Tuesday, June 9, 2009

TARP Repayments: $68B Repayment, But $3T to go.

Martin Weiss was on BNN today discussing the $68B TARP Repayment. Some of his points:

- Government made a mistake in giving TARP money in the first place
- Banks are now making mistake in repaying the money
- We are just in the eye of the financial storm, this is what this rally is about
- Next phase in this hurricane: surge in interest rate, specially long term bonds. US Treasury has assumed responsibility of all these toxic assets. Bad news for banks and insurers.
- 82% of the derivatives markets are interest rate derivatives: banks will need TARP monye again.

His advice to investors: take advantage of this government induced rally and SELL.

Mr. Weiss' point is that the banks should never have received the money. He contends that they were about to go over the edge of the cliff, or some were already over the brink. Banks should not go into rehab.

Speaking of the $0.68T TARP repayments. It is very difficult to keep track of where past TARP money and spending went, but here is a rough estimate:

$0.5T in FRE/FNM
$180B in AIG ( repassed free to GS, which repays TARP!)
$0.7T agency and government securities,
$100B into C and BAC
$30B into GM, Chrysler
$2T in deficit spending

The Economist says that governments own roughly $450 billion in banks.:

"More than 600 banks across the country have participated in the CPP, representing $199 billion in investments...
In addition to Treasury’s potential income from sale of the warrants, these 10 institutions have already paid dividends on the preferred stock totaling approximately $1.8 billion over the last seven months. Dividend payments received for all CPP participants are approximately $4.5 billion to date."

The Economist then concurs with Mr. Weiss:

"That's lovely and all, but most financial observers were never as worried about getting paid back as they were about whether or not the whole plan was a good idea in the first place—whether the TARP was sufficient to stabilise the banking system. For the moment, the answer appears to have been yes, but that doesn't mean that banks need to run off and pay back TARP as fast as they can."

"If markets or the economy slump again, investors’ appetite for new shares will evaporate. Of the ten banks, eight had been pressed by the government to take funds in October, amid efforts to shore up the banking system. Although some individual institutions may try to claim that they took the money unwillingly, government intervention was necessary to prevent the entire system from collapsing as banks were found to own hundreds of billions of dollars of hard-to-value assets.Even today all banks remain plugged into government life support systems. Central banks provide generous collateral rules for borrowing, in an effort to provide banks with liquidity. Some banks have managed to issue debt without government guarantees, but the system needs to refinance some $25.6 trillion of wholesale funding by 2011: without an implicit state back stop this would be impossible. And the value of banks’ assets is being sheltered by central banks’ asset purchasing programmes and in some cases flattered by more generous accounting rules. The truth is that the West has a thinly capitalised banking system that is being allowed to earn its way back to health. Save for defence and space exploration it is hard to think of a privately-run industry more dependent on the state."

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