The American Recovery and Reinvestment Act (ARRA) signed into law by President Barack Obama on February 17, 2009 did rewrite Section 111 of the Emergency Economic Stabilization Act of 2008 (EESA) and did provide modified rules for the Troubled Asset Relief Program (TARP). The Stimulus or Recovery Act is worth $787 billion and it contains multiple programs: Tax Cuts – $244 billion, Aids For State and Local Government – $217 billion, Relief (Extended Unemployment, Health Insurance for Unemployed) – $120 Billion, Infrastructure – $101 Billion, Energy Efficiency – $59.5 Billion, and Human Capital – $45.5 Billion. TARP allowed the US Department of the Treasury to purchase up to $700 billion of difficult-to-value assets – MBS and CDO – from banks or other financial institutions. Since the enactment of TARP in October2008, more than 360 US banks have received at least $353 billion of funds from the Treasury.
This included:
• $145 billion of capital injections to Citigroup, Bank of America, JP Morgan and Wells Fargo
• $10 billion each for Goldman Sachs and Morgan Stanley
• A grand total of $84 billion to the rest of the US banks
• $40 billion in capital injections and $113 billion in credit in AIG
The US Treasury announced recently that its massive TARP banking bailout would cost less than expected amid repayments and rising values of some investments. The Treasury said it had notified Congress that the projected cost of the TARP program to taxpayers had fallen by $11.4 billion to $105.4 billion. That cost was in line with the losses expected in the October 2008 law authorizing the Treasury to spend US$700 billion to save the financial system after the Lehman Brothers bankruptcy triggered a global crisis. The improvement in the TARP cost projection came on the back of repayments that have been greater than initially anticipated – about $190 billion to date – and an increase in values of some major investments, in particular Citigroup. The Treasury’s holding of 7.7 billion shares of Citigroup common stock had climbed 27 percent. Other key investments that also gained value were General Motors, up 61 percent, and Chrysler, up 10 percent. The projected cost for bailing out insurance giant American International Group was lowered by $2.9 billion. In April, Tim Geithner estimated that the entire US bailout would cost $87 billion, or 0.6 percent of economic output.
Officially, of the $245 billion invested in US banks, over $169 billion has been paid back, including $13.7 billion in dividends, interest and other income, along with $4 billion in warrant proceeds as of April 2010. The truth is that Wall Street has benefited immensely from the TARP money.
• Treasury injected capital directly into the banks through purchases of preferred stock
• The Financial Accounting Standards Board (FASB) modified fair-value accounting rules to reduce pressure on banks to write down the value of their troubled assets
• The Federal Reserve cut interest rates to zero
• Regulators allowed several investment banks to convert themselves into bank holding companies and access the Fed’s discount window for cheap loans
With everything working in their favor, all the major banks have made the repayment of TARP money their top priority, leaving very little capital for investing in riskier small businesses, start-ups, and entrepreneurial enterprises. To me this is totally asymmetric: socialist benefits and capitalist strategies.
Toni,
I recall the bailout was rejected at first … what changed in the plan details from the moment of rejection until it was accepted in the end ?
Raul
Raul,
A significant difference between the House version and the Senate version was the inclusion of a 1-year extension of revisions to the alternative minimum tax which added $70 billion to the bill’s total.
Toni,
Great article I was waiting for this one. Could you please explain the liquidity vs equity infusion ? or more details on this issue. thx
BMM
Bogdan,
Re-balancing the liquidity within the financial system was executed via purchasing the “troubled-assets” and the easy access to the discount window. The government ownership was executed via preffered shares and warranties.
Toni,
Thx … when did they decide with the preferred shares option ? after the liquidity injection or they did them both together in the same time ?
BMM
Bogdan,
They decided all at the same time but the implementation came a bit later.
Toni,
It was rumored that the White House is looking for a one million job gain on Friday … hmm … Now that seems off the charts … how likely is that according to your call ?
BogdanC
BpgdanC,
I doubt the NFP will be in excess of 300k. In fact, if the private component is over 100k, I would find it very bullish.
Toni,
I see … moreover ADP came in the red … We’ll see.
Bogdan C
BogdanC,
ADP came +55k. If x>0 then x is positive. That one i got in the first grade. Joke aside, I would not put to much money on ADP number.
Toni,
Hehe … good one … well yes but if x>0 it doesn’t mean it is pozitive enough
Joke aside, one of my friends told me that he read some research that there is quite a + corr between the ADP numbers and NFP … and since it came +55k with previous 65K and market expected 68K I read that as it came in “red” and thinking to extrapolate that for friday’s NFP to see if “who cares if it is true tomorrow, when you can ramp the market today” ? … or not !
BogdanC
BogdanC,
I knew what you meant. The ADP news was slightly less than expected.
Personally, I do not buy the argument that ADP number is the magic ball for NFP. At the end of the day, ADP is just a part of the whole set. It is a payroll processing company.
For instance, I can build few correlations with NFP that have almost nothing in common with it…
Toni,
disappointing … what could be done to boost the private component next ?
BogdanC
BogdanC,
I expected a number under 500k. There are two signs of hope:
1. The average work week rose to 34.2 hours in May from 34.1
2. The U-6 rate decreased to 16.6 percent from 17.1 percent
Washington took some steps to encourage private hiring, and there are some positive signs especially within the manufacturing sector. The service sector is still behind.
Toni,
What happened with the too big to fail too big to exist proposal by Sanders ?
Raul
Raul,
Good question. The last time I checked, VT Senator’s petition to Treasury Secretary Timothy Geithner had close to 8,100 signatures.
Toni,
I see … and what is the deal ? how many signatures does it need or ?
I mean, Sanders proposed this on 11/09/09 by saying:
“That is why I introduced legislation that would give the secretary of the Treasury 90 days to identify every single financial institution and insurance company in this country that is too big to fail and to break up those institutions within one year.”
It’s almost there the “within one year” …
Anyway, what could be some options in fixing this too big to fail issue ?
Raul
Raul,
The number that I saw could be related to the latest version introduced for the new bill. I should check the whole stry again. The fact that things do not get that traction should come as a surprise, I assure you.
The Senate bill seeks to avoid the “too big to fail” problem by pushing failing banks into an “orderly” bankruptcy-type process.
If I had a plan, it would contain 3 points:
1. some kind of restrictions with regard to the size of the balance sheet
2. VaR-based insurance fee paid into Rescue Fund
3. If signs of insolvency emerge, the Fed & Co. should be able to take-over for good
Toni,
Rescue Fund you mean some piggy bank where banks pay proportionally a fee based on their VaR levels ?
Fed take over for good … what do you mean exactly ?
I never asked you, why are doing this blog etc etc … I mean I see no ads & cr*p all over the place … very neat and organized, not to mention that it never takes days after days to have your input regarding X matter.
Raul
Raul,
The Rescue Fund should work in the way FDIC operates these days. Right, I would like to see those banks out of business for good, with no second chance.
As far as my blog is concerned, I could give you a short explanation: I got sick and tired of listening to all kinds of nonsense “expert” opinions around me.
for good ok … after FED & co take over, what will they be doing with them ? simply out of history or ?
Raul
There only one advantage with a real capitalist economy: bankcruptcy. Otherwise we have French stupid socialism.
Raul,
You know what is funny about this blog ? If you put a dummy, medium hard or +++ technical question, you will get a fast answer from a pro in the field.
But, if you give an email to one of your “top tier” RO economic universities professors, it is very unlikely that you will get an answer; if you get one it takes maybe 2 weeks or so … The only way to get a normal answer is if you are a “back” kisser all semester long … even if that happens you will get an “academia” answer …
If that is not the case, personally because once in the 2nd year I had something to say “against the system” in a 300 people course room, I was close not to graduate in time. Dude failed me in the last semester; luckily I was inspired to make some photos (even thought that is not normally allowed in the first place) of my entire paper exam and when told dudes from the Uni that I will go to the press, dude changed the mark from 3.5 to 9.
He also had a course once about externalities. In a nu shell, this blog is a positive externality no doubt about that while dude is a negative externality all day long; besides he actions above, for 100EUR you could pass with an “A” the exam and for 200-300EUR (depending on the mark you dictated) he could “create” a nice graduation thesis for you …
I’m sick … Give me a break …
BogdanC
BogdanC,
If I were you I would go to the press anyway. Do you want me to leverage that? Back at ASE I had just 3 real professors. All the others were simply buffoons.
Toni,
Besides the fall of Lehman, you could do an article also about Iceland … I only read some news but that was crazy. Just a suggestion.
Raul
Raul,
Maybe…but I have to put it on the back burner for the moment.
Toni,
Geithner “Geithner: This isn’t Paulson’s plan”. Why nobody liked the old TARP but not the case with the new TARP. Except for the +70b what was the difference ? Both plans had in mind buying difficult-to-value assets MBS and CDO after all and try to store confidence in the system right ?
Raul
Raul,
To tell you the truth, I have no idea how much trash TARP actually bought. We do not have a clear number. The CDO secondary market is still a joke and I reckon it will stay like that with or without TARP intervention. There is another point: why the government should step in the CDO/MBS markets when the underlying real estate market is in so much trouble even 4 years after the beginning of the downtrend?
Toni,
From the numbers you outline “360 US banks have received at least $353 billion of funds from the Treasury” … how can one make a distinction to what was liquidity injection and on the other side equity infusion ?
