TARP and the Stimulus Package Revisited
Introduction
In the US, there have been two major Federal programs launched to deal with the global economic malaise:
- TARP ($700 billion) was intended to deal with the credit freeze, and
- The American Reinvestment and Recovery Plan ($787 billion) was designed to deal with the recession by creating/saving 3 to 4 million jobs.
Looking back, what can we say about the effectiveness of these programs?
TARP
Let us quickly revisit the circumstances leading to TARP.
· The real estate market peaked, and as is always the case on the downside of the cycle, some foreclosures occurred;
- Panic grew in the large banks because none of them knew how risky their holdings of mortgage backed securities actually were;
- Trading in mortgage backed securities came to a halt and the large banks stopped lending to one another;
- A global credit freeze took place; real estate and stock losses exceeded $50 trillion.
In this setting, the then Secretary of the Treasury Paulson made a power grab unprecedented in U.S. history. In the text of his initial four-page Congressional request, he asked for $700 billion to purchase mortgage-related assets defined as “residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages.” He asked for this authority with no strings and absolutely no liability for him or his staff if things went wrong: “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.” And even though the bill ultimately passed Congress (it ended up being 96 pages long), Paulson got what he wanted.
I never liked TARP as originally formulated because it was the wrong medicine for the disease. The disease was that the credit markets were frozen because banks did not trust one another. This could and should have been remedied by the Feds guaranteeing bank-to-bank loans. The Executive branch could have made these guarantees via the Federal Reserve with no Congressional involvement. And the guarantees would have cost American taxpayers nothing unless the banks failed. Instead, we got TARP after a delay of three critical weeks that were needed for Congressional approval.
Where does TARP stand today? Virtually none of the money has been used to buy mortgage- related assets. As can be seen in Table 1, the Treasury has made investments or commitments of $478 billion (fortunately less than the original $700 billion in the Congressional Bill), $84 billion has been repaid, leaving $394 billion outstanding.
Table 1. – TARP Summary (in bil. US$)
|
Investments |
|||
| Progam Investments |
Initial |
Repurchase |
Net |
| Capital Purchase Program (CPP) |
204,644 |
70,722 |
133,922 |
| Automotive Industry Financing Program – AIFP |
79,967 |
2,140 |
77,827 |
| Automotive Supplier Support Program – ASSP |
5,000 |
1,500 |
3,500 |
| Consumer/Business Lending Initiative Program – TALF |
20,000 |
|
20,000 |
| Targeted Investment Program – TIP |
40,000 |
|
40,000 |
| Asset Guarantee Program – AGP |
15,000 |
10,000 |
5,000 |
| Systematically Significant Failing Institutions |
69,835 |
|
69,835 |
| Legacy Securities Public/Private Program – S-PPIP |
16,667 |
|
16,667 |
| Home Affordable Modification Program – HAMP |
27,253 |
|
27,253 |
| Total Investments/Commitments |
478,366 |
84,362 |
394,004 |
|
|
|
|
|
| Income |
|
|
|
| Warrant Proceeds |
2,901 |
|
|
| Dividends |
12,799 |
|
|
| Interest |
233 |
|
|
| Other |
425 |
|
|
| Total Income |
16,358 |
|
|
|
|
|
|
|
| Return |
3.4% |
4.2% |
|
TARP income has been $16 billion which, if annualized, would mean returns of 3.4% and 4.2% against the Initial and Net investments/commitments, respectively. However, these returns will be erased by the losses to be realized on the Automotive Industry Financing Program.
The Capital Purchase Program has been by far the largest TARP activity. Table 2 provides detailed data on the top ten banks participating in the program as well summary totals.
Table 2. – Capital Purchase Program (in mil. US$)
|
|
|
Warrant | |
| Financial Company |
Amount |
Repaid |
Proceeds |
| Citigroup |
25,000 |
|
|
| Wells Fargo |
25,000 |
|
|
| JP MorganChase |
25,000 |
25,000 |
|
| Bank of America |
25,000 |
|
|
| Goldman Sachs |
10,000 |
10,000 |
1,100 |
| Morgan Stanley |
10,000 |
10,000 |
950 |
| The PNC Financial Services Group Inc. |
7,579 |
|
|
| US Bancorp |
6,599 |
6,599 |
139 |
| Capital One |
3,555 |
3,555 |
|
| SunTrust |
3,500 |
|
|
| Total – Top 10 |
141,233 |
55,154 |
2,189 |
| Overall Total – 685 Banks |
204,644 |
70,722 |
2,901 |
Surveys indicate that for all CPP recipients, bank loans are down.
It is notable that neither Bank of America nor Citibank have paid any of their money back inasmuch as each of them has also received $20 billion from the Targeted Investment Program as well as billions of dollars of assistance from the Asset Guarantee program.
The AIG saga is also worthy of comment. At one point, the US Government was committed to more than $170 billion to bail out the insurance giant AIG. AIG is the sole recipient of the $70 billion coming of TARP’s Systematically Significant Failing Institutions Program.
