Tuesday, September 15, 2009
Uncle Sam, Speculator
"Critics of the Troubled Asset Relief Program said the government was giving away taxpayer funds when it invested in financial institutions last fall. The government insisted the investments would show a profit. Who was right? So far, it seems the government, according to a report from SNL Financial. ... Including warrants and dividends, government has received $44.7 billion back. The total rate of return to the Treasury for all companies that have repaid TARP funds and redeemed their warrants is 10.16%, according to SNL data. The warrant repurchases have accounted for a large portion of the returns--7.15%. ... The biggest returns are chalked up from Goldman Sachs Group, Morgan Stanley [MS] and American Express, which yielded 14.18%, 12.68% and 12.23%, respectively. ... And this analysis doesn't include huge government investments in American International Group or the mortgage giants Freddie Mac or Fannie Mae, let alone TARP funds funneled to auto makers General Motors and Chrysler", Stephen Grocer at the WSJ, 28 August 2009, link: http://blogs.wsj.com/deals/2009/08/27/tarp-scorecard-paybacks-have-yielded-total-return-of-1016/
"Taxpayers are getting a reward for the trillions of their dollars US authorities put at risk in a bid to save the financial system. But they still face big potential losses from the rescue effort, which will remain on the government's books for many years. ... The government didn't set out to turn a profit; it set out to prevent the collapse of the financial system and the damage that would have caused to the economy. ... The Treasury is sitting on some very large risks, including $248.8 billion in investments to banks and [AIG] that haven't yet been paid back, and many of those banks are in a weaker position than those that have returned their [TARP] money. ... 'It is not a bad return for all of the extra added benefits [of stabilizing the financial system],' said John-Patrick O'Sullivan, a senior banking analyst at SNL Financial, a research firm specializing in banks. ... Dividend and warrant payments from those firms worked out to a 7% annualized rate of return for the government on its investments, he estimated. ... On a portfolio that averaged $2.1 trillion, the net income in the first half of the year amounted to roughly a 1.5% annualized return, not a large return, but more than what the Fed would have earned had it put the same sum in short-term Treasury bills", my emphasis, Jon Hilsenrath at the WSJ, 1 September 2009, link: http://online.wsj.com/article/SB125176287995474339.html.
"Indeed, during the Great Panic of 2008, American taxpayers reluctantly made a series of very expensive investments in blue-chip companies--Fannie Mae, AIG, General Motors. But it's been hard to see the returns of these efforts, since they were designed to avert a total meldown. ... We can't extrapolate the early returns to the broader pool, due to what economists call adverse selection. In engliosh, it means the healthiest banks fled like thieves (not the flacks: that's hyperbole!) once they could raise private capital, leaving behind the weaker institutions", my emphasis, Daniel Gross (DGI) at Newsweek, 7 September 2009.
Yves Smith (YS) slams the similar FT and NYT articles at Naked Capitalism, 31 August 2009, link: http://www.nakedcapitalism.com/2009/08/more-bogus-bailout-reporting-as-big-banks-repay-money-us-sees-a-profit.html. Between the FT, NYT and WSJ, it appears these stories were coordinated. Yes YS, "the spin is in". Why not? Look at the wonderful job Zimbabwe Ben (ZB) has done as Fed Head. That's why these stories are appearing now, to provide cover for ZB's recent reappointment. YS writes, "Credit 101 is that your best borrowers repay first". Amen.
Are these SNL guys kidding? 10.16% is a good return on these "investments"? SNL excluded the value of guarantees from the investment "base". $40.6 billion in, $44.7 billion back, a 10.16% profit. Wow. MS was $6.71 in October, it's $29.53 now, a 340% increase in 11 months. 10.16% on the "investments" which were repaid does nothing for me. It excludes the effects of public subsidies to these firms through suppressed interest rates. Would there be any "return" if the public's "lost interest" is included? Compare Uncle Sam's return with Lloyd Blankfein's, my 6 September 2009 post: http://skepticaltexascpa.blogspot.com/2009/09/goldman-speaks.html.
How does DG know what the "investments" were designed to do? I think they were designed to bail out Wall Street. At least he recognizes "adverse selection". DG's piece reminded me of the "old days", i.e., when Newsweek had more critical economics columnists like Henry Hazlitt, 1946-66 and Millton Friedman, 1966-84. How we could use them now.
YS is almost certainly correct, these look like planted stories. SNL must be composed of fools, or worse. The Fed's "making" a profit is preposterous. It issues non-interest bearing paper called Federal Reserve Notes! Imagine, the "capital market line" is so flat, that the Fed's portfolio of garbage only made 1.5% over T-bills. This might mean T-bills are garbage. Got gold? Get more. Got T-bills, have an anxiety attack!