Did We Really Waste $78 Billion on TARP?
The problem is that since FASB 157 (the “mark to market” rule) went into effect, once an asset is sold at a fire sale price, everyone else must mark the asset down to the fire sale price. That triggers a lot of bad things, and the net effect of those bad things is to make a bank apparently insolvent.
So along comes the TARP. There was a lot of debate on how exactly the TARP should work, and frankly we’re not clear yet how it really was exercised; there’s plenty of room to criticize, and once we have better information I’m sure there will be a lot of evaluation with hindsight.
There’s one thing of which we can be certain: if TARP was going to work, it must buy assets at more than their market value. We know that because if TARP bought the assets at just what the market would yield at the time, it would have no effect. If the assets would sell today at 25¢ on the dollar, and a bank was insolvent valuing those assets at 25¢ on the dollar, then buying them doesn’t make the bank any less insolvent. The whole point of TARP was to make the Treasury the “buyer of last resort,” in order to pick up “toxic assets” and improve the balance sheets of the banks that held them.
But that was ancient history in the modern news world, it’s months ago, and who remembers from back then? Still, it’s bad enough that you can’t expect the legacy media to understand technology issues or report them correctly, but you would hope that business reporters would understand business. Somehow, the urge to report crises, catastrophes, and impending doom overwhelms the desire to think.
Well I don’t know about ‘overpaying’ but I sure would like to see an in depth analysis of why we can’t simply let the incompetent greedy institutions that created and purchased these ‘assets’ go to the wall and LOSE EVERYTHING. Why should I have to pay for some idiot bankster while he continues on as if nothing has happened except for the the fact that he has to struggle on with only $200.00 for his lunches instead of his usual $400.00. How ‘business as usual’ can be a recipe for future success is way beyond me. I would have thought that ‘business as usual’ would be about the last thing we needed. All that seems to be happening is that there is a panicked attempt to re-inflate the collapsed debt/credit bubble, at whatever cost. This is doomed to be an EPIC FAIL. Even if successful, it is a disastrous social policy which will simply fail again. Sooner rather than later taking the last possible social reserves of ‘real’ money with it. And then where will we be ?
This is not even remotely funny any longer. Bankrupt them all and start over. It’s the only FAIR way to go at this point. If these are the ‘geniuses’ running the thing then fire them and get some randompeople off the street, and see if the results can be improved. They probably can’t be worsened.
I would not buy a 2-bedroom cracker box for $450k in Los Angeles because, to my mind, it was not worth a dime over $220k, I don’t care how many real-estate hucksters said otherwise. I looked at how and when the house was made and what the real estate prices were up until about 2000, and it was not worth what the “make big money in real estate” scammers claimed, period. Now, I am vindicated, and the market is sliding right back to it’s real and natural value (before 10 years of fraud pumped it up), and I am waiting to buy a great house for a fair price. But now the Fed is meddling in the market and is trying to prop up the price back to the level that I will not purchase it. Why? So they can save the banksers and real estate fraudsters from the shit sandwich I intend to feed them as payback for having to endure their lies and arrogance and smug “house prices only go up” rhetoric for the past decade. I’ll just sit here on the sideline with my money and wait. Right now, you can find hundreds of idiots who will practically beg you to rent their folly for a good price in order to save them from going under. The smart money will wait.
FASB 157 (the “mark to market” rule).
To quote the sage Sultan of Agrabah from Aladdin:
“It’s that Law that’s the problem.”
Would be nice to have a Sultan that could fix it by decree.
Doug, you’d do well to go back and read the October piece, then. The banks and institutions that had the most toxic assets are gone: Washington Mututal, Wachovia, Merrill-Lynch, Bear-Stearns, AIG, and so on. But the issue was the banking system being pulled under; if that had happened — well, when it happened in Argentina, the result was 25 percent unemployment and middle-class people reduced to rag-picking to eat.
Sneedle, I think you’re right than the overly agressive mark to market has a big share of the blame.
why we can’t simply let the incompetent greedy institutions that created and purchased these ‘assets’ go to the wall and LOSE EVERYTHING
Well, there is great attraction in the idea that the individuals who ran the institutions into the toilet should be the ones to pay to clean things up. But the problem is that those individuals and those intitutions are not one and the same thing. Most of the shareholders of those institutions (i.e. the owners) are innocent of any wrongdoing. So letting the institutions sink into a black hole of nothingness means harming not only the bad guys, but innocents as well.
Oh, I think an orderly bankruptcy or other reorganization for some of them is in order. Citi, I just heard, has $1 trillion in assets and a a market value of $18 billion; the market clearly “thinks” there’s $982 billion in liabilities hanging around somewhere. Some kind of reorganization seems in order. Much the same with GM: their cost structure isn’t improved by any amount of bailout money, or by forcing the executives to wear sackcloth and ashes in Congressional hearings either.
But that’s different from letting the banking system collapse; the attendant massive deflation would not be a Good Thing.
Mark-to-market is the obstacle here. It exacerbates trends towards bubbles and busts. Remove it, then these guys can unload their assets without making themselves unviable or vulnerable. This is the source of the credit freeze. They are trying to adhere to their required ratios of lending to assets. Mark-to-market makes it impossible to unload their bad assets, because as soon as they do, the rest of their values sink, then their ratios are off and Bad Things happen. I said this same thing back in September when the ‘crisis’ broke.
YES YES AND YES!
Wrong, we wasted $350,000,000,000 and aren’t finished yet.