Anton
Anton,
On the official governmental sites, you could find a detailed list of how much Uncle Sam bought into Wall Street equity.
Toni,
the 353$ or so, was both providing liquidy and taking stakes through equity infusion right ? I still have a hard time “catching” the money circuit in this mega bailout thing. thx
Raul
Raul,
What do you mean by 353$?
Toni,
http://www.cnbc.com/id/37550457
From where are these guys coming out with these 7000 prediction for gold ?
Anton
Anton,
I am sure you don’t want me to answer that. It would be a waste of time.
Toni,
I got it …
Good luck with that!
Toni,
Sales of U.S. previously owned homes plunged 27 percent in July, twice as much as forecast … Purchases plummeted to a 3.83 million annual pace, the lowest in a decade on record keeping and worse than the most pessimistic forecast of economists surveyed by Bloomberg … foreclosures hold near record-highs and the economy cools …
1. Isn’t that a devastating reading on the U.S. housing market ?
2. The worse-than-bad news just keeps rolling in, yet the market somehow largely ignores it … I was thinking a DOW below 10k right after the release … how comes this is not priced in that much ?
3. How did economists get it so wrong in terms of the expected consensus ?
4. A more rhetorical one: where does it stop this housing fall ?
Have a great day,
BogdanC
BogdanC,
Home Sales number is a volatile indicator, nonetheless. By all means, it is a very bad reading with no hope for the end of the downturn. It seems like nothing could stop the fallout. I believe that the market does not price in the official estimates. Instead, there is a whisper number traders go with. As far as forecasting is concerned, the economists are not the best students in the class. The final question has an answer: sustainable job creation.
Toni,
Thank you … regarding the FED inflation/deflation etc … inflation I think is quite remote for now and even for the close future since if banks lend out too much money, both the banks and the Fed from where it came from, will be repaid in worthless dollars which clearly is not in their best interests … + I guess they will now probably carefully watch out very closely their 1$ lent to have the expected 1.x productivity (at least for a while) …
Thus, do you believe in the Japanese style economy scenario in which the US will go into recession, then recovers, then fall back into recession, recovers again etc ? … Japan is still suffering this economic pattern for 20 years now … Is this the end of the period when everybody pleased themselves with the reduced GDP volatility which implied also that recessions became fewer and fewer in frequency and duration aka “The Great Moderation” ?
Have a great weekend,
BogdanC
BogdanC,
That could be a possible scenario. Nevertheless, US is not Japan and the likelihood of going through the same process is limited. One thing is sure: the optimal GDP growth rate is going to be different going forward.
Toni,
Thank you …. could you recommend me a “no scam” forex broker for a friend of mine who wants to try the market ? (he will trade/invers from Romania)
BogdanC
BogdanC,
I know some brokers in US and I could give you some pointers in that direction. As far as RO brokers are concerned, I could not advise you on that.
Toni,
I’m interested in some names too … I kept reading about scam forex brokers saying they take 2 pips spread but “sometimes” they were taking more …
Dany
Dany,
Like I said. I do not know anyone in RO. In US I could point you to Charles Schwab.
Toni,
I’m not sure if you heard about it, but what about the company from Fîntîna village Brasov that made in 2009 a record 11x more profit than Petrom which is ~ also 2.5% of Romania’s GDP with 0 employees and very interesting having a turnover = profit ?
BogdanC
BogdanC,
I have no idea what are you talking about. Never heard about that.
… it is just coming out … the IRS from GER USA and ROM are trying to figure out what’s there … 11x the profit of Petrom with 0 employees
) … an interview with one of the shareholders http://www.infolegal.ro/cornel-ionescu-seful-american-european-marketing-and-enterprises-sa-nu-mi-e-frica-de-niciun-fisc/2010/08/31/
btw, in what scenarios can a company have a profit = turnover ?
Dany
Dany,
To tell you the truth, I am not that much into this kind of news. The profit cannot be 100% of the sales, unless an idiot could assume that a firm could operate with ZERO expenses.
Toni,
Guy says: Cum nu apare nicio cheltuiala pe firma, înseamna ca si contabilul l-ati platit din propriul buzunar … Da, v-am spus … Pai si este legal? … Da, toate cheltuielile se platesc de asociati, fara sa le contabilizam …
Why wouldn’t they deduct expenses ? I don’t get it …
Dany
Dany,
Don’t you have anything better to do?
Toni,
The NBR panel is held at Bucharest not CJ or TM right ?
BogdanC
BogdanC,
You are correct, sir. The exact location is: Bucureşti, Banca Naţională a României – Sala Mitiţă Constantinescu. My panel starts at 9:00 am.