The Government's financial system bailout/rescue plan focuses on the lack of lending to consumers and businesses as banks in the country preserve cash to repair their balance sheets. The TARP's Capital Assistance Program designed under former Treasury Secretary Hank Paulson provided (and perhaps forced) capital to banks of all sizes, beginning with eight institutions in late October 2008. Recently, JPMorgan, Goldman Sachs, Bank of America and other TARP recipients expressed their intention to promptly return the taxpayer capital and remove government influence and scrutiny over their businesses. If these institutions are drowning in loan losses and desperately need capital to improve their balance sheets how can they afford to repay the TARP money?
A review of last week's updated FDIC Quarterly Banking Profile (QBP) for the fourth quarter of 2008 provides several reasons why the banks can afford to repay the TARP capital. Despite posting an industry-wide quarterly loss of $32.1 billion and continued deterioration in asset qualify, the industry's cash flow position improved during the crisis:
Total deposits increased by $307.9 billion (3.5 percent) in the fourth quarter, the largest percentage increase in a quarter in ten years. Banks' balances at Federal Reserve Banks increased by $342 billion in the quarter. While 1,069 banks (out of 8,305) reported increases in reserve balances during the quarter, five banks accounted for more than half of the entire industry increase.
So banks flush with cash due to the surge in deposits are parking the money at the Fed instead of making loans. Got it, that explains the government's frustration with banks for not lending. Wait a second, reading further into the QBP shows that most institutions actually increased their loans:
Three large banks accounted for all of the decline in the industry’s loans during the fourth quarter; most institutions grew their loan balances in the quarter. Almost two-thirds of all institutions (64.7 percent) reported increases in their loans and leases, while only about half as many institutions (2,865 institutions, or 34.5 percent of all reporters) had declines in their loan portfolios.
Most banks increased their loan portfolios? Three large, over-leveraged banks restructured their loan portfolios while 64.7% of banks increased lending. Banks simply do not need additional capital to meet demand for loans to qualified borrowers. Furthermore, TARP capital costs banks 5% annually and comes with incredible intrusion into their business decisions. With strong deposit growth most institutions have sufficient cash to meet their funding needs and it should come as no surprise that many want to return the TARP funds promptly. Perhaps the Fed and Treasury, in the face of declining credit growth,
have lost sight on the real reason for the lack of bank lending: a lack
of demand by businesses and consumers. No bailout or new Fed lending acronym will spur demand, only time will heal these wounds.
Note: Please do not take this post as an endorsement to invest in financial stocks as many significant risks remain.
Former NY Governor Eliot Spitzer investigates the nature of the AIG bailout in two stories at Slate.com. The second piece, The Real AIG Scandal, Continued, looks at Goldman Sach's comments regarding the additional capital requested by Goldman to secure its credit default swap trades with AIG.
I particularly agree with this comment regarding the Government's response to the AIG bonus payments:
Maybe one or two of the more than two dozen government entities now
beating their chests about bonuses can redirect their energies to this
much larger issue confronting us: Who signed off on this $80 billion
bailout—now approaching $200 billion—and why?
Check out Spitzer's articles on AIG, they discuss a side that received little press coverage. Spitzer focuses on the decision to pay 100% on the credit default swaps (CDS) that AIG wrote on mortgage backed securities and corporate debt using the taxpayer bailout funds is important.
CDS are agreements between two parties without the benefit of a clearinghouse guarenteeing performance. Therefore, counterparty risk a factor in determining the price set by the parties of the CDS contract. The decision to pay the full value on the CDS contracts (using taxpayer money) when AIG was insolvent was made without debate. In a bankruptcy/restructuring of AIG the CDS counterparty would certainly received less than 100% of the insured value. This decision makes the AIG bailout of $173 billion look more like another broad financial system bailout.
The Federal Reserve's FOMC Statement today led to large rallies in treasuries, foreign currencies and the stock market. Breaking down the statement in comparison to the previous Jan 28, 2009 statement shows the following:
- Target range for the federal funds rate remains at 0 to 1/4 percent and the wording regarding the duration of the low rates was unchanged at "an extended period of time."
- Inflation expectations were also unchanged with the FOMC expecting "inflation to remain subdued" and continuing to "see some risk that inflation could persist for a time below rates that best foster economic growth and price stability."
- The Committee's opinion on the economic recovery improved as they removed the following statement that appeared in January's statement from today's release, "the downside risks to that (economic) outlook are significant"
- Lastly, Bernanke & Co. pulled out the bazooka, helicopter, tank and all other monetary weapons of mass destruction with the statement about further increasing the Fed's balance sheet. The FOMC committed to purchase an additional $750 billion of agency mortgage-backed securities as well as an additional $100 billion agency debt and the big market mover of $300 billion of longer-term treasury securities over the next six months.
Today's announcement saw massive intraday reversals in the price of gold ($50+) and in the ten and thirty year treasury bonds (up 4+ and 5+ handles, respectively). The most interesting move is the large drop in the dollar index. This daily chart shows the index breaking down after a two week slide: