All of this time and attention is being applied due to what is perceived as a "bailout" of the banks by the Federal Government via the TARP. Many pundits have opined that the banks have had it easy and are making all kinds of money with all the "free money" provided by the Treasury and the Fed. And officials are boasting about the "return" they are getting from TARP "for the taxpayers". Here's a recent one from MSNBC that has all of the required drama and outrage and big numbers.
But what did the banks do with the TARP funds? What did they use them for? What assets did they buy with the funds? I can't find anything.
In FY 2009, the TARP withdrawals from the Treasury's account totaled about $365B, this was an equity investment by the Treasury into the banks. It started in 4Q CY 2008 and was effectively allocated by end of 1Q 2009. $365B is a big number and "can't hide". Since it was equity, it perhaps could even be leveraged. What happened to banks asset base from end of 3Q 2008 to the end of 1Q 2009? Let's look at the big asset classes from the Fed's latest z.1:
US Treasuries (No change)
MBS (Up $100B and subsequently back to unchanged)
Bonds (No change)
Stocks (Down $20B)
Total Bank Credit (DOWN!)
I think we have to conclude the trend was unchanged to down for bank assets all throughout the period that the TARP funds were being dispersed, and this trend has persisted if you follow it through to present. It doesn't look (to me) that the banks acquired any assets with the additional authority the TARP funds may have provided, and if anything were 'deleveraging' or reducing assets the whole time.
And now, the banks are just returning the TARP funds that they had no use for anyway. The only "use" I can think of is that one set of government regulators desired higher bank capital levels for a period of time, so another set of government appropriators provided the funds. This could have been easily avoided by a temporary waiver on capital levels while the banks reduced assets anyway.
This TARP controversy was and is a colossal waste of political time and energy. We could have avoided this soap opera, and instead had an intelligent discussion about how to truly increase output and employment in the economy.
12 comments:
Yes, you are absolutely right. Tarp was totally unecessary and a waste of time. Easier ways could have been found to address the problem as you pointed out. And since Tarp is considered money "spent" by the government, it factors in to the whole, deficit-fear mentality, leaving less, or nothing, for truly important investments that the gov't could have made.
Mike I looked into this to try to tell if the TARP banks were selling bonds these past two weeks to be able to send back the funds to the Treasury. But it looks like they never bought any in the first place so they kept the TARP funds as excess reserve balances that now pay small interest from the Fed.
You bring up the deficit: If the Treasury deficit spends to buy equity in banks, and the banks just hold the funds as excess reserve balances (which now pay interest), then there would be no net new funds available to buy the new bonds. So in the case of TARP you may have had Treasury issue $365B of new bonds for which the new reserves stayed tied up in the banks interest paying reserve accounts, so the rest of the market would have to have absorbed this 365B, sounds like it would have been very bearish for bonds at that time, and may have contributed to the big drop off in bonds from the late 2008 highs?
Banks have been issuing new stock to "pay back" the Treasury. That's the real rub. You know how they say deficit spending "crowds out" private sector investment? And as we know, that's simply not true because the deficit adds to private sector wealth in the form of increased holdings of financial assets and higher income/savings etc as the gov't spends the money. On the other hand, selling stock exchanges reserves for stock without those reserves being recycled back in the form of additional spending. So, the "payback" is really a true crowding out of private sector investment.
Mike/Matt,
This is very interesting. Basically you are saying that the TARP money got paid in reserves instead of Treasuries. However the Fed requires by law to ask the Treasury to raise bonds since it was a fiscal operation. So the Treasury needed to raise about $365B from the market.
In the QE operations, the Fed had announced that it may purchase $300B of Treasuries. Is it anyway related ?
Ramanan,
I'm assuming that when Treasury bought the 365B TARP shares they took the shares from the banks and then forwarded the banks reserve balances. Simultaneously Treasury had to sell 365B of bonds. Based on what I see in the z.1, it doesnt look like the banks bought anything (not even short term Treasuries). So I assume the funds constituted excess reserve balances that the banks just held on to. So at that point you had 365B of bond market dilutiuon with no new reserve balances available in the system to help to absorb the bonds.
