U.S. ends TARP with $15.3B profit
money.cnn.com
money.cnn.com
Of course the qualifications for this special treatment were: being very big, being politically well-connected, and having taken stupid risks. So every well-run, medium sized bank that didn’t have an army of lobbyists got screwed. And now we see that our favorites have prospered and declare “profit!” while ignoring the red ink for everyone else in the economy.
The "toxic assets" that TARP bought weren't as bad as people feared. But the market wasn't buying them because nobody knew their true value. Everyone lost faith in the ratings agencies so it was chaos.
Small banks benefited from this as well. It stabilized the market for mortgage securities, which small banks had large exposure to. It solved the liquidity crunch so the banks could stay open.
If the big banks fail, it would take the small ones with them. It would also take a lot of good businesses with it. The whole economy runs on lines of credit.
That process would have bankrupted nearly every major bank. Buying the toxic assets was an extreme bailout for the banks, that were carrying trillions in liabilities that suddenly went under. Most of the majors were completely insolvent.
Tarp both directly and indirectly included the autos. Directly, because the auto bailout was funded under tarp, and indirectly because the way cars are sold - through loans, was about to be a broken process. if you remember, companies were no longer processing orders of auto parts companies unless they were paying in cash, for fear they might go under. The same situation happened in the banks. if the autos had gone, just that alone would have added another 2 million to unemployment in a month. Ford, the healthiest of the autos would have gone under too - as the companies that made GM and Christler's parts also made theirs. This alone would have destroyed the world economy for decades, let alone the financials all going kaput all at once.
there were aspects of TARP that could have been implemented better, such as stipulations on c suite bonnuses, but overall TARP was needed or else we would be in a really bad place right now.
There were in fact willing buyers after the great depression. You're admitting I'm right by pointing out the great depression: all of those assets were eventually purchased by the market, that's a tremendous example of what I'm talking about. The only thing you can say is: it took too long, but that's merely an opinion. Besides, the government not only caused the great depression, but then made it much worse. I'd argue the market would have corrected dramatically faster had the government & Fed not screwed things up so massively.
The problem in this case was the market price would have bankrupted the banks that were sitting on worthless loans. And the price deterioration in the housing market from the sinking toxic assets would have wiped out trillions in wealth for the middle class.
https://en.wikipedia.org/wiki/Keynesian_beauty_contest
https://en.wikipedia.org/wiki/Pluralistic_ignorance
The market can't buy value if everyone believes everyone else believes that the value isn't there. (Actually you can go any number of layers of belief; what you need is shared knowledge, in the sense logicians use the term.)
Everyone in the market is trying to guess what everyone else in the market will do, who are also trying to guess what the market is doing. Once you crash, you don't just need sentiment-of-value to improve, or even sentiment-of-sentiment-of-value. You need sentiment-of-sentiment-of-sentiment...etc.
So, you can get grid-lock. Which is why you need the government to step in.
There were probably a lot of structural issues that prevented many of the large players to purchases these assets though (mostly liquidity). This is probably the justification the Federal Reserve used to purchase said assets.
One program that doesn't really get much attention in the media (maybe because it was more nuanced and complicated?) was the TALF program [1]. I did a summer internship in 2009 with the Federal Reserve Bank in New York and it really seemed like that program was their primary concern because it was much more directed at the private loan market with targeted loans at "normal" spreads (whatever that meant at the time...) To date, I guess, they've made ~$173m [2]. The design of TALF was wayyy different than TARP, both in scale and objective. At the time I was working on drilling down on the demographic data of who, exactly, was applying for TALF loans. Really interesting stuff.
Not sure we'll be able to actually understand the ramifications for a while.
[1] http://en.wikipedia.org/wiki/Term_Asset-Backed_Securities_Lo... [2] http://blogs.wsj.com/economics/2013/01/15/treasury-turns-173...
It would have been possible to restore confidence in other ways. Traditionally, good assets are collected into good banks, and bad assets are dumped into bad banks. The bad banks get thrown under a bus, and the good banks get full government backing until trust is restored. It's a tried and tested formula that has worked in other countries.
