Now that the bulk of the crisis has passed, and the panic has subsided, the banks want to return the money, no strings attached. Return the cash, leave the regulatory environment alone, write downt h warrants, and move on with our lives.

My response is, “Not so fast.”

Let’s not forget how this occurred: A radical deregulatory scheme let these companies operate with little or no oversight. Without adult supervision, they promptly blew themselves up, destroyed billions of dollars in shareholder value, cost the global economy trillions, and scared the beejesus out of everyone else.

When these companies were circling the drain, nobody but Uncle Sam (and the Taxpayers) — and for only Goldman Sachs and GE, Warren Buffett — was willing to fund these companies. The risk levels were extremely high, the potential damage to the dollar, the taxpayer, inflation, and the US credit rating was also very high. As is, the US is still out of pocket trillions of dollars, and are likely to see major losses. Prudent well managed firms are seeing their expenses go thru the roof — especially FDIC insurance.

This is not money that you get to return and say, Thanks, but we no longer need this.

Instead, there are several things that should happen, if our elected officials and regulators have any savvy:

1) The Warrants should be placed into a Trust for the benefit of taxpayers, where it will be held for 5 or 10 years. Then, it can be liquidated for the benefit of the Treasury.

2)Re-instate Glass Steagall, revert the leverage rules, repeal CFMA;

3) Adequately fund and staff the SEC;

4) Remove the incentives for excess risk taking  (i.e., private profits but socialized losses)

5) Align compensation systems with actual risk adjusted profits.

Lastly, I would like to see a bi-partisan, Blue Ribbon panel put together analyzing why this occurred. Put an Elizabeth Warren or a Paul Volcker in charge, and give them 6 months to create a comprehension assessment of what went wrong, along with recommendations on how to fix it.

But a no-strings-attached, return-of-the-money, back-to-business-as-usual ? Not so fast . . .

>

Source:
U.S. Weighs How to Let Banks Give Money Back
LOUISE STORY and ERIC DASH
NYT, May 19, 2009

http://www.nytimes.com/2009/05/20/business/20repay.html

Banks seeking to repay TARP billions must wait until June 8
Ronald D. Orol
MarketWatch, May 19, 2009, 5:22 p.m.

http://www.marketwatch.com/story/goldman-morgan-stanley-ask-to-repay-tarp-reports

Fed to Respond to TARP-Repayment Applications in June
Scott Lanman
Bloomberg, May 19 2009

http://www.bloomberg.com/apps/news?pid=20601087&sid=a7MkO._fo1fw&

Category: Bailouts, Credit, Investing, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

44 Responses to “Recall Why TARP Funds Were Necessary”

  1. km4 says:

    In prepared remarks to the Senate Banking Committee, Treasury Secretary Timothy Geithner is telling senators that consumers and investors need protections against manipulation and deception in financial services.

    Perhaps waving with his right hand as his left hand gives trillions of TARP $$$ to the too big to fail banks then he jerks off !

  2. Mannwich says:

    Wall Street wants to just proceed like nothing happened. If the O admin allows it, that’s just what will happen and we’ll be back here again at some point down the road.

  3. manhattanguy says:

    It’s always about a short term fix, no one think of a long term solution. That’s a problem in general with our society.

  4. b_thunder says:

    3) Adequately fund and staff the SEC ———–> wishful thinking!

    Geithner wants to do the opposite, transfer SEC powers to the FED. Yes, transfer the functions of protecting the public from the scams to the enablers and faclitators of the biggest scam in history!
    After all that Fed’s done, after trillions of new dollars printed and trillions of dollars worth of crappy assets purchased by the Fed from major institutions, does anyone still think that the Fed will risk “the system” and prosecute a major firm even if the firm is involved in illegal activities?

    While the SEC has to answer the Congress and by extension it answers Us, The People, the Fed has to answer…. their owners, the BANKS!

    p.s. If this was a new, tougher regulation the market wouldn’t rally, it would sell off.

  5. dead hobo says:

    BR said

    But a no-strings-attached, return-of-the-money, back-to-business-as-usual ? Not so fast . . .

    comment
    ——————-
    Dreamer. Who do you think is really running the show there?

  6. mcrcr4 says:

    6) Let the Justice Department do its job.

    Best regards,
    RF

  7. ben22 says:

    BR,

    What would them giving the money back do the still massive leverage ratio’s at the banks.

    Also, how can Glass Steagall be reinstated when it seems a lot of those banks are still something like 23:1. I don’t understand what would happen as a result of putting that back in place.

    Nice btw.

  8. AmenRa says:

    If we took the toxic assets off their books in return for the TARP funding then shouldn’t we give them back their toxic assets if they return the TARP funds?