Just after Congress had passed TARP, Paulson had a private meeting with AIG senior officials. As I reported in http://www.morssglobalfinance.com/reflections-on-tarp-aig-citi-and-compensation/, the only other person in that meaning was Lloyd Blankfein. He had just replaced Paulson as CEO of Goldman Sachs. Shortly thereafter, AIG divulged that it has used some of the government largess to pay Goldman Sachs $12.9 billion. This was after Goldman had already directly received $10 billion from TARP. Without the money from AIG, Goldman would have failed stress tests (see p. 27 of http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20090507a1.pdf ). So today, Goldman has been able to pay back the $10 billion it received directly from TARP.
An appearance of impropriety? I think so.
What can we say overall about TARP? CPP was the wrong medicine to end the credit freeze. The auto and auto supplier support is mostly lost money. TALF and S-PPIP are putting the US government in the financial asset investment business with the private sector – totally inappropriate and unnecessary. The mortgage modification program (HAMP) is helping to reduce foreclosures. The credit freeze is gradually receding. This is happening primarily as a result of Federal Reserve and other governmental loan guarantees outside of TARP.
On final fact on TARP: personnel and other costs of running TARP are about $85 million per month. That works out to a little more than $1 billion per year.
For excellent TARP data, see:
http://www.financialstability.gov/latest/reportsanddocs.html and http://financialservices.house.gov/Key_Issues/TARP_Oversight_and_Accountability_Reports/Monthly_105_a_for_September_2009_10_09.pdf.
The American Reinvestment and Recovery Plan
The American Reinvestment and Recovery Plan was launched in February 2009. With funding of $787 billion, its goal is to create/save 3 to 4 million jobs. Data on what the Plan will be able to accomplish is just coming via two sources:
- reports from the Federal agencies/departments paying out the funds, and
- reports from the recipients.
Consider first the Federal government reports presented in Table 3.
Table 3 – Federal Reports on Stimulus Package (in bil. US$)
|
Funding |
Paid |
% Paid |
|
| Agency |
Available |
Out |
Out |
| Education |
67.600 |
21.820 |
32.3% |
| Health/Human Services |
55.630 |
34.260 |
61.6% |
| Labor |
54.530 |
29.180 |
53.5% |
| Transportation |
29.570 |
4.060 |
13.7% |
| Energy |
18.260 |
1.020 |
5.6% |
| Social Security |
13.300 |
13.300 |
100.0% |
| Housing |
11.330 |
1.710 |
15.1% |
| Agriculture |
7.210 |
5.280 |
73.2% |
| Environmental Protection |
7.140 |
0.237 |
3.3% |
| Justice |
3.970 |
1.230 |
31.0% |
| Treasury |
3.820 |
1.230 |
32.2% |
| Defense |
3.340 |
0.244 |
7.3% |
| Natl. Science Foundation |
2.400 |
0.027 |
1.1% |
| US Army Corps of Engineers |
2.300 |
0.366 |
15.9% |
| General Services |
1.820 |
0.299 |
16.4% |
| Homeland Security |
1.720 |
0.108 |
6.3% |
| Commerce |
1.350 |
0.579 |
42.9% |
| Veterans |
0.909 |
0.501 |
55.1% |
| Interior |
0.900 |
0.141 |
15.7% |
| Natl. Aeronautics/Space |
0.445 |
0.037 |
8.3% |
| Small Business Adm. |
0.359 |
0.117 |
32.6% |
| National Community Service |
0.156 |
0.020 |
12.8% |
| State |
0.144 |
0.025 |
17.4% |
| Railroad Retirement |
0.141 |
0.141 |
100.0% |
| Federal Communications |
0.072 |
0.053 |
73.6% |
| Natl. Endowment for Arts |
0.050 |
0.010 |
20.0% |
| Smithsonian Institution |
0.021 |
0.002 |
9.5% |
| USAID |
0.021 |
0.004 |
19.0% |
| Total |
288.508 |
116.001 |
40.2% |
The first point to note from Table 3 is the number of Federal departments/agencies involved. You can’t tell me the best way to get stimulus money out in a hurry was to give it to give it out via 28 different government bureaucracies.
Second, so now in October, nine months after enactment, only $288 billion of the $787 billion, or 37% of the funds, are available.
Third, it is somewhat impressive that 40% of the funds available have been “paid out”. A major contributor to this high percentage is transfers made to lower level governments to save jobs.
Consider next the recipient reports presented in Table 4.
