TARP ROI? Also: PPIP, we hardly knew ye.

A tasty morsel from Planet Money:

Treasury Department just sent out this statement saying that 10 of the largest financial institutions have been cleared to repay their bailout money, totaling as much as $68 billion.

Mixed news of course - we'll have to wait until all is said and done to properly judge TARP, and this ignores any systemic or solvency problems that may still exist, but if the taxpayer comes close to breaking even on this it'll be a major win.

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On a related note, remember all the hullabaloo about Geithner's infamous PPIP? Yeah, that whole thing never got off the ground. (Which might actually be a good thing.)

Heads Will May Roll!

"The very notion that anyone would infuse money into a financially troubled entity without demanding changes in management is preposterous."

-Elizabeth Warren, Chair of the Congressional Oversight Panel to oversee the TARP

I agree, Lizzie. But guess what? We already did! What now?

Elizabeth Warren, chief watchdog of America's $700bn (£472bn) bank bailout plan, will this week call for the removal of top executives from Citigroup, AIG and other institutions that have received government funds in a damning report that will question the administration's approach to saving the financial system from collapse.

Warren, a Harvard law professor and chair of the congressional oversight committee monitoring the government's Troubled Asset Relief Program (Tarp), is also set to call for shareholders in those institutions to be "wiped out". "It is crucial for these things to happen," she said. "Japan tried to avoid them and just offered subsidy with little or no consequences for management or equity investors, and this is why Japan suffered a lost decade." She declined to give more detail but confirmed that she would refer to insurance group AIG, which has received $173bn in bailout money, and banking giant Citigroup, which has had $45bn in funds and more than $316bn of loan guarantees.

It'll be interesting to see how this plays out. Is the Panel then recommending FDIC receivership? How does Warren see the shareholders getting wiped out? All common stock goes to Uncle Sam?

And who has the authority to act or not on the Panel's recs? Treasury? Can Geithner just give Warren the Heisman on this or is the ball in Congress's court now?

Clearly this has been a case of putting the (gold-plated) cart before the proverbial horse.

Via capitalism, birthday suit style.

Digging Deeper on Geithner's Plan

I've been watching several excellent videos explaining the Geithner Public-Private Investment Partnership (PPIP) plan over at the YouTubes courtesy of Salman Khan of the Khan Academy. Khan explains things clearly and effectively with simple visual aids.

If you're confused about the plan (and confusing it is) then check out Khan's series. He starts off explaining the basics of how the plan works and then in "Geithner II" raises the disturbing point that these banks could buy these assets from themselves - via special investment vehicles, hedge funds, or other independent entities associated with the banks - in effect recapitalizing themselves by shoring up balance sheets with a fat government subsidy:



This does seem like an almost foregone conclusion unless the gov't can somehow prevent it through legal means...but I'm not sure they can. Even if the banks do an end-around here, it might actually work in terms of recapitalizing the banks and avoiding insolvency, but it would essentially be an indirect bailout, which is extremely distasteful right now. I'm more or less in agreement with Khan and the Krugman/Johnson camp - the sooner we nationalize these institutions ("nationalize" in the sense of putting them into FDIC receivership, recapitalization, and eventual reprivatization) - the sooner we can rebound from this crisis. Even if the PPIP works to keep the banks functioning, it does so at great expense to the taxpayer and does nothing to address the systemic risk of these "too big to fail" banks. I'd prefer the definite path of nationalization rather than this pseudo-nationalization by way of enormous gov't subsidy.

In his latest video, "Geithner 5: A better solution," Khan addresses the problem which the PPIP is intended to solve - that of a lack of information about these toxic assets and liquidity (ignoring for the moment the high likelihood that it's as much as or even more of a solvency problem than a liquidity one). He has a great idea, similar to the one I mentioned here, to open up the market to all investors and provide detailed information on all these toxic assets. Basically list these assets as shares of corporations (owned by their respective banks) on the New York Stock Exchange and allow anyone to purchase shares. At the moment these assets are only available to institutional or large net worth investors via hedge funds and the like; mincing them into thousands of shares would allow access to Phil Everyman. Aside from the idea that individual investors should be able to receive the benefits of the "Geithner put" just like hedge funds, Khan's idea solves both the lack of information and liquidity problems:



There are details to be worked out in the execution, of course. The analysis and summaries of the assets as he describes would take some time and a lot of hard work on the part of some smart people, but it's something that, once done, would allow any individual with a modicum of means to invest in these assets.

I find this stuff fascinating, intimidating, and troubling all at once.

Perhaps an iShares PPIP ETF?

Love this idea from Daniel Gross over at Slate. Wouldn't be too hard to imagine a way to get individual investors access to the new Public-Private Investment Program (PPIP), and I would guess a lot of savvy investors would be willing to toss a little cash toward a big upside/low downside investment that would work directly toward helping stabilize the financial sector.

Hell, I'd jump on board if all my investable assets weren't tied up in nonperishables right now.

The Geithner Put: Will It Work?

Interesting debate between four economists over at the Times concerning the latest revision of the TARP from Treasury.

From what I understand - and don't quote me on this - Geithner's program provides non-recourse low-cost loans to private investors. Basically the gov't is subsidizing about 93% of the cost of buying up at least $500B in toxic assets. This gives investors essentially zero downside with the taxpayer* FDIC on the hook for major cabbage if the assets turn out to be worthless in actuality, not just artificially depressed (as the Geithner camp is hoping is the case).

The debate ranges from "this plan sucks" (Krugman) to "better than nothing" (DeLong). From what I've read it seems that the plan will help, but the real question is whether it is just delaying an inevitable nationalization.

*Update: My mistake. The taxpayer isn't on the hook because the FDIC (funded by bank fees, not tax dollars) guarantees the loans to investors to purchase suspect loans from banks, although the taxpayer is on the hook for the second part of the program, which targets purchase of mortgage-backed securities (the typical so-called toxic assets). Check this post for clarification. But the gov't is nevertheless giving investors a huge incentive here assuming auction prices are acceptable to institutions holding these crappy assets.

"I don't really have a question but I was told that I can use the five minutes."

Check out this clip from the House Committee on Financial Services hearing on 2/12, when TARP recipients went to the Hill with their tails between their legs to receive the full fire and brimstone of one Rep. Mike Capuano (D-MA-8).



Gotta love my congressman's enthusiasm. I like around 4:40 when he screams about getting the money "out on the street." Sounds like a capo threatening his loansharks.

"In the new world that you created and we have to clean up."

(Please note that not all of his constituents are incarcerated.)

Whoa and he's a fellow alumnus. Big Green '73! Go figure. Amazing what you can learn about the people who legislate on your behalf if you do a little homework.