  9. Mannwich says:

    @b_thunder: Sadly, I agree. If they were serious about true reform, this bullshit market would indeed sell off in a hurray, which is why true reform won’t happen any time soon, if ever.

  10. leftback says:

    Sure, let them pay back the TARP – then come whining for it again next winter when Jumbo and CRE blow up!!

    Glass-Steagall helps to prevent the I-banking arm making profits while setting up disaster for the commercial arm.

  11. franklin411 says:

    I don’t think we’re going to have a “back to normal” response. Three major developments affirm this: the health insurance business, users of coal-produced energy, and the auto companies have all signed on to administration policies that they bitterly fought for decades. Now, the health insurers are on board for health care reform, and energy/auto companies are on board for climate change measures. In all three cases, the industry has stated that they know that they will either be on the reform bus or in front of it. They’d rather be on it.

    I expect that the same will happen with regard to Wall Street. The main reason the cramdown bill failed was because many Americans have the attitude that they would rather lose their first born child than see their neighbor’s mortgage cut by 20% “unfairly” through a cramdown. Banks were able to manipulate this ill-informed sentiment and wield it as a club against reform. Reinstating Glass-Steagall is too arcane to be wielded in such a fashion.

    And remember…unlike the cramdown bill, the administration has made financial sector reform a top priority. The President has spoken on it, and he can’t easily let this slide away.

  12. Short Crone says:

    Interesting column by Bob Veres(yes, he’s from the touchy feely world) this week: he attended the IMCA meeting and one of the things he reported was that after last fall’s meltdown, investment bank brokerage managers locked down their restless field force with a combination of threats and bonuses-bonuses paid with TARP money. The threat was to terminate and then poison the relationship with the client by pointing out how much money they had lost with the adviser and assigning them to a new, better manager, OR sign here and receive a bonus for committing to stay 7 more years. Reports vary, but the going rate for these bonuses seems to have been 75% of the broker’s pre-meltdown gross dealer revenue. Of course, other banks were wooing the same advisers with promises of bonuses on the order of 100% to 140% of pre-meltdown revenue.
    “The alert reader may wonder how these essentially bankrupt companies can pay out million-dollar retention bonuses to field forces that number in the tens of thousands. This is our TARP money at work …”

  13. franklin411 says:

    Wo0ot! If you’re watching the Treasury Secretary on CNBC, he just destroyed that racist bastard Corker! =)

  14. Mannwich says:

    If they let the banks pay back TARP, it should come with a guarantee that they get no more bailouts when the shit hits the fan again at a later date (and it will). Will it happen? Not likely but that’s what they should do.

  15. Transor Z says:

    IMO, at a minimum, payback should be conditioned on compliance with legislation requiring that the leverage ratio return to traditional levels, strict capital reserve requirements against derivative-based CDS liabilities, substantial elimination of off-balance sheet accounting by financial institutions.

    That legislation needs to be thoughtful — I like the idea of a Blue Ribbon panel floated above — and quite possibly wouldn’t be passed until next session. Tough noogies.

  16. JohnnyVee says:

    A kite wants to break free of its line so it can fly higher. If the kite is let loose, however, it merely falls to the ground. Unchecked, so will banking.

  17. AndreD says:

    Excellent article as always.

    Except…

    > Now that the bulk of the crisis has passed [...]

    Depends on what you identify as the crisis, I’d say. As mentioned above, the Fed is supposed to audit Wall Street… quite a breathtaking propsal. If that’s going to happen…

    …then we’ll all have to be patient for the incestuous system to fail. Could take a while.

    Unfortunately, in the meantime, respect (should there be any left) for Wall Street will further decline. People will still buy T-Bonds, though, I presume.

    Just ONE thing I don’t understand. In February, Obama has asked US customers to lend more, because “that’s how you pay for a car, a home…”. How could it be possible that weakened consumers who make up for 72% of US GDP, in the largest economy of the world, still come up with a growing demand for goods and services? Isn’t 72% of the world’s largest economy a factor you can’t rule out? Will the postman bring free cash each morning?

    The bulk of the crisis lies ahead.

  18. Onlooker from Troy says:

    The problem is that they’ll just come back and extort us for money again when things go to hell. If we don’t break this financial oligarchy we’re screwed. It’s their world, we just live in it (and funnel money to them).

  19. leftback says:

    The 2-year is catching a bid – now at 0.85%. Something may be afoot here.

  20. Cursive says:

    No new regulation or reinstatement of an old regulation can chaste these bunch. It’s a kleptocracy. These banksters only know how to make money by stealing or scamming to get it. Only congressional hearings and vigilant prosecution of the criminals will end it.

