TARP Beginning to Turn a Profit? Lessons in Government Taking an Equity Stake
So at least some of the TARP money the government put into the banks last fall appears to be making a profit:
Back in September, I was in the minority on the left in thinking the TARP bailout plan, with all it's flaws, was better than the status quo and so far evidence is that not only did the plan help stabilize the financial system, it won't cost taxpayers anywhere near the amount feared by critics-- and many of the TARP investments will end up netting profits to the governemnt that can be used for other needs.
The US government...is sitting on a paper profit of almost $11bn on its 34 per cent shareholding in Citigroup, its only direct stake in a large financial institution...The government said it had earned an annualised return of 23 per cent from its $10bn investment in Goldman Sachs under Tarp. In June, Goldman returned the $10bn and later paid another $1.1bn to buy back warrants attached to Tarp aid. Morgan Stanley, American Express and other banks have done the same, leaving taxpayers with substantial profits.
Now, there are plenty of things that can still go wrong and the government is on the hook to insure a wide range of bad assets that could undermine any profits from these individual equity investments. But my point last September was that such potential insurance losses were already likely to happen and that the advantage of TARP as proposed was that it at least included solid equity investments that could (and did) yield returns to the taxpayers that could offset any insurance promises made by the governemnt.
Even the financial blackhole that is AIG may be turning a corner at minor profits begin to replace the hemmoraging losses of last fall. And taxpayers are promised some relief although most analysts are rightly skeptical that the AIG bailout -- notably begun before TARP was implemented -- will get repaid. But at least the losses look to be less than those initially feared as well.
Was TARP ideal? Hell no. Nationalization would have been better and would have increased the upside for taxpayers as banks recovered, instead of hundreds of billions in profits being pocketed by many of the idiots who caused the financial meltdown, then got to benefit from public intervention to end the credit death spiral. Ideological opposition to temporary government ownership of the banks meant that taxpayers lost out on profits that were due that government intersection-- a classic example of anti-government ideology forcing government to be less effective and more costly than it should have been.
But I also think some knee-jerk ideology on the left contributed to the problem as well. TARP when proposed was not ideal, but most progressives should have been cheering on the provisions for equity stakes in distressed firms as a big step forward compared to mindless subsidies and insurance programs that leave little or no financial upside for taxpayers. Instead, too many progressives fixated on the "costs" of the bailout, ignoring the fact that an equity stake is not spending per se but merely a transformation of government cash into an alternative investment of financial value (whether less or more in the future depending on financial results).
The deep lesson that progressives should be focusing public attention upon is that when companies come asking for a bailout, the government shouldn't ever be handing out subsidies, tax breaks or other goodies to private firms without taxpayers getting a stake that can return value to the Treasury. Federal and state governments currently hands out hundreds of billions of dollars in tax breaks and other forms of economic subsidy, yet taxpayers rarely get an equity stake or at least some kind of income-generating bond in return.
In fact, state governments have been experimenting with creating profit-generating public venture capital funds that can play a more dynamic role in nurturing economic growth in their states. Most are modest but generate both new jobs and returns to taxpayers.
So far, the federal government has ventured into equity stakes only in companies that financial or corporate basketcases -- ie. AIG, General Motors and so on -- but imagine the returns to taxpayers if some of the subsidies the public hands out to healthy firms came with some kind of longer-term financial return to taxpayers? Instead of such corporate handouts being a cost to taxpayers, it could be an income generator to help pay for everything from health care reform to infrastructure investments.
I can't believe that you're criticizing anti-bailout progressives here. For one thing, no fair trying to separate out the financial debacle that is AIG -- all the bailouts, pre and post TARP are equal. If AIG is the worst return it could wipe out any gains made by other banks. Putting AIG aside would be like a portfolio manager saying how good their returns are, less the outlying bad investment.
The problem with Citigroup is -- can the government unwind 34% of the stock without knocking down Citi's stock price. Also, isn't the price of Citi's stock actually inflated by the government stake. The answer is that we don't know and it's too early to crow.
But the big thing that progressives got right, even if the government gets some insanely great return on bailout investments is that the entire enterprise was a transfer of wealth from people who make the median income to people who make big bucks on Wall St. Taxpayers were forced to put their money on the line so that the better compensated could collect their bonus checks. Yes, it was an unintended consequence, but it happened.
Even worse, the government was a forced investor. We were threatened into capitalizing the banks and holding stock in some cases but illiquid warrants in most so that Wall St. could continue its business as usual.
Nathan, you say we're wrong to focus on "cost" and that these were investments. Every investment, even a successful one, has a cost, though. There's an opportunity cost. We committed more than $1 trillion and now our opponents tell us we can't afford universal health care or to expand unemployment benefits. We had a trillion to invest in the banks but we don't seem to have it to invest in ordinary people. Funny that.
August 26, 2009 9:37 AM | Reply | Permalink
Good points.
You can add that Nathan doesn't seem to remember that TARP was sold -- for the weeks it was sold -- as a program 1) to take toxic assets off the banks' balance sheets and 2) to get banks lending again.
The first wasn't tried; the second hasn't happened. But the real crime was the failure to capitalize on the disaster the PTB caused.
We had a chance -- a once in a lifetime chance -- to change the power structure in our country, to cut the legs off the financial octopus -- all eight legs.
And folks like Nathan gave it all up for what? a measly $11 billion?
August 26, 2009 9:51 AM | Reply | Permalink
Yup, we blew it.
August 27, 2009 12:43 AM | Reply | Permalink
Ellen - you left out a key phrase - it was meant to get banks lending "to each other" again. That was the primary focus. And thankfully that did happen again. The commercial paper market came back from the dead and Libor rates came down from the stratosphere. Getting banks to start lending to consumers and small businesses again is more of a "trickle down" or second derivative effect that takes much longer time period.
August 27, 2009 5:08 PM | Reply | Permalink
The commercial paper market came back from the dead
Good thoughts Bill, but that wasn't TARP but the FED and I believe that they still have much of those 'assets'
The story I would like to read is the impact of the suspension of Mark to market. Has anybody done any research on this and how it affected balance sheets.
August 28, 2009 1:42 AM | Reply | Permalink
Yes the Fed played a major role in the CP market. That may have been a bad example. Point is that both the TARP and Fed restored confidence that banks could lend to other banks. That was the major goal, not so much that banks would lend to me or you. Consumer lending, lower mortgage rates, etc. were hoped to come at a later point in time. People shouldn't say TARP didn't work because Mr. Small Business still has problems getting a loan.
August 28, 2009 7:24 AM | Reply | Permalink
So we only help the big guys huh? Those privelged elite. God bless 'em.
I guess thats my problem. I don't want my taxes helping them. I want them helping me.
They are supposed to suffer, because they broke it- you know moral hazard. Oh but that's right capitalism is only for little guys.
August 29, 2009 3:06 PM | Reply | Permalink
No - I've been on here many times arguing that instead of TARP 2.0 or Porkulus 2.0 that we suspend the Payroll Tax for 12-18 month period to put $ back directly into hands of the taxpayers.
I didn't mean to imply that TARP was the best way to go. I just took exception to someone saying that TARP didn't accomplish what it was designed to do. Combination of the TARP and the Fed buying back massive amounts of securities helped get us off the edge of the cliff.
August 29, 2009 3:30 PM | Reply | Permalink
If the money is paid back with interest, there is no opportunity cost, since we will have all the money committed to TARP back, which can then be spent on health care reform. And if taxpayers get their money back, there is no transfer from middle class folks to the wealthy (although the wealthy did well off the bailouts since they had the most upfront to lose from liquidation of the banking system).
And as I noted last September, it was precisely because AIG and other bailouts were happening without TARP that I supported the legislation, which would give taxpayers more protection and more guarantee of an equity stake in future bailouts. And notably, the TARP investments seem to be getting paid back, while many of the non-TARP bailouts like AIG still seem to be underwater for taxpayers.
And whether TARP was enacted was not connected to whether we got real financial reform. That's still being fought out in the banking committees -- and in states where I have worked for years with allies on state reforms. And continue to coordinate with DC allies to push federal reforms.
But the hard reality is that there was a real credit crisis last fall and a real recession verging on depression exploding-- and the combination of TARP and the federal recovery spending plan have helped stem what could have been a complete meltdown of the economy. And the TARP investments will not cost taxpayers the much hyped $700 billion pushed by critics but will instead increase the debt in the long-term probably by far less than $100 billion, and maybe even cost taxpayers nothing.
Yet no one will claim a victory for government efficacy and success -- helping to feed the most basic rightwing theme of government incompetence and misspending. And the real story seems to be not necessarily the most progressive solution by any means, but a solid result for macroeconomic intervention against the laissez-faire ideology of the far right.