What TARP didn't solve was the endemic corruption and criminality that caused 2008. (Remember how some banks launched foreclosure farms that rubber-stamped property seizures - and sometimes stole property that didn't even have an outstanding loan?)
Unfortunately the corruption goes all the way to the Fed and the Congress, so a full restoration of Glass-Steagall, and jail time for the main perps, was never going to happen.
A few billion in 'profit' sounds like a lot, but it's a drop in the ocean compared to the incredible destruction and loss of economic potential caused by the persistent fraud, aversion to adult supervision, and deep-seated social irresponsibility endemic at all levels of the financial industries.
The US is a hyper regulated, highly taxed welfare state. The US economy carries more regulations per capita than any other country on earth, and it passes more new regulations per year than anyone else.
You can't call a country in which the total government system extracts 40% of the economy - effectively a government system larger than the entire economy of Japan - a Capitalist country. It's not even close.
Nor can you call the world's largest welfare state, with the largest entitlement programs, a Capitalist country.
Where's the Capitalism? Capitalism requires, at a minimum, very low taxation, few economic regulations, strong protections on property rights, low friction for trade, and very little government intervention into the economy. The US has almost the opposite of that and has for a very long time.
Ahem. Your lack of perspective is painful. May I recommend [1], which ranks countries by both tax burden and government spending as a percentage of GDP. The US is in 60th place in terms of relative tax burden, and 46th place in terms of relative GDP expenditure. Of particular note: please look at the countries ranked below the US in either measure, and tell me which of those both fit your definition of "capitalism" and are places you'd actually want to live.
You can only say that US is "a hyper regulated, highly taxed welfare state" if your baseline of comparison is some wholly delusional Libertarian-land. No such place exists. In the real world of developed nations, keeping civilisation functioning requires both taxation and spending. By that measure, the US is relatively lowly-taxed, and miserably ineffectual at delivering a welfare state.
1: http://en.wikipedia.org/wiki/Government_spending#As_a_percen...
Libertarian land doesn't exist? You're openly admitting I'm right that the US isn't a highly Capitalist nation, and you're attempting to mock me for being right, hilariously. The US a century ago was a very low regulation, very low taxation, very high Capitalism country. Hong Kong at times has also come very close to qualifying for libertarian land.
As I noted the government's take of the economy is ~40%. That alone automatically disqualifies the US as a Capitalist nation. You can't have a government system that large and still pretend the US is a low regulation, low tax, small government, Capitalist system.
The countries you're comparing the US to, proves my point further: the US is under no circumstances a capitalist country. It's not even close. Comparing the US to middling, poorly run welfare states (the vast majority of all countries), is exactly what I'm talking about.
I never said the US had the worst tax burden. I never said the US government system extracted the highest % of GDP. I said the US was blatantly not a Capitalist country because of how large those figures are. I'm right, all those other countries you're comparing the US to are not highly Capitalist countries either.
Show me the tax burden as a % of GDP for the US in 1890 or 1910, or the government expenditures as a % of GDP for the same era. And I'll show you a Capitalist system.
You want an example of a low figure country I'd like to live in? Sure, Singapore, from your wiki list: 13% tax burden of GDP, and 17% govt expenditures of GDP. No coincidence they've enjoyed one of the greatest booms in world history.
I've been nothing but nice here, and I've been mocked, derided, and called names for it. For debating something as simple and non-emotional as economics, and I supposedly live up to some negative stereotype.
1) I'm not a libertarian.
2) I didn't argue anything inflammatory or negative. I've said nothing mean, at all. I said a highly capitalist country can't have high taxation, a large government, and high regulations. I'm absolutely correct about that. By definition, that cannot be a very capitalist nation.
Pointing out that the US has a more capitalistic economic than other countries currently enjoy is largely irrelevant in deciding whether or not it can be called capitalistic.
[1]https://www08.wellsfargomedia.com/downloads/pdf/invest_relat...
http://www.treasury.gov/initiatives/financial-stability/repo...
Reading the press release is nice, but it does help to actually read the report to Congress.