Table 4. – Recipient Reports on Stimulus Package (in bil. US$)
|
Funds |
Funds |
Funds |
Jobs Created |
|
| State |
Awarded |
Awarded/Cap |
Received |
Saved |
|
Alabama |
$178,584,902 |
$38 |
$14,823,533 |
355 |
|
Alaska |
$260,027,473 |
$379 |
$25,527,604 |
287 |
|
Arizona |
$139,394,764 |
$21 |
$29,602,539 |
657 |
|
Arkansas |
$59,148,946 |
$21 |
$6,676,854 |
163 |
|
California |
$1,140,160,787 |
$31 |
$157,917,608 |
2,260 |
|
Colorado |
$553,776,068 |
$112 |
$48,328,093 |
4,695 |
|
Connecticut |
$47,242,441 |
$13 |
$1,036,461 |
20 |
|
Delaware |
$30,291,890 |
$35 |
$4,812,042 |
125 |
|
District of Columbia |
$562,322,305 |
$950 |
$22,448,456 |
370 |
|
Florida |
$334,589,808 |
$18 |
$47,992,548 |
1,635 |
|
Georgia |
$209,482,928 |
$22 |
$19,196,775 |
1,046 |
|
Guam |
$44,612,920 |
$0 |
$457,554 |
121 |
|
Hawaii |
$122,426,923 |
$95 |
$12,541,719 |
250 |
|
Idaho |
$477,881,019 |
$314 |
$82,188,228 |
632 |
|
Illinois |
$473,752,704 |
$37 |
$21,652,299 |
288 |
|
Indiana |
$146,366,045 |
$23 |
$12,037,921 |
328 |
|
Iowa |
$79,310,049 |
$26 |
$3,134,091 |
158 |
|
Kansas |
$118,086,846 |
$42 |
$20,752,682 |
209 |
|
Kentucky |
$225,461,391 |
$53 |
$22,823,585 |
867 |
|
Louisiana |
$115,018,704 |
$26 |
$33,304,949 |
564 |
|
Maine |
$22,618,007 |
$17 |
$16,280,717 |
87 |
|
Maryland |
$590,509,364 |
$105 |
$48,241,770 |
965 |
|
Massachusetts |
$335,241,953 |
$52 |
$47,616,167 |
584 |
|
Michigan |
$115,016,107 |
$12 |
$149,568,669 |
397 |
|
Minnesota |
$90,980,677 |
$17 |
$33,002,079 |
605 |
|
Mississippi |
$138,938,139 |
$47 |
$10,027,865 |
225 |
|
Missouri |
$144,138,143 |
$24 |
$53,986,117 |
475 |
|
Montana |
$99,222,138 |
$103 |
$11,451,684 |
453 |
|
Nebraska |
$48,436,627 |
$27 |
$1,551,547 |
87 |
|
Nevada |
$70,804,150 |
$27 |
$15,512,281 |
159 |
|
New Hampshire |
$16,322,139 |
$12 |
$427,341 |
22 |
|
New Jersey |
$208,112,862 |
$24 |
$29,733,751 |
622 |
|
New Mexico |
$514,911,760 |
$259 |
$263,559,316 |
419 |
|
New York |
$750,770,331 |
$39 |
$59,974,189 |
656 |
|
North Carolina |
$121,273,751 |
$13 |
$11,911,316 |
301 |
|
North Dakota |
$95,454,597 |
$149 |
$16,909,008 |
219 |
|
Northern Mariana Islands |
$1,496,819 |
$0 |
$84,409 |
28 |
|
Ohio |
$256,268,787 |
$22 |
$23,525,623 |
699 |
|
Oklahoma |
$79,861,774 |
$22 |
$10,216,245 |
202 |
|
Oregon |
$105,688,096 |
$28 |
$48,566,518 |
491 |
|
Pennsylvania |
$2,035,153,906 |
$163 |
$39,191,670 |
495 |
|
Puerto Rico |
$7,535,626 |
$2 |
$1,394,712 |
126 |
|
Rhode Island |
$7,593,190 |
$7 |
$540,798 |
6 |
|
South Carolina |
$253,842,587 |
$57 |
$219,564,904 |
146 |
|
South Dakota |
$33,786,876 |
$42 |
$4,638,459 |
97 |
|
Tennessee |
$1,111,093,954 |
$179 |
$75,582,686 |
1,156 |
|
Texas |
$534,020,287 |
$22 |
$47,084,710 |
1,100 |
|
U.S. Virgin Islands |
$9,415,808 |
$0 |
$247,163 |
63 |
|
Utah |
$194,367,989 |
$71 |
$17,369,807 |
536 |
|
Vermont |
$12,580,985 |
$20 |
$495,047 |
28 |
|
Virginia |
$366,321,001 |
$47 |
$80,008,834 |
654 |
|
Washington |
$2,218,947,727 |
$339 |
$228,819,248 |
2,909 |
|
West Virginia |
$58,193,089 |
$32 |
$4,365,051 |
31 |
|
Wisconsin |
$46,161,884 |
$8 |
$12,293,907 |
248 |
|
Wyoming |
$18,376,036 |
$35 |
$585,123 |
61 |
|
Total |
$16,031,396,079 |
$4,279 |
$2,171,584,272 |
30,383 |
|
Job Estimates |
1,491,515 |
11,010,890 |
It is not surprising that recipients report considerably lower payment levels than the government.
In the last row, I have estimated how many jobs would be created if funds awarded and received were $787 billion, based on the 30,383 jobs already reported as having been created. In other words, for funds awarded, I multiplied the 30,383 jobs by the ratio of $787 to $16 and performed the same calculation for the funds received column.
Let us look at the job creation numbers in the context of US job losses. Since the US recession started in December 2007, 7.2 million jobs have been lost. If the stimulus package works according to White House estimates, it will save 3 to 4 million jobs. We will see.
For good information on the stimulus package, see http://www.recovery.gov.
