovia Corp (WB.N: Quote, Profile, Research, Stock Buzz) to take place was criticized Thursday by Sen. Charles Schumer, who said it may prove too expensive for taxpayers.

In a letter to U.S. Treasury Secretary Henry Paulson and Internal Revenue Service Commissioner Doug Shulman, Schumer said that by making acquired banks’ loan losses more valuable for tax deduction purposes, the IRS ruling could cost taxpayers $140 billion, citing an estimate from the law firm Jones Day.

Schumer, a New York Democrat who sits on the Senate Banking Committee, said the ruling could save Wells Fargo alone $19.4 billion of taxes on its purchase of Wachovia, more than the $15.1 billion in stock that San Francisco-based Wells Fargo agreed to pay.

“I am concerned that the notice, which was never debated by Congress, could end up costing taxpayers tens of billions of more dollars on top of the hundreds of billions of dollars already approved by Congress in the financial rescue plan,” Schumer wrote, referring to this month’s $700 billion financial industry bailout. Click HERE for full story.

In a nutshell, it is obvious that we have not heard the end to this. It may just some down to some heavy regulation and tighter protocol on the bank’s use of TARP funds, higher cost to the banks, greater tax payer ownership etc. This is a very sensitive subject and when the politicians feel enough heat, they will act.  But painting the TARP as the largest fleecing in American history will not bode well for confidence. -Best, Mr Mortgage

13 Responses to “TARP – ‘Troubled ASSET RELIEF Program’? Are Banks the ‘Troubled Asset’?”

  1. Thanks Mr. M.

    Finally some proof of what many of us knew was in fact their clear intentions from the start…

    This “Bail Out” was just such a waste of Tax Payers money and will prove in the end to be the biggest tax burden heaped onto our society in history. We will be paying for their blunders for decades to come and the fat cats in Washington and the executives at these banks will be just fine sipping their brandy and smoking their cigars. Talk about laughing all the way to the bank. Boy did they get away with a beauty this time!!!

    Unfortunately I get the impression that People just don’t care anymore. I think the masses are just numb from everything that has happened. It all came apart so quickly that nobody really has a clue what to do. We shall see from what happens in the election next week, but my gut says voter turn out will be low as usual and the talking heads will remain in power. It will prove to be a very sad commentary of the citizens in this country if that occurs in my opinion…

  2. Where is the 24/7 media blitz now that it is evident that TARP funds have been used for executive bonuses, balance-sheet shoring up, and acquisitions?

  3. Why aren’t the taxpayers up in arms! This is insane and we just sit here and passively let this happen! Obviously the taxpayer didn’t want the bailout, but it was forced on us anyway.
    If we don’t march on Washington DC how about a civil disobedience and take a week vacation from the economy, i.e. don’t spend any money for a week, on anything! Stock up as needed but stay home, don’t go out!
    Fed Up US Taxpayer!

  4. It is happening albeit slowly. Here is Barney Frank from today:

    “I am deeply disappointed that a number of financial institutions are distorting the legislation that Congress passed at the president’s request to respond to the credit crisis by making funds available for increased lending,” Rep. Barney Frank said in a statement.

    “Any use of the these funds for any purpose other than lending — for bonuses, for severance pay, for dividends, for acquisitions of other institutions, etc. — is a violation of the terms of the Act.”

    Too bad for him it really doesn’t matter what he thinks. There are no rules being broken because the Tax Payer “Bail Out” came without strings attached for Paulson and Bernanke et al to do whatever they please with the Tax Payer money. There is no legal way for them to force the lenders to lend. They forced the money down the lenders throats so now it is entirely up to the lenders to do whatever they want to with the money.

  5. Time to rob some banks.

    I can totally see the popularity in crime rising again, like it did in the 30’s. Who will be the next Bonnie and Clyde? Babyface? …

  6. 2009 is shaping up to be a catastrophic year. Auto, credit card, homes…all these loans are lining up to crash big time. Lay-offs across the board. Govt going bankrupt at state and local levels. This is looking all-time!!

  7. Barbedwiresmile: It’s all about “Obama is the savior!”…according to cbs, nbc and abc. Sarcasm is great.

  8. Big banks are making money available to the credit-worthy, but are they borrowing. I just took 13gs from Citi at an effective 4% for 14 mos. No collateral. Chase wants me to do a 50g HELOC. Ha. No way, Jose. In 14 mos I’ll write Citi a check; I’m not paying 14% thereafter. I was temporarily carrying $3900 on the credit card for several months for a special reason. Citi’s computers must have figured they could trap me in debt at a higher effective rate. I’ve seen this happen with Chase, too. I simply phoned Citi and wiped out the debt then used their check to deposit 13gs into my bank account. I have a particular use for the money. The fact that it is borrowed means I’ll be more conservative with it than if I just used my own funds, for I don’t want to pay back Citi with those funds. That I hate debt will focus my mind even more. It’s all about educating myself in speculation. You see ALL investing these days is speculation. Those that don’t believe it have lost 30-70% or more in mutual funds. We’ve got ten years to go, at least, in this Bear Market. It has to be traded.

  9. In the previous post I should have said “but they are NOT borrowing, by and large.”

  10. Cramer today in a video on TheStreet.com said credit card companies like American Express and Capitol One aren’t in trouble unless unemployment goes above 10%. I’m certainly willing to wait for that before putting in a short.

  11. Agreed. I am not sure WHAT it will take for the American Taxpayers to wake up to the fact that they and their children are being ROBBED BLIND.

    The media is too distracted by the elections to even care, and would never report the truth on it anyway, since one of their big functions is to keep the masses calm.

    Check out Denninger’s latest article on the Market Ticker, linked from ML-Implode as a website. He always has the latest scoop.

  12. David – our fellow citizens are oblivious they are being robbed blind. Rock of Love and American Idol keep them passively entertained and outraged (“Did you hear what Simon said to that poor girl?”). It’s a shame so few want to stretch their minds about what’s going on since it’s a potential major turning point in history.

    I think Ellen Brown’s Web of Debt should be required reading for anyone voting this year. Lyndon LaRouche’s economic reports also a must-read. That would give every American an idea as to what’s going on and what the remedies are.

    The fake-bailout is treasonous on Paulson’s part. This was never meant to stimulate the flow of credit to the citizens. Recapitalization of banks, increase deposit base to offset all those future losses in derivatives that are to come (or already triggering off balance sheet?).

    If Mr. M’s theory holds true about the real TARP’s, then maybe that will wake the people up and create outrage. If not, leave it to Simon and Bret Michaels to incite the revolt.

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