Here are the top four [2]:
Citigroup - 2.5 T$
Morgan Stanley - 2.0 T$
Merrill Lynch - 1.9 T$
BOA - 1.3 T$
[1]: http://www.gao.gov/new.items/d11696.pdf (Table 8, PDF page 144)
[2]: http://www.sott.net/article/250592-Audit-of-the-Federal-Rese...
For example, an overnight PDCF loan of $10 billion that was renewed daily at the same level for 30 business days would result in an aggregate amount borrowed of $300 billion although the institution, in effect, borrowed only $10 billion over 30 days. In contrast, a TAF loan of $10 billion extended over a 1-month period would appear as $10 billion. As a result, the total transaction amounts shown in table 8 for PDCF are not directly comparable to the total transaction amounts shown for TAF and other programs that made loans for periods longer than overnight.
Your fully unreturned is incorrect, many of the loans used to create those totals were payed back the very next day after they were made.
A more interesting analysis would show a plot of the outstanding loan balance each institution maintained over time.
All loans extended under this facility were repaid in full, with interest, in accordance with the terms of the facility.
A lot of unnecessary M&A activity is powered by cheap loans. On the other hand, if conservative investments were returning a decent return, the VC industry wouldn't be awash with cash.
Here is a graph from CNN about it http://money.cnn.com/2011/02/16/news/economy/middle_class/
https://www.bcgperspectives.com/content/articles/financial_i...
The total number of millionaire households (in U.S. dollar terms) reached 16.3 million in 2013, up strongly from 13.7 million in 2012 and representing 1.1 percent of all households globally. The U.S. had the highest number of millionaire households (7.1 million), as well as the highest number of new millionaires (1.1 million).
It is the common man who didn't see any benefit from TARP.
The winners were the narrower subset of Americans who skewed older and wealthier (enough to have already owned a home).
"The homeownership rate is computed by dividing the number of owner-occupied housing units by the number of occupied housing units or households."
Does the home ownership rate go down, along with that absolute and percentage increase in the number of people who don't own a home?
And if what we're trying to do is figure out what the common man (whatever that is) rents or owns, it's a terrible and misleading measure to use.
Among 30-34 year olds, the home ownership rate is above 50%. Among 25-29 year olds, it's still 37%, which is substantial.
The stats say the vast majority of sub 30 adults are renting, not living at home with their parents. That group is the only majority renter group and has been for decades.
208 million people in the US live in a home that is owner occupied, and that represents 79.5 million homes. Those 79.5 million homes have a mere 2.6 people per home. It's blatantly obvious the 'common man' owns a home.
74 million of the US population are non-adults and can't qualify for home ownership typically. That leaves 240 million people.
Just the fact that there are nearly 80 million homes that are owner occupied, proves my point. You can't have 80 million owner occupied homes, and pretend it's the minority, when the total sum of all households in the US is 123 million.
There are 43 million households that are renter occupied, representing 104 million people. By definition these people are the uncommon, the minority.
And it's worth pointing out one of your subconscious biases at work here. You say: "Nowhere on earth, at any point in time, has it been common for a 24 or 26 year old to own a home." And sure, that's true. But they comprise just as much a part of the common man as a 35 year old white man. Just because someone is young doesn't mean you can write them off as "oh they don't count as a typical American!"
14% of people 24-34 live at home with their parents. That's a substantial number. If there are 50 million people in that age group (a guesstimate), that means you're deciding to count 7 million people--a number that is increasing faster than the rate of population growth--as living in owner-occupied housing, when that's misleading as to their actual economic status. And there are similar setups--cousins living with family members, friends living with friends--who aren't counted either. And, given the socioeconomic makeup of most Hacker News readers, I'm guessing the typical reader doesn't have much exposure to demographics where this is a big trend.
But strictly speaking, it's a Troubled Assets Relief Program, not Middle Class Enrichment Program, so not sure where those expectations come from.
Further, all homeowners got bailed out via a multi-trillion dollar asset inflation program that re-inflated housing prices. If you own a house, you saw a massive benefit from that bailout.
The government & Fed ran programs that directly, by design, benefited all homeowners, to the tune of $5+ trillion.
http://www.bloomberg.com/news/2014-03-14/blackstone-s-home-b...
Home equity has climbed by $4+ trillion in just the last 2.5 years, an increase of 64%; from $6.7 trillion in the first quarter of 2012, to roughly $11 trillion today.
Home owners have benefited massively from the Fed bailout, via low mortgage rates and cheap refinancing. Home owners have gained probably $8 trillion since the bottom, across essentially every market in the US.
You're definitely right about prices have definitely gone up[1] (side note: Case-Shiller Index isn't close to 64% nationally), but all of this is all on paper. Residential home sales are still at '08/'09 levels; it's hard to translate those paper gains into liquidity [2]. I also agree with the low mortgage rates comment, however, all of the QE money is going everywhere but the housing market. Even if you have a stellar credit rating, it will be incredibly difficult to get a loan. Hell, even Ben Bernanke couldn't refinance his mortgage, which is both ironic and absolutely insane when you think about it [3]. Six years post-TARP, the housing market and American economy, still have plenty of structural issues. TARP was a monumental decision that will forever affect every part of America and housing prices cannot be the only metric or lens that we judge TARP's performance on.
[1]Case Shiller Housing Index - http://us.spindices.com/additional-reports/all-returns/index... [2]https://www.flickr.com/photos/126862837@N04/15451411994/ [3]http://www.bloomberg.com/news/2014-10-02/you-know-it-s-a-tou...
Let that sink in for a second, the banks sunk the economy, and the government helped them make huge profits.
Of course, without government intervention, they'd get nothing in bankruptcy.
I think losing 95% of your investment is enough to avoid huge moral hazard.
Society benefits because letting them fail sinks the economy much further.
There were multiple options for saving the US banking system, which was insolvent as a whole, since the supposedly not-insolvent banks would have gone down the tubes instantly had any of the larger insolvent banks been allowed to fail, due to their derivatives exposure and other counter-party risk.
For example, the banks could have been nationalized, and the charade of continuing large management bonuses could have been avoided.
What we got as a result of TARP and related bailout approaches is an unrepentant risky TBTF system that could explode again, and a compensation structure that fuels income inequality. Feh.
At the end:
> Overall, the auto bailout was the one big money loser for TARP. Even with the Ally sale, taxpayers lost about $9.2 billion.
Do they mean it could have been 15.3 + 9.2 billion in the end for the total $24.5 billions in profit?
I don't think taxpayers lost anything if the program broke even.
If they bailed out the banks and the car companies and the car companies earned money, the treasury would have profited much more.
But then, the treasury didn't do the bailout to profit. They did it to short-circuit a potential Great Depression. From that standpoint, it was a success at any price.
So here's where the numbers come from :
1) +15.3 billion : auto industry + financial industry
which is 0.06% per year, for 3.5% over 6 years
2) -9.2 billion : auto industry
3) +1.3 billion : Ally Financial
Therefore:
4) (inferred) -10.5 billion : auto industry - Ally Financial
5) (inferred) +24.5 billion : financial industry TARP
First caveat. Given the risk on the troubled assets, this is a pathetically bad return over 6 years. These were the worst of the worst, something everybody else would have demanded something like 13-14% interest per year for in 2008.
Second caveat, we all know why the finance industry came out ahead (not necessarily a good publication in this link, just the first reasonable link on Google for this subject) :
http://www.financialsense.com/contributors/greg-weldon/stock...
So really, the full story is, $426 billion TARP + $3 Trillion in loans to banks was sufficient to convince the banks to pay $450 billion to the US government. They have not, of course, paid back the 3 trillion, nor are they capable of doing so.
Third caveat, a lot of that $3 trillion has gone into stock buybacks, effectively giving the money to investors in S&P 500 companies (especially financials). The idea is that the S&P should continue to increase in value, despite the money flow having stopped (mostly). History teaches though, that when this happens, a more common result is a stock market crash. That doesn't happen until loans aren't free anymore though (currently the FED says rate hike will happen around June).
