TARP – What Has Happened? Does Anyone Care? Part 3 – Autos and Assessment
by Elliott R. Morss, Ph.D.
TARP is a large, on-going program (see Table 1) with decisions being taken on a daily basis that have significant implications for US taxpayers. In earlier parts of this series,
Table 1. – TARP – Activities Through June 2010
|Capital Purchase Program (CPP)||204.89||204.89||146.88||58.01|
|Auto Industry Finance (AIFP)||84.84||79.69||11.20||68.49|
|Targeted Investment Program (TIP)||40.00||40.00||40.00||0.00|
|Legacy Securities (PPIP)||30.36||12.41||0.37||12.04|
|Mortgage Modification (HAMP)||41.32||0.25||0.00||0.25|
|Consumer/Business Lending Initiative||20.18||0.19||0.00||0.19|
I have covered CPP, PPIP, and AIG. This part will cover the auto industry support and offer an overall assessment of TARP. The mortgage and lending programs are important, but I lack the expertise to cover them adequately.
Auto Industry Finance
Support under this program went to two very different types of firms:
- finance companies that lost money trading asset backed securities – GMAC (now Ally) and Chrysler Financial;
- high cost auto companies badly hurt by the global recession (General Motors and Chrysler).
TARP lent $16.2 billion to GMAC later converted to preferred convertible shares. When all shares are converted to common stock, the US government will own about 90% of Ally. Ally does not trade publicly, but is talking of a possible IPO in 2011. TARP also lent $1.5 billion to Chrysler Finance that has been repaid.
TARP lent $50.7 billion to General Motors. $986 million was lost during the reorganization. TARP now owns 60.8% of the new GM’s common stock and preferred stock with a $2.1 billion liquidity preference. There is talk of an IPO for new GM.
TARP lent $12.8 billion to Chrysler. $1.9 billion was lost when the company went bankrupt. TARP now owns 9.9% of new Chrysler (Chrysler Group LLC) and a debt claim of $7.1 billion against the firm. There is no talk yet of an IPO for new Chrysler.
There is no question that something substantial had to be done when the bottom fell out of the asset-backed securities (ABS) market. It had to be done because the crisis put the safety of deposits at risk. Why? Because Glass-Steagall had been overturned and banks had become traders.
Who cares if investment banks, private equity firms, and hedge funds trade and fail? I don’t – caveat emptor – unless bank deposits are put at risk and they were. So protecting depository institutions required propping up AIG and a number of financial institutions because banks trading activities had made these institutions interdependent.
Paulson et al saw the threat but in my view used the wrong initial medicine to deal with the bank problem. It took three weeks to get the TARP appropriation approved by Congress. In those three weeks, the credit freeze worsened and catapulted us into a global recession.
What should have been done? The Federal Reserve has unlimited authority to make loan guarantees. It does not need Congressional approval to make guarantees. How should this authority have been used? As I have argued at length elsewhere, the credit freeze occurred primarily because with all the trading and repackaging of mortgages, the ability to accurately assess the risk of different packages had been lost. The ABS market did not close down because most mortgages were suddenly bad; it closed down because nobody knew which packages were good and which ones were risky.
At the beginning of the three weeks it took to get TARP approved, the Fed should have announced it would guarantee the ABS packages of all banks at pre-crisis values for three months. And during that time, banks would have to get an accurate picture of the riskiness and performance of their ABS packages for guarantees to continue. In short, I fault Paulson et al for not making more use of the Fed’s loan guarantee window.
In looking at the CPP program, it is notable that while more than 70% of the funds have been repaid, 87% of the banks getting support have repaid nothing yet.
The Treasury selected and then partnered (loan and equity) with 8 companies to invest in real estate at the bottom of the cycle – a money making venture if there ever was one. In my view, this is a bad program for government. The total program ($40 billion) is too small to have any real impact on the market. The government should leave such programs to private entities.
As distasteful as this bailout was, something had to be done because depository institutions trade ABS and consequently have links to AIG. This bailout is large and complex. But I fault the government for two actions:
- Choosing to pay banks 100 cents on the dollar with the FRBNY money. AIG was effectively bankrupt. The US government did not buy their insurance before it went bankrupt – the banks did. That cost $37 billion.
- The Series D preferred stock paid a 10% dividend and it was cumulative. It was converted into Series E preferred stock. The government is also holding Series F preferred stock. Together, Series E and F preferred are valued at $71.4 billion. They pay a 10% dividend, but it is not cumulative. Why not?
It is hard to justify the Federal largesse going to the financial arms of the auto companies. They made the mistake of trading in ABS and lost money. Chrysler Financial paid its money bank, but the government will own about 90% of GMAC/Ally when it converts its preferred stock holdings.
I see the payments to the auto companies more as a part of the stimulus package than having anything to do with the credit freeze.
5. Government Ownership
The government has started to sell off its 25% ownership of Citigroup. But its ownership in other companies is sizeable: AIG – 80%+, Ally – 90%, GM – 61%, Chrysler – 10%. With all these holdings, maybe we should feel good about our TARP bureaucracy costing us $133 million monthly having contracts with 22 law firms and 15 financial organizations.
As noted in earlier writings, I am not a fan of our financial reform bill because it does not ban bank trading. But there is one section relevant to TARP. Section 1302 caps TARP at $475 billion. I quote Paragraph 5 of that section: ‘‘(5) No authority under this Act may be used to incur any obligation for a program or initiative that was not initiated prior to June 25, 2010.’’ And Section 1303: ‘‘(f) REPORT.—The Secretary of the Treasury shall report to Congress every 6 months on amounts received and transferred to the general fund under subsection (d).’’