  21. cvienne says:

    Look at ‘Goldie’ on a weekly chart going back to the october ’07 high…

    Then look at today’s price action…

    It’s only Wednesday…but I’m just saying…

  22. Groty says:

    It’s beyond stupid that they want to auction the warrants today. Some of those warrants are going to be gold mines by the time they expire.

    Not keeping the warrants is another way of screwing the taxpayer.

  23. clawback says:

    BR wrote a piece last September about all the jokers who had sucked millions of dollars out of the companies they had helped to ruin. He had a whole list of people and what they pulled in in 2007 (or earlier) whose companies had either since failed or were on the brink. We’re talking about people like Stan O’Neal, Sandy Weill, Angelo Mozilo and others. Lloyd Blankfein…

    My question (I’m sort of dreaming, but I’m still asking) — my question is why we don’t claw back money from those who committed fraud or misfeasance and from those who profited, knowingly or not, from the same fraud and misfeasance? Look at Madoff as an example. Obviously he doesn’t keep his money, but neither do the clients who received non-existent “returns” on the money they gave to Bernie. The same should apply here. Those who took the risks should bear the costs of unrecoverable losses — not taxpayers in general who didn’t necessarily invest in financials or in securitized mortgages. BTW, most of us have already suffered from our indirect exposure to these — why should we also have to pay for other people’s losses?

    Geithner and Bubbles can whine all they want about protecting “the system”. As far as I know there aren’t a bunch of outstanding CDS on Stan O’Neal. Sorry, Stan. Geithner and Bubbles (with Sheila’s compliance) have knowingly let people profit from fraud while taxpayers who never stood to profit have to bear the costs — all because they’ve been afraid of “systemic risk.”

    Clawback should be a basic principle and tool of any bailout commission.

  24. This is not money that you get to return and say, Thanks, but we no longer need this.

    And it would be at this point Colbert would stop the story and say:

    Yes, you keep that money darn you! KEEP IT!

    :twisted:

    Barry, that is a classic Monty Python line that is a great close to this mad cap time. It is a whole sketch in itself. The joke rolodex is spinning in my head here. :mrgreen:

  25. I think America has the right to feel like the divorced wife who just gave her ex husband sex and is now watching him walk out the door cell phoning his girlfriend to patch things up

  26. Whammer says:

    BR, yet another post showing why I love this blog.

    Agree with the folks who are saying that this really needs to be a “line in the sand” moment. Enough already.

    I’m recalling a few past calamities…..

    Late ’70s/early ’80s — banks made massive amounts of loans in developing countries. They defaulted. Much talk at that time about how the entire system would collapse unless we effectively bailed them out.

    Late ’80s — S&L crisis. Borrow cheaply, lend to anything, oops….. gotta bail that out. BTW, that particular crisis was years in the making, since the early days of the Reagan administration and the deregulation of the S&Ls….

    Late ’90s — LTCM, Russia, Thailand, etc. I don’t know what happened with the Russia/Thai stuff, but certainly it was all hands on deck to stop the LTCM debacle from “bringing down the system”.

    Now, here we are. And this time, they really did screw things up to the point where the system was coming down, and/or may still come down. Every step of the way these people have been privately gaining and socializing the losses. This absolutely needs to stop.

    Enough already. And no more.

    Regulate the crap out of these guys. Bring back Glass Steagall. Fund the SEC. Transparency needs to rule.

    http://www.tnr.com/politics/story.html?id=686e3d61-aa6f-4431-acac-d067fe28ed8e

  27. Whammer says:

    @common man: great analogy!

  28. randy says:

    BR,

    I like your 5. I don’t think we have a chance in hell to get 1 or 2. 3 is straight-forward enough, but I don’t know how you shrink the talent gap between regulators and regulated–the regulated will always have more money and talent. I suspect that the O-team will make honest attempts at 4 and 5. But those two are so complex that I am afraid we will never quite succeed. We will just have another layer of perpetually evolving rules and loopholes. All that said, we still have to try to do all 5.

    I would humbly add:
    6) SEC: Increased transparency rules for financial industries companies. Compensation details for senior management. More details on leverage.

    7) New criminal legislation that holds company management more personally responsible for market damage done by their companies. The CEO, CFO, and board of directors of the next Goldman/Lehman/Merrill/AIG needs to get to spend serious time in jail and have their personal wealth confiscated.

