Let's start with the SIGTARP mission, then the findings.
MissionLet's dive into the 224 page report and see how well TARP, and the alphabet soup of lending facilities met their stated goals.
SIGTARP�s mission is to advance economic stability by promoting the efficiency and effectiveness of TARP management, through transparency, through coordinated oversight, and through robust enforcement against those, whether inside or outside of Government, who waste, steal or abuse TARP funds.
On the positive side, there are clear signs that aspects of the financial system are far more stable than they were at the height of the crisis in the fall of 2008. Many large banks have once again been able to raise funds in the capital markets, and some institutions � including some that appeared to be on the verge of collapse � have recovered sufficiently to repay their TARP investments years earlier than most would have predicted. These repayments and the sales of the warrants associated with them have meant that Treasury (and thus the taxpayer) has turned a profit on some of the individual TARP investments; as a result of these repayments, among other positive developments, it now appears that the ultimate cost of TARP to the American taxpayer, while still substantial, might be significantly less than initially estimated.Mish: The idea that there are "profits" is fictitious. It's effectively praising making 10 cents on a dollar while not counting hundreds of $billions lost on AIG and Fannie Mae, and ignoring $300 billion worth of loan guarantees at Citigroup still in effect.
Moreover, the only reason banks were able to show a profit and pay back TARP loans is mark-to-market rules were delayed further and banks did not have to bring hundreds of billions of dollars in off balance sheet SIVs back on to bank balance sheets.
Many of TARP�s stated goals, however, have simply not been met. Despite the fact that the explicit goal of the Capital Purchase Program (�CPP�) was to increase financing to U.S. businesses and consumers, lending continues to decrease, month after month, and the TARP program designed specifically to address small-business lending � announced in March 2009 � has still not been implemented by Treasury. Notwithstanding the fact that preserving homeownership and promoting jobs were explicit purposes of the Emergency Economic Stabilization Act of 2008 (�EESA�), the statute that created TARP, nearly 16 months later, home foreclosures remain at record levels, the TARP foreclosure prevention program has only permanently modified a small fraction of eligible mortgages, and unemployment is the highest it has been in a generation. Whether these goals can effectively be met through existing TARP programs is very much an open question at this time.Mish: Question? There is no question. TARP will do nothing for foreclosures or bank lending, not now, not ever.
The substantial costs of TARP � in money, moral hazard effects on the market, and government credibility � will have been for naught if we do nothing to correct the fundamental problems in our financial system and end up in a similar or even greater crisis in two, or five, or ten years� time.Mish: The Report Blasts Geithner and the NY Fed. I seriously doubt Geithner survives this but the sad thing is Geithner will not end up in prison where he belongs.
It is hard to see how any of the fundamental problems in the system have been addressed to date.
� To the extent that huge, interconnected, �too big to fail� institutions contributed to the crisis, those institutions are now even larger, in part because of the substantial subsidies provided by TARP and other bailout programs.
� To the extent that institutions were previously incentivized to take reckless risks through a �heads, I win; tails, the Government will bail me out� mentality, the market is more convinced than ever that the Government will step in as necessary to save systemically significant institutions. This perception was reinforced when TARP was extended until October 3, 2010, thus permitting Treasury to maintain a war chest of potential rescue funding at the same time that banks that have shown questionable ability to return to profitability (and in some cases are posting multi-billion-dollar losses) are exiting TARP programs.
� To the extent that large institutions� risky behavior resulted from the desire to justify ever-greater bonuses � and indeed, the race appears to be on for TARP recipients to exit the program in order to avoid its pay restrictions � the current bonus season demonstrates that although there have been some improvements in the form that bonus compensation takes for some executives, there has been little fundamental change in the excessive compensation culture on Wall Street.
� To the extent that the crisis was fueled by a �bubble� in the housing market, the Federal Government�s concerted efforts to support home prices � as discussed more fully in Section 3 of this report � risk re-inflating that bubble in light of the Government�s effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market.
SIGTARP�s audit, which was issued on November 17, 2009, found, among other things, that the terms of the original FRBNY financing did not result from independent analysis, but were simply an adoption of the term sheet from an aborted private financing discussion, and those terms, which included an onerous effective interest rate of 11%, made modification of the terms and further Government action inevitable.Mish: The report also highlights numerous cases of fraud, money laundering, insider trading, and tax evasion . There are 77 active cases are under investigation. Ongoing investigations involve: Omni National Bank, Bank of America, Colonial Bancgroup/Taylor, Bean & Whitaker, AIG, others.
The audit also found that, in structuring Maiden Lane III, FRBNY attempted to obtain concessions, or �haircuts� from the CDS counterparties � and one counterparty was prepared to take a modest haircut � but the FRBNY�s negotiating strategy was hampered by a series of policy decisions that severely limited its ability to obtain concessions, including its decision not to accept concessions unless concessions could be obtained from all of the counterparties, its refusal to use its leverage as regulator to some of the institutions involved, and its basic discomfort with interfering with the sanctity of the counterparties� contractual rights. These policy choices led directly to a negotiating strategy with the counterparties that even then-FRBNY President Geithner acknowledged had little likelihood of success. The audit further noted that although Mr. Geithner has denied that his intent was to benefit the counterparties,the overall structure of the AIG bailout resulted in AIG�s counterparties receiving tens of billions of dollars they likely would not have otherwise received had AIG gone into bankruptcy.