This is what you may generally get if the Treasury buys financial assets from banks via deficit spending, and the Fed now pays the banks interest on reserve balances. These are very strange times.
Mike is right that the banks lately are selling some more shares to pay back some of the Tarp funds. But here is an article that says Bof A did use some excess reserve balnces to pay back half of their tarp: "The bank said it will repay the TARP funds by the sale of $18.8 billion in common equivalent securities, along with $26.2 billion in “excess liquidity.” Documents should be signed sometime this week to cement the deal."
So now the Treasury account has the reserve balances back and I guess since the bonds were issued 12 months ago, the Treausry can now spend the reserve balances without issuing any new bonds for a few weeks here. Very strange times...
Ram,
To your specific question, I believe the Treasury always spends in reserve balances just like we do. But since it cannot have an overdraft, the treasury sells bonds and has the proceeds depoisted in the Treasurys account at the Fed somewhat simultaneously.
I dont think it was related to the Feds QE as Mike has said here before: "the Fed can acquire assets at zero cost", so the Fed is just creating reserve balances out of thin air to buy T-bonds or MBS this year, I believe as open market operations intended to control the term structure of interest rates., Resp,
Matt,
Thanks for the comment. Yes QE doesn't have to do anything with this, I understand. The reason I brought up QE is that $365B sounds too huge for the market to have absorbed considering banks didn't want to buy them. To counter this I speculated in my previous comment that the Fed announced $300B QE for treasuries.
Ram,
Yes I think that would be alot too! And youre right the Treasury did step up about the same time for the 300. Ill try to find some time to look at Feds. pace of purchases vs Treasury auctions back around that time.
Bonds did come down fast off of their all time highs as "the crisis" eased. If Treasury auctions were putting the 365B out faster than the Fed was buying, maybe this contributed to the quick sell off in bonds back then?
Any thoughts on the current (smaller) sell off in bonds?
Hi Matt,
No idea on the recent movement. Maybe banks raising money from the market to take it out of circulation - in the sense extinguishing their deposit liabilities? Emails from the management(s) said "raised money" -so they didnt sell the bonds.
If you find out putting out the 365faster than the Fed buying 300, can you let me know ?
Ram,
Hope you see this.
What do you mean above "emails from mgmt"?
Also, could you expand on your statement "extinguish liabilities" by selling bonds...why would a bank want to do that?
I understand that deposits are bank 'liabilities'...
Hi Matt,
I have an RSS feed for this blog and the comments section and my Outlook catches all the comments.
"Raising money" by banks is a tricky issue.
This WSJ article gives some details on how the money was raised
http://online.wsj.com/article/BT-CO-20091216-716212.html
I just happened to quote the emails from the senior management who are said to have told that they raised money from the market to pay the Treasury. So it was not a simple transaction where banks' reserves just go or the banks returned some Treasuries to the Treasury.
Also I believe, the Treasury has not yet sold its stake to the public and is going to wait for share prices to go up.
Also according to the WSJ article, the banks sold complex options to investors so that the TARP money can be paid.
When a corporate raises debt or equity its just a change of name of deposits of the bank accounts. However, when a bank "raises money", it just hands over securities and extinguishes the deposits of the buyer of the securities. So banks need not sell treasuries.
From the WSJ article, one can make out that the investors who had the option of buying stocks of banks, did exercise them. This would have fired an asset sale and somewhere down the line - Treasury sales.
So adding your story to mine - banks got paid in reserves from TARP and the Treasury got a stake in the banks in the process. The Treasury issues debt to the non-banks In the middle of this the Fed does QE. Some banks returned the TARP money earlier (didnt track). But more banks issued securities to investors for a stake recently, which may have caused Treasury sales somewhere in the chain.
Ram,
Look at the Treasury Securities snip from my post above.
In Q4 CY08 the Treasury net issued 561B. In Q1 CY09 the Treasury net issued 466B. All of the TARP funds were issued to the banks by the end of Q1 CY09 (364B).
Over this same time frame, the Fed looks like they increased their holdings of Tbonds from 476B to 492B, thus it looks like the bonds were sold to the non-govt sector in advance of any Fed purchases of Treasuries this past year.
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