    8) Fix chapter 11 (non-finance industry) and FDIC (finance industry) to cover all types and sizes of companies. I don’t know the details of the gaps here, but the fact that we have been unable to use chapter 11/FDIC is clear evidence that they are currently broken. It might be prudent to create several different versions of FDIC to focus on different areas of the financial industry (insurance, brokerage, etc.) so that they can specialize, and so that a run in one industry does not empty the insurance coffers for all of the industries.

    9) Strengthen anti-trust laws and execute other measures to reduce the overall size of each market participant, in hopes of maintaining competitiveness and scaling everyone down to fit within the new chapter 11 laws–no more too big to fail. Maybe simple market caps. Maybe a steep progressive business tax structure. Glass-Steagall covers some of this, but we need to look seriously at the gap. I think that many institutions were too big to fail before Glass-Steagall was repealed.

    10) Home nation exclusion laws. What I mean by that is new laws governing the financial industries requiring companies that operate in the US from outside of the country to adhere to materially similar or more stringent standards with regard to operations, size, transparency, insurance, taxes, leverage, etc.. If your home country does not meet these standards then you would not be licensed to operate in the US. Obviously we would need to spend some significant time coordinating laws with our friends before this went in to effect, so:

    11) A multi-nation coordination board that discusses two things and makes policy suggestions back to their home countries with regard to the home nation exclusion laws and other various financial market regulations. The two things are:
    a) Discrepancies in the regulatory environments between nations (“You say your law is equivalent to mine, but I say yours is weaker because of this loophole…”)
    b) Regulatory challenges created by new financial innovations. Specifically looking for innovations and determining how to regulate them in a consistent manner across national borders.

    12) Tighter limits on the Fed and Treasury so that they can’t perform a bailout/give-away like this in the future.

    Our markets have become too much like betting parlors. We need to recognize that companies can only get so big; for internal management and external risk reasons. And then they transition in to a new stage of life where they simply maintain size, generate profits, and pay dividends. Growth is worshiped too much. I have no idea how to change that, but I think it is one of the biggest underlying causes for this mess. Shareholders chase only growth, and so big companies have to run big risks to give them that growth and keep their stock price up. How do we figure out how to do that?

  29. howard0339 says:

    AS a person who was “selling” some of the high risk instruments to the most sophisticated of “investors” let me make an observation or three.
    1. Ya gotta keep up with the competition or lose clients by the hundreds….so we tell the mooch that we’re better.
    2. Selling, or reloading, an existing client is easy as eating ice cream….they trust you so you can basically loot them.
    3. Commissions rule. Period. Sales meetings are held every morning wherein the low earners are featured, ridiculed, and prodded.
    4. Management actively sold US, the salesmen and employees, on the schemes. None of us ever had a clue that what we were selling was very risky. I believed each and every word I was told and passed the rosy scenario along to clients. Only after Bear hit the skids did any of us have a clue and then just try unwinding a million positions in ten markets.

    In short this was a runaway train without brakes gathering momentum and more box cars as it plummeted down a 60% grade, all of us were blinded by the commissions that matched the firm belief we were doing GOOD, a deadly combination.

    Did I know I was playing with widows and orphans? Not until after the fact, and remember that the widows and orphans were demanding performance…or else.

    My opinion is that the regulators abandoned supervision, Glass Stegal was killed, and the SEC suddenly allowed leverage of 40 and 50 to one instead of 12 to one (with financial back up) that was standard.

    Good Post Barry

  30. leftback says:

    @howard: Ah, the joys of sell-side life. We never knew what we were selling, but enjoyed the coke and hookers.

  31. danm says:

    AmenRa Says:

    May 20th, 2009 at 10:50 am
    If we took the toxic assets off their books in return for the TARP funding then shouldn’t we give them back their toxic assets if they return the TARP funds?

    ——————-
    That’s just it. Now that they got rid of their toxic assets or did not have to write them down, they have no need for the oney unless it’s no strings attached. Their wish will probably come true…

    I wouldn’t be surprised if all the leaders want is to take the bad assets off their books and give us a make believe free-market again.

  32. momoso says:

    Amen Barry!!! I have personally dismissed Taibbi’s conspiracy theories, and all the accusations that the admin is in the pocket of WS. But paying back warrants for pennies on the dollar? No way.

    I’m just afraid that with all the AIG, GS favoritism and exec cap talk the store of outrage is running low. And now when we really really should push back everyone is tuned off.

    Warrants is the real deal, and we should make a stand.

    I urge everyone to call their congressman and senator on this one.

  33. Groty says:

    I’m 100% with you momoso. Some of those warrants could potentially be home runs, which could serve to mitigate probable losses at AIG, GM, Chrysler, FNM, FRE, etc.

    It’s idiotic not to keep the warrants.

    Do you think Blankfein will approach Buffett about buying back the GS warrants? Ha!

  34. royrogers says:

    guys stop crying about the tarp, it is not fair, everybody knows its not fair, even the perpertrators, but this is the system we live under.
    Make money by buying hard asset type of stocks like gold and oil and agriculture,
    before the USD vaporizes.

  35. jc says:

    Good money after bad, the relatively healthy banks will repay their gifts without penalty and the basket cases will keep taking, the repayments will allow Tiny Tim to keep throwing money down the shitt hole without going back to Congress to beg for more – unless the CA RE meltdown takes out a couple more of the immortal 19. Of course with the hundreds of billions of guarantees CITI, AIG and BAC can sidestep more TARP bailouts since the guarantees aren’t part of TT’s limited budget. GMAC first, CITI next, then BAC…

    The Treasury Department is poised to inject more than $7 billion into GMAC, the first installment of a new government aid package that could reach $14 billion, according to people familiar with the matter. The injection is designed to firm up the company’s balance sheet and allow it to grant loans for car purchases at General Motors and Chrysler.

    The increasing infusion of taxpayer money into GMAC could turn the federal government into a large — and potentially majority — shareholder in the company, which is now owned by GM and a group led by private-equity firm Cerberus Capital Management.

    http://online.wsj.com#mod=djemalertNEWS

  36. harold hecuba says:

    crises passed? i’m afraid the crises still lies ahead.

  37. thefinancedude says:

    Ritholz,
    Why in the world would they form this partisan committee? They can’t! If they do that, the graft reality becomes paramount as we discover they’re mostly all in on this! I got a kick out of the vetting process when Obama was bringing in the transfused blood through the Treasury. If the fraud can be discovered simply by nominating all these people to unelected positions, why don’t we just nominate them all so we can find all the dirty promises and hidden money stashed in those freezers! Why isn’t all of Congress going through the same vetting process year after year to prove their transparency? Better question: Why are we still JUST talking about this? What happened to dem tea parties? Oink, Oink…

  38. W T F says:

    Regarding institutions that want to withdraw from TARP: institutions that are too big to fail (TBTF) should not be allowed to withdraw from TARP until new laws are implemented to allow the FDIC (or some other government agency) to take over and “resolve” TBTF institutions.

    Once those new laws and regulations are in effect then any institution should be free to withdraw from TARP once it meets the government’s exit criteria. The government’s exit criteria should require that the party withdrawing renounce ALL government subsidies. This includes FDIC guarantees of the TBTF institution’s bond offering, participation in the TALF, US government guarantees related to money market funds, and participation in all other Fed-subsidized programs (with the exception of the PPIP) at the very least.

    Once a TBTF institution withdraws from TARP if that institution subsequently encounters financial stresses then that institution no longer qualifies for participation in the TARP and instead would be subject to resolution under the new regulatory scheme.

    In short: you want out of the pool – you’re out – no double dipping. ‘Nuff said.

  39. call me ahab says:

    jc Says:

    “Of course with the hundreds of billions of guarantees CITI, AIG and BAC can sidestep more TARP bailouts since the guarantees aren’t part of TT’s limited budget. ”

    i thought with the payback there was no more guarantees- am I wrong?

  40. i vented about this yesterday, their biggest concern with TARP is, once again, compensation….two short months ago, every one of these fucking stocks was headed to zero, now they are back to be worried about the quickest way to start stuffing their pockets again, without so much as a thank you to the folks in “flyover” country who saved them from themselves…

    the whole thing sucks.

  41. CaptainNed says:

    OK, this regulator from a small New England state doesn’t share the vox populi opinion over the banking system. The mega-banks have never tried to compete here and have precious little presence here, so their panjandrums aren’t on my radar screen. The banks in my state are all healthy in both ROAA and capital and they never invested in the mortgage mess either directly or through purchasing junk securities.

    You New Yorkers need to understand that the vast swath of community banks never took part in the market manipulations that brought us to our current mess. Your City centrism and belief that all US economic activity is funded through the City banks only confirms your inability to dissociate stock price fluctuations from prudent management decisions.

  42. [...] 5/20: Barry Ritholtz is now on top of this.  I really hope it gets traction.  Today I will call my [...]

  43. [...] is weird: On Wednesday, May 20, (Recall Why TARP Funds Were Necessary) I wrote the following: “Lastly, I would like to see a bi-partisan, Blue Ribbon panel put [...]

  44. [...] Barry Ritholtz’s suggestions for financial reform, which he posted in this article on his site, The Big Picture . In addition to Barry’s list, I proposed the following suggestions in a commentary posted later [...]