The TARP Money Maker

Yesterday the Treasury announced that it would let 10 of the largest TARP recipient banks to start paying back as much as $68 Billion of the $200 Billion that was given out. While this is definitely a good sign we are not yet in the clear.

ROBIN SIDEL and DEBORAH SOLOMON of the Wall Street Journal write…

While the collapse of the U.S. banking system is no longer seen as an imminent danger, access to the capital markets remains difficult and bank balance sheets are clogged with troubled loans and other assets. Most of the nation's 8,000 banks are being hammered by the recession, and the number of bank failures is expected to climb. The 10 banks seeking to return government money will be able to continue leaning on the U.S. government in other ways, including by issuing debt guaranteed by the Federal Deposit Insurance Corp.

But there may still be a silver lining in all of this mess. Kevin Hall of the McClatchy Newspapers, points out that these 10 banks have paid the government $1.8 billion in dividends on the preferred stock. That is a return of about 4.64% on the $64 billion.

In all, the government has received $4.5 billion from all bailout recipients, who've received $200 billion, for an annualized rate of return since Nov. 12, 2008, when the money was lent out, of 3.94 percent.

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The government stands to earn even more when it sells the stock warrants it holds in conjunction with its preferred shares in the 10 bank-holding companies that are paying their bailout. Treasury and the banks are negotiating a fair-market value for these warrants.

The warrants could be worth as much as an additional $5 billion.

Overall it looks as if TARP is accomplishing what it set out to do and even if I don't want to I have to give credit to the Bush administration for setting this up and Obama for maintaining it. I certainly don’t want the government to get into the habit of handing out money to corporations that are on the rocks, and no one in the banks or in government seems to yet have addressed the root causes that got us into the mess in the first place, namely the reckless deregulation of the banking industry which allowed banks to get to be “too big to fail” and easy money mortgages which created a housing bubble that had no place to go but bust. I also feel that the government needs to sell any shares it has in these banks and in the auto companies as soon as possible.

The other thing we need to watch, is that the government doesn’t go over board as it tries to re-regulate business. For example, while I think it makes sense for the government to have some say on things like bonuses and executive pay packages while the government is giving them money to stay afloat, I am concerned that they may be over stepping things by trying to heavily regulate exec-pay for all publicly traded corporations.

Government always seems to work on the extremes and never finds the happy medium. We either deregulate to the point that corporations are basically running the country or we over regulate and stifle progress and growth.

Head Nod: Justin Gardner - Donklephant

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