Another Naked Capitalism gem.
“Clearly, the spin is in. As a post earlier today discusses, the Financial Times is running a story that claims that the Fed made money on its rescue programs, then slips in all the tidbits in the body of the article to let discerning readers know that the reporter understands that the analysis is utter rubbish while looking like it is not crossing the Fed.
In a simply remarkable coincidence of timing, the New York Time running a story with the very same message, namely that bailouts are good for taxpayers because the Treasury has made money on the TARP.
If you believe that, I have a bridge in Brooklyn I’d like to sell you. The fact that we have such patent garbage running as a front page New York Times story says either the reporter and his editors lack the ability to think critically (or find sources who could do that for them) or that we have a controlled press. Given that subscriber-driven Bloomberg has even fallen in line, I am inclined to the latter view, but I am still curious as to how this has been achieved. Is this the price of access journalism, or is something more pernicious at work?
Now to the intellectually bankrupt New York Times story. Here is how it determined the TARP was making money:
The profits, collected from eight of the biggest banks that have fully repaid their obligations to the government, come to about $4 billion, or the equivalent of about 15 percent annually, according to calculations compiled for The New York Times.
Help me. Credit 101 is that your best borrowers repay first (unless you gave them overly generous terms, of course, then they might hang on to the proceeds). A quick but not conclusive search suggests that only a small portion of the TARP has been retired, so it is wildly premature to declare victory.
In fact, another source looked at the TARP as of June and estimated that it had lost $148 billion, and had lowered loss total as a result of the repayments. Now bank stocks have rallied since then, but the biggest contributors to the red ink, namely AIG and Citigroup, are not in any better shape fundamentally than they were then. Indeed, the fact that new AIG CEO Robert Benmosche has in a remarkable show of hubris, effectively told the US taxpayer to stuff it, AIG has the dough and is in no particular hurry to return it, nor does it care what the public or Treasury wants, its demands are unreasonable. I wouldn’t hold my breath about having the loans repaid.
Moreover, the piece contains a huge canard:
But the real profit came as banks were permitted to buy back the so-called warrants, whose low fixed price provided a windfall for the government as the shares of the companies soared
Roger Ehrenberg already dispatched this goofy idea with admirable zeal:
The US taxpayer has been systematically looted out of hundreds of billions of dollars….Goldman Sachs is posting record earnings and will invariably be preparing to pay record bonuses, not nine months after the firm was in mortal danger? Whether anyone will admit it or not, without the AIG (read: Wall Street and European bank) bail-out and the FDIC issuance guarantees, neither Goldman nor any other bulge bracket firm lacking stable base of core deposits would be alive and breathing today.
Goldman is a great firm with a stellar culture, and in most circumstances it’s risk management and funding practices have been second to none. Except when the crisis hit. It stood with the rest of Wall Street as a firm with longer-dated, less liquid assets funded with extremely short-dated liabilities….In exchange for giving the firm life (TARP, FDIC guarantees, synthetic bail-out via AIG, etc.), the US Treasury (and the US taxpayer by extension) got some warrants on $10 billion of TARP capital injected into the firm….. Lloyd Blankfein smartly paid the full $1.1 billion requested. He looked like a hero for doing so, a true US patriot repaying the US Government in full for its lifeline, thanking the US taxpayer in the process. $1.1 billion… $1.1 billion…Hmm…something doesn’t seem right. You know why it doesn’t seem right? BECAUSE THE US TREASURY MIS-PRICED THE FREAKING OPTION.
There is not a Wall Street derivatives trader on the planet that would have done the US Government deal on an arms-length basis. Nothing remotely close. Goldman’s equity could have done a digital, dis-continuous move towards zero if it couldn’t finance its balance sheet overnight. Remember Bear Stearns? Lehman Brothers? These things happened. Goldman, though clearly a stronger institution, was facing a crisis of confidence that pervaded the market. Lenders weren’t discriminating back in November 2008. If you didn’t have term credit, you certainly weren’t getting any new lines or getting any rolls, either. So what is the cost of an option to insure a $1 trillion balance sheet and hundreds of billions in off-balance sheet liabilities teetering on the brink? Let’s just say that it is a tad north of $1.1 billion in premium. And the $10 billion TARP figure? It’s a joke. Take into account the AIG payments, the FDIC guarantees and the value of the markets knowing that the US Government won’t let you go down under any circumstances. $1.1 billion in option premium? How about 20x that, perhaps more. But no, this is not the way it went down….
But no, if you subscribe to the world according to the New York Times, you’d think we the long suffering taxpayer got a really good deal. By extension, we should be really happy if financial firms throw themselves off the cliff again en masse, since that will give us all the opportunity to make even more money by rescuing them!”
Yves Smith writes Naked Capitalism–other than guest posts of course. Here’s his bio.
“Yves has spent more than 25 years in the financial services industry and currently heads Aurora Advisors, a New York-based management consulting firm specializing in corporate finance advisory and financial services. Prior experience includes Goldman Sachs (in corporate finance), McKinsey & Co., and Sumitomo Bank (as head of mergers and acquisitions). Yves has written for publications in the United States and Australia, including The New York Times, The Christian Science Monitor, Slate, The Conference Board Review, Institutional Investor, The Daily Deal and the Australian Financial Review.[Yves is a graduate of Harvard College and Harvard Business School.”