TARPs and MREs

Seeing as how the big news tomorrow will be the financial stimulus, I wanted to re-post this blog post from Robert Reich (Secretary of Labor under Clinton, all around economics guy, and adviser [I believe un-official] to Obama).

I'm going to intersperse my sardonic comments. To sum it all up, I think Reich gives some clear, albeit obvious guidelines on what should happen to any further money, so that it does not end up like the TARP. He is phrasing his comments in terms of the second half of the TARP funds, but I think it should apply to anything applied financial-wise.


What Should Be Done With The Next $350 Billion of Taxpayer Bailout Money: Criteria for TARP II

It's difficult to make the case that the first $350 billion bailout of Wall Street -- so-called "TARP I" -- fulfilled its goals, unless one argues that the Street would have imploded without it, which is pretty much what Hank Paulson is saying these days. And since it's impossible to prove a counter-factual, especially when the Treasury was never clear about TARP I's goals to begin with, Paulson may have a point. But the easier and probably more correct argument is that American taxpayers wasted $350 billion. [seems to me that someone was arguing that this would happen back in the fall!] No one knows exactly where it went -- at least two recent reports reveal that the Treasury had no idea [he's talking about the "capital purchase program" as listed in the chart in my earlier post, which 'only' lost 18%]-- but we do know the money did not go to small businesses, struggling homeowners, students, or anyone else needing credit, which was the major public justification for the bailout. In all likelihood, on the basis of the skimpy evidence we now have, the money went instead to bank shareholders in the form of dividends; to bank executives, traders, and directors as compensation (directors of major Wall Street banks continued to pull down an average of $350K each in 2008 merely for sitting in on a handful of board meetings at which they obviously didn't oversee very much); to some holders of bank debt; and to platoons of lawyers, accountants, and other financiers who have advised the banks about other places to park the rest of the money in the meantime.

Congress is now about to give the next Treasury secretary an additional $350 billion, [or $800B, or make a bad bank, or whatever] as the second tranche of the bailout. One hopes that the new administration will use it better. Some suggested guidelines:

1. Do not use any of the money to buy stock in -- that is, to "recapitalize" -- the banks. This is a sinkhole of cosmic proportion. Citigroup, to take but one example, has so far received $45 billion of taxpayer cash since early October (along with some $250 billion in taxpayer-supported guarantees from the Fed for junky assets on Citi's balance sheets), and is in far worse financial shape than it was three months ago. Perhaps, someday over the rainbow, these shares in Citi along with Citi's lousy assets will be worth more than taxpayers paid for them. But we're not in Wonderland yet and probably never will be. Giving Citi or any other big bank more taxpayer money is analogous to giving it to Bernard Madoff. It's a giant Ponzi scheme. The money will disappear. [yes! this is what I, and those other economists I posted about are saying! BUYING STOCK IN A FAILING COMPANY HELPS NOBODY]

2. Do not use the money to buy the banks' "troubled" assets. This might have made sense a year ago when the proportion of such assets -- which include mortage-backed securities as well as loans to private-equity partnerships that pissed them away -- was relatively small. But these days a huge and growing proportion of bank assets are "troubled." (It's also a huge waste of taxpayer dollars for the Fed to exchange them for Treasury bills.)

3. Prohibit any bank that gets TARP II funds from issuing dividends, purchasing other companies, or paying off creditors.

4. Bar any bank that gets TARP II funds from paying its executives, traders, or directors more than 10 percent of what they received in 2007.

5. Require that any bank getting TARP II funds be reimbursed by its executives, traders, and directors 50 percent of whatever amounts they were compensated in 2005, 2006, 2007, and 2008. This compensation was, after all, based on false premises and fraudulant assertions, and on balance sheets that hid the true extent of these banks' risks and liabilities.

6. Insist that at least 90 percent of the TARP II money be used for new bank loans. If the banks cannot find suitable borrowers, they should return the money. [I think #3, 4, 5, and 6 should go without saying, if they get anything at all]

You may judge these conditions harsh. I think them prudent. They may force a number of big banks to go into chapter 11 bankruptcy, which would not be the end of the world but perhaps the beginning. [it is absolutely ridiculous that people seem to think we should have a banking crisis in which everyone gets to stay in business after they caused one of the largest asset bubbles in history] At least then we'd find out what was on their balance sheets, because they'd have no choice but to sell off some of their junk, even at fire-sale prices (believe me, if the price is low enough, there are investors around the world who will buy them); they'd have to negotiate with their creditors and pay some of them off; many of their CEOs would be fired and directors replaced, which they should have been already; and most of their shareholders would be wiped out, which is unfortunate for them but, hey, they took the risk. In other words, these provisions would force the banks to clean up their balance sheets. This is the only way to get them to start lending again. [or, maybe "somebody" should "take control" of these banks to force these things to happen.]

Meanwhile, Congress should attach to TARP II -- or to the upcoming stimulus bill -- a small change in the bankruptcy law allowing homeowners to renegotiate their mortgages on their primary residences (as owners of second homes and commercial real estate can already do). The practical effect will be to give homeowners more bargaining leverage with their mortgage banks, and save at least 800,000 homes from foreclosure. Yes, in theory, holders of mortgage-backed securities will take a hit but as a practical matter they've already taken a hit because the securities (and the securities in which they're wrapped) are already deemed to be junk. At the least, this change will put a bit of a damper on the rising number of foreclosures. A home that's occupied by a family paying something on their mortgage is far better than a home that's empty, on which no one is paying anything.


The only problem is that this week Reich has taken a step back from the sterness of this post. Perhaps with the stimulus bill looming, or for some other reason (note in this one where he mentions that Obama's officials are nodding their heads at the bad bank), he is trying to be more diplomatic and picking his battles.

But one thing is perfectly clear: TARP was a lesson in exactly what not to do. The money vanished, and shit is still broken. No more buying assets, no more buying stock, no more cushioning balance sheets so that investors can get the hell out. It's time to shut the doors, and open the books. Somebody needs to take control, and it sure as hell isn't these bozos.

Trust me--time is running out here. The stimulus isn't going to come in time, not before things get bad. I believe the ticker symbol you are looking for is MRE.

No comments: