Dr Fragen in the operating room

Bank Bail Outs – Happy Birthday TARP


Another lesson on economics from my brilliant sibling. This initially an email to a mutual friend and college classmate sent on October 3, 2012.
My good Doctor,
I was getting a little sick of the rhetoric on the bank bail outs and how this administration saved Wall Street so I decided to do a little research. First off, TARP’s enabling legislation was passed four years ago today, so happy Birthday TARP. In honor of TARP, here is a website that everyone in America should visit.
This is the website for the US Treasury and, in particular, a link to the section on the Troubled Asset Recovery Program – more commonly known as TARP. After poking around the website for a while and reading the monthly reports to Congress, a few things are obvious.

To begin with, TARP should be viewed as three major investment programs – the Bank Support Program, the AIG Investment Program and, the Automotive Industry Financing Program. There were a couple of other programs, but they don’t amount to much.
Under the Bank Support Program, the US Treasury invested a total of $245 billion in financial institutions NOT named AIG or Ally Financial (fka, General Motors Acceptance Corp, the auto financing arm of GM). This includes all the money they invested in Citigroup, BofA, Morgan Stanley, JP Morgan, Goldman Sachs, Wells Fargo, all the way on down the line to the smallest regional banks. Of that amount, $2.8 billion was written off as unrecoverable and $11.3 billion is still outstanding. And $231 billion was repaid. Oh, and the US Treasury made $33.7 billion of income on these investments, largely through dividends and the sale of warrants that were attached to the preferred stock investments. To recap, US Treasury invested $245 billion in US Banks and, to date, has recovered $265 billion. This is the “bail out” that Wall Street got from the US Government.
For AIG, the US Treasury invested a total of $68 billion in common and preferred stock. The NY Federal Reserve Bank also extended an $85 billion secured credit facility to AIG. The NY Fed also extended two other loans to AIG, one that went to purchase a pool of “toxic” residential mortgage backed securities (the $19.5 billion Maiden Lane II portfolio), and one that went to purchase AIG’s complex portfolio of Collateralized Debt Obligations and CDS (the $24.5 billion Maiden Lane III portfolio). You can read all about the NY Fed involvement on their website. http://www.newyorkfed.org/aboutthefed/aig/index.html.
As we approach the proverbial “end of the day” on the AIG Investment Program, the US Treasury and the NY Fed (who forwards profits to the US Treasury) are going to make a significant return on this investment. The liquidation of the Maiden Lane portfolios was completed in August 2012. Total capital “invested” in the Maiden Lane portfolios, $45 billion; total capital returned, $53 billion. Total profit on the purchase of certain “toxic” assets from AIG, $8 billion. http://www.newyorkfed.org/aboutthefed/aig/financial_information.html
Regarding the Fed’s equity position in AIG, in exchange for $68 billion of invested equity and providing the $85 billion secured credit facility, the US Treasury and the NY Fed received, in the aggregate, $20 billion of preferred stock and about 1.64 billion shares of AIG common stock. On January 14, 2011, the Credit Facility was fully repaid and cancelled. The preferred stock was fully redeemed by March 22, 2012 and as of August 30, 2012, after several sales of the AIG common stock owned by the US Treasury which netted proceeds of about $23 billion, the government’s remaining investment in AIG is approximately $24.2 billion, which consists of approximately 871.1 million shares of common stock held by Treasury.
And AIG recently announced and completed plans to further reduce Treasury’s stake in AIG through a combination of $5 billion stock buy-back and an $18 billion secondary offering of Treasury shares http://www.businessweek.com/news/2012-09-10/aig-stock-prices-at-32-dot-50-share-as-treasury-cuts-stake Now that these transactions are complete, Treasury is fully repaid, has a “profit” on the position and STILL owns 22% of AIG’s common stock with a market value of more than $12 billion.
The last big bucket in TARP was the Automotive Industry Finance Program. Under the AIFP, the US Treasury “invested” $79.7 billion of taxpayer capital in General Motors ($51.0 billion), Chrysler ($12.4 billion) and Ally Financial (fka GMAC) ($16.3 billion). In July 2011, the US Treasury exited its investment in Chrysler. http://www.treasury.gov/press-center/press-releases/Pages/tg1253.aspx In total, the taxpayers realized $11.2 billion or a small loss of $1.2 billion.
In Ally Financial, the US Treasury has recovered $5.5 billion to date, and still owns 73% of the common stock of Ally. In the quarter that ended, Ally had record pre-tax earnings from its core operations (making auto loans) of $533 million; that annualizes out to more than $2 billion per year in pre-tax earnings. In short, I think the US Treasury (a 73% shareholder) stands a very good chance at recovering all of its remaining $11 billion investment in Ally.
Which brings us to General Motors. The bottom line is that the US Treasury has pulled out about $24 billion of its original $51 billion investment. The UST still owns 500,065,254 shares of GM (a shade under 32% of the outstanding shares). UST’s cost basis is $43.52 per share; GM closed today at $24.39 per share, up from a low of $19 per share and an IPO price of $33 per share. So we are at least $10 billion under water on the GM investment. This loss is only aggravating if you understand the history of the GM “Bankruptcy” process.
In a typical bankruptcy in the United States, creditors are paid according to their seniority. And creditors that are similarly situated are treated “equally”. This was not the case in the GM bankruptcy, or in the Chrysler bankruptcy. http://www.law.nyu.edu/ecm_dlv3/groups/public/@nyu_law_website__alumni/documents/documents/ecm_pro_065458.pdf Here is a good article by an NYU Law Professor discussing the ways the GM and Chrysler plan’s violated the US Code. In short, In GM’s bankruptcy, claims put in by the UAW were given nearly $17 billion of value that could have been used to repay the US taxpayer. These pension claims, a direct transfer to the unionized auto workers of America, were artificially prioritized above other creditors and incredibly, above the new money invested by the US taxpayer. Also, if you actually read the Asset Purchase Contract that embodies the terms of the UST’s investment http://www.treasury.gov/initiatives/financial-stability/TARP-Programs/automotive-programs/Documents/GM_Master_Sale-and-Purchase_Agreement_090909.pdf it is very clear that the “New” GM was only going to assume pension and other obligations that were owed to the UAW; the government actually discriminated against non-union workers (see top of page 30).
So there you have it, a relatively complete accounting of the major items in TARP. I thought that the 4th birthday should bring some sort of accounting.
Enjoy the debate tonight and when you hear O’bama claim to have “saved GM”, or when he complains that “Wall Street was bailed out” and hasn’t “paid its fair share”, be a skeptic.
Remember, an informed electorate is a dangerous thing.