Now You See It, Now You Don’t: TARP

October 23, 2009 at 2:00 am Leave a comment

Magic

Elizabeth Warren,  who oversees the TARP (Troubled Asset Relief Program), along with being  the Chair on the Congressional Oversight Panel and a professor at the Harvard Law School, goes out on a limb and candidly states, “ We not only don’t know [where the TARP money is], Maria, we’re not ever going to know.”

Ms. Warren is quick to blame former Treasury Secretary Henry “Hank” Paulson for not implementing accountability for the TARP funds handed to the large commercial and investment banks (see my earlier TARP article). How do you prove the money handed over to the banks was used for  non-lending activities, such as marketing, compensation, television advertising, dividends, acquisitions or other corporate purposes other than lending? The short answer…you can’t! Even if TARP capital tracking was instituted, I think it would have been a fruitless effort since even legitimate use of the TARP funds would only free up additional capital for other suboptimal purposes. If my mom gave me $100 while I was struggling for money in college and told me to use it for food – well I, like a good chunk of students, would have eaten anyways without the handout. The windfall $100 bailout would likely be used for a guys trip to Las Vegas or some Laker basketball tickets. The banks will certainly lend, but not at the same pre-Lehman bankruptcy levels, regardless of whether TARP tracking was instituted or not. Ms. Warren correctly points out that regulators are speaking out of both sides of their mouths. The government wants banks to lend more (which reduces the bank’s capital base) and also raise their sickly reserve levels at the same time.

See TARP commentary on CNBC video interview at minute 2:48

Maria Bartiromo also probes the topic of executive pay compensation given a recent Congressional proposal that  TARP recipients cut salaries of the top 25 executives by -90%. Seems like a reasonable request given the circumstances. However, having the government force banks into making bad loans is probably not the right answer. This stance will only force the banks to take higher loan deliquency provisions and recognize more potential writedowns in the future. Eventually the Fed will cut interest rates paid to banks on the reserves held at the central bank, thereby invcentivizing the banks to take advantage of the steeper yield curve and make handsome spreads on loans.

Until then, some of the banks will sit patiently on their TARP capital (not lending) while Ms. Warren and government officials will wonder how the billions of TARP bailouts magically disappeared.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management and its clients had a direct position in VFH and BAC shares at the time this article was originally posted. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

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