August 26, 2009 6:28 PM | Reply | Permalink
Thanks for the reply Nathan. We'll probably have to disagree as friends about most of it but on the opportunity cost front: just because you get a positive return doesn't mean there isn't an opportunity cost. If I take my hundred bucks and put it in the stock market and make five percent a year on it, that's great. But it means I couldn't put my hundred bucks into, say, a bond that paid 9%. There was a cost to my choice of making the first investment even if the first investment turned out to be okay.
We committed capital to Wall Street, that means we couldn't commit it elsewhere even if some of those other commitments would have yielded better returns.
We should also take risk into account. Lets say we get a decent return from TARP. Was it worth the risk? Could we have gotten that return with less risk?
Finally, about Wall Street fat cats getting a transfer of wealth from the middle class -- they did, even if we get a positive return. It basically means we capitalized them at a time when they otherwise would not have been able to cut their huge pay checks. If it had been anyone else, we'd have let them... not get their checks. Those bankers got special treatment and it isn't right or fair.
August 26, 2009 8:52 PM | Reply | Permalink
But the federal government is not limited in the money it can spend like the average investor. It can print money or borrow nearly endlessly, so the only costs are the actual losses on investments. There are no opportunity costs for the federal government in how it spends it's money-- only actual losses, which is precisely why the federal government is so critical during financial crises.
The U.S. is running a large deficit this year as a result of that ability to ignore opportunity costs, but if the recession fully retreats, it will be worth whatever short-term costs were wracked up.
Yes, nationalization would have been better to short-circuit the waste of Wall Street and increased the returns to taxpayers. Instead, the wealthy co-investors with the feds had their own bonanza, which is extremely unfortunate, but is a better result than if the feds had just let everything fall apart.
August 26, 2009 11:04 PM | Reply | Permalink
It can print money or borrow endlessly only if it doesn't care about the impacts on inflation and the value of the dollar. And those are the opportunity costs of printing too much money - run away inflation and a plunging dollar
August 27, 2009 5:20 PM | Reply | Permalink
hahaha. Yes, lets use the stockmarket as the barometer to judge the prospects for the tax-payer's 'investment' here.
How can the stock-price go anywhere but up when -you can borrow at 0%,
-you can make profits by fleecing over-extended consumers on late-fees and punitive interest, you can ramp up your proprietary trading book pumping up the market near term by squeezing all the shorts in the market,
-you're free to book your assets at any price you see fit?
-you face no downside on any losses because -you're leveraged at 50 to 1?
-you can securitize any old sludge and pass it on to the Fed at inflated prices?
-you face pretty much no regulatory restrictions on bonuses and dividends?
Why, who could think this could go wrong for the tax-payer?
Why don't you try to offer a substantive argument instead dancing around flailing your ticker tape like a moron?
August 26, 2009 10:07 AM | Reply | Permalink
And how many hundreds of smaller, better managed banks have gone out of business, thus greatly reducing competition to the largest banks who got us into this mess?
August 26, 2009 11:02 AM | Reply | Permalink
Which gives you the other side of the moral hazard of a taxpayer investment. It's bad enough when the only government investments are too-big-to-fail basket cases that would be getting other breaks by hook or by crook. But when the government invests in general, the temptation to give extracurricular support to companies the government has a stake in could be pretty strong. At its worst this leads to Marcos-style crony capitalism.
Then again, maybe you could argue that if people in the government are going steer contracts to political contributors and former/future employers the taxpayers at least should get a break from it.
August 26, 2009 12:35 PM | Reply | Permalink
Why does this guy Nathan Newman get to post articles like this on TPM where he's on the left hand side with the other regular bloggers?
He should stick to his union topics. Making comments like "there's no opportunity costs for government spending" is just silly. I guess he slept through his morning Econ 101 class.
August 28, 2009 1:18 PM | Reply | Permalink
"Opportunity cost" has a very specific meaning in economics; it means the spending you can't do because you have committed the fixed amount of money (or time) to one choice over another.
Government, and in particular the United States, do not face the same kind of opportunity costs as individuals or businesses that can max out their income or credit possibilities. The federal government can deficit spend or print money largely at will.
Such choices may have costs (long-term debt, inflation) but those are not opportunity costs but very different kinds of costs in economic terms. The whole basis of Keynesian economics is tied to this reality that government in a recession is the only actor not facing the same opportunity costs as individuals and businesses with frozen credit in the economy.
August 31, 2009 7:03 AM | Reply | Permalink
Yes but governments certainly face opportunity costs just like individuals. Even the federal government needs to face the opportunity costs today of potential costs in the future
August 31, 2009 10:48 AM | Reply | Permalink