Frankly if you're in a startup, make sure to have a job at Google, Yahoo or Amazon or some large player by the time the rate hikes happen.
They can crash the Soviet Union, tank modern Russia, break the pound, prop up Japan, build out trillions in manufacturing in China, encourage $20 trillion in new debt creation in China, crash oil with a stronger dollar, nominally inflate stock markets with asset inflation programs, rig the commodity market and libor, squeeze countries into default via currency or bond manipulation, and so on.
"The 'small profit', along with most of the so-called 'recovery' of Uncle Sam’s $426 billion initial investment, was ground out of the backs of America’s savers and depositors; or it was scalped from the massive financial bubbles the Fed has generated in the Wall Street casino." [2]
[1] http://www.amazon.com/The-Great-Deformation-Corruption-Capit...
[2] http://davidstockmanscontracorner.com/the-greater-abominatio...
http://data.bls.gov/cgi-bin/cpicalc.pl?cost1=425.00&year1=20...
Nice spin though. Seems to have duped most of the 1337 h4x0rz here. Tell us CNN, how much of that QE* money are we getting back?
How did banks manage to pay back this loan ? What kind of condition did the government give ?
Sure, Detroit might be dead (isn't it already?) but there would also be a huge infrastructure for Tesla to buy on the cheap.
Imagine a world in which Tesla and other startups are the only car manufactures in the US? (Well, save for Ford which didn't need a bailout)
What sort of opportunities would there be for FinTech companies sans Goldman, et al? How many small businesses could have been started with $475 billion?
If they invested that money in S&P500, they would get 130% back.
According to the article, the USG put $426B in and made $15.3B. That's a 3.5% return on that money over 5+ years. As an investment, that seems terrible. If the USG had just bought an S&P500 index fund on Oct 3, 2008, they would have made something like +70% (Source: Yahoo Finance). Again, this is just looking at TARP like an investment by the government.
1) QE has held down the cost of US debt, probably saving a trillion plus in interest payments the last five years alone.
2) QE has devalued the real value of foreign held debt. Eg China + Japan's $2.5+ trillion in US debt they're holding has lost a lot of real value courtesy of QE. That's less that has to be paid back in theory (it won't be paid back in reality). Saving hundreds of billions regardless.
3) A lot of dollar assets are held overseas (and of course commodities trade in dollars), but the primary beneficiary of the dollar-based asset inflation program has been the US stock market and US real estate market. Foreigners are partially subsidizing, via the dollar global reserve standard, a huge rebound in US asset prices. It's a form of redistributing wealth from the rest of the world that uses dollars, back to Americans that own real estate or stocks.
In effect while the economies of Japan and most of Europe have been in ten year recessions in real terms, they're paying for the US economy to be doing relatively very well right now. All partially accomplished by the US Dollar standard, that can be freely abused by the Fed to prop up the US at the expense of the massive foreign dollar holdings.
4) QE has been partially paying for government employment, welfare benefits, social security, military employment et al. If the US couldn't have used QE to fund the huge hole in its budget, the US Govt. would have been forced to divert a large amount of money to paying higher interest to draw in buyers for that debt (or the US Govt would have had to slash its budget big time). Instead, the US was able to keep people floating in jobs or with food stamps or whatever, people who otherwise would not have been ok at least near-term, and the net cost of them not being ok would have been even higher long-term than the cost of the last five years.
5) The US residential housing market alone has gained something like $10 trillion in value since the bottom, due in part to the Fed's program of holding down interest rates. That gain drastically offsets the cost of QE. However, QE also helped inflate the stock market substantially, according to the Fed's own words on the matter, so there's a few trillion dollars more. The asset inflation side of QE has been wildly successful so far - the primary question is whether everything will ultimately have to crash back down, post QE and or with higher interest rates.
The capital side might change, as bonds may fall in price before the Fed sells them.
They invested $426 billion 2008 dollars and got back $438 billion 2014 dollars. Officially inflation was 9.7% so they lost about $20 billion.
The idea that the government could just print money and solve the problem is naive. The costs of that bailout are reflected in a lower living standard and massive government debt as well as further imbalances.