SIGTARP�s Investigations Division has continued to develop into a sophisticated white-collar investigative agency.Mish: Please consider a prime conflict of interest example in regards to PPIP, the Public-Private-Investment-Plan, specifically designed to allow banks to dump their worst assets onto the public (taxpayers) shielding banks from the risk.
Through December 31, 2009, SIGTARP has opened 86 and has 77 ongoing criminal and civil investigations. These investigations include complex issues concerning suspected TARP fraud, accounting fraud, securities fraud, insider trading, bank fraud, mortgage fraud, mortgage servicer misconduct, fraudulent advance-fee schemes, public corruption, false statements, obstruction of justice, money laundering, and tax-related investigations.
While the majority of SIGTARP�s investigative activity remains confidential, developments in several of SIGTARP�s investigations have become public over the past quarter as discussed more fully in Section 1 of this report.
A substantial number of SIGTARP�s ongoing investigations were developed in whole or in part through tips or leads provided on SIGTARP�s Hotline (877-SIG-2009 or accessible at www.SIGTARP.gov). From its inception through December 31, 2009, the SIGTARP Hotline received and analyzed nearly 9,900 contacts, running the gamut from expressions of concern over the economy to serious allegations of fraud.
Section 5 also provides an update on the issue of imposing conflict-of-interest walls in PPIP, including a discussion of a series of suspect trades that has already occurred within one of the Public-Private Investment Funds (�PPIFs�) in which a portfolio manager directed the sale of a security from a non-PPIF fund under his management to a dealer after the security had been downgraded and then, minutes later, purchased from that dealer the same security at a slightly higher price for the PPIF. SIGTARP is reviewing these trades. The fact that these kinds of issues could arise in the first instance is the direct result of Treasury�s refusal to require information barriers or walls in PPIP, and in an environment in which large portions of the public already view the fairness of Government programs with skepticism, whether fairly or unfairly, the reputational risk associated with this review is a wholly unnecessary cost.Mish: Note the refutation of the preposterous claims that taxpayers will be made whole.
Contrary to the January 7, 2010, assertion by Treasury that the taxpayer �will be made whole� because the FRBNY loan to Maiden Lane III is on track to being repaid in full, it is clear that any assessment of the costs to the Government and the taxpayer necessarily must look beyond FRBNY�s loan to Maiden Lane III to also take into account both the funds that FRBNY previously loaned to AIG and the subsequent TARP investments. All of these infusions to AIG are linked inextricably: more than half the total amounts paid to counterparties in connection with the CDS portfolio retired through Maiden Lane III did not come about through the Maiden Lane III CDO purchases, but rather from AIG�s earlier collateral postings that were made possible in part by the original FRBNY loan, which was, in turn, paid down with TARP funds. Because of this linkage, the ultimate costs to the Government and the taxpayer cannot be measured in isolation. Stated another way, regardless of whether FRBNY is made whole on its loan to Maiden Lane III, the ultimate value or cost to the taxpayer cannot be calculated until the likelihood of AIG repaying all of its assistance can be more readily determined. Treasury�s recent suggestion to the contrary is, at best, incomplete.Mish: The report blasts Bernanke's wall of secrecy need. Inquiring minds may also wish to review Secret Deals Involving No One; AIG Coverup Conspiracy Unravels.
SIGTARP�s audit also noted that the now familiar argument from Government officials about the dire consequences of basic transparency, as advocated by the Federal Reserve in connection with Maiden Lane III, once again simply does not withstand scrutiny. Federal Reserve officials initially refused to disclose the identities of the counterparties or the details of the payments, warning that disclosure of the names would undermine AIG�s stability, the privacy and business interests of the counterparties, and the stability of the markets. After public and CongressionalMish: Inquiring minds note how insurance companies gamed the system.
pressure, AIG disclosed the identities of its counterparties, including its eight largest: Soci�t� G�n�rale, Goldman Sachs Group Inc., Merrill Lynch, Deutsche Bank AG, UBS, Calyon Corporate and Investment Banking (a subsidiary of Cr�dit Agricole S.A.), Barclays PLC, and Bank of America. Notwithstanding the Federal Reserve�s warnings, the sky did not fall; there is no indication that AIG�s disclosure undermined the stability of AIG or the market or damaged legitimate interests of the counterparties.
The audit also noted that the CPP investments in two insurance companies highlight an incongruity in the CPP program design. Hartford and Lincoln were able to obtain CPP funds by buying small thrift savings institutions and becoming thrift/savings and loan holding companies, thereby meeting the technical criteria for receipt of CPP funds. The amount of CPP funds provided, however, was then determined by the assets of the holding company (i.e., the parent insurance company), not just the assets of the much smaller qualifying thrifts. In the case of Lincoln, for example, the company was able to obtain $950 million in TARP funds after it acquired a thrift that, on its own, would have been able to obtain at most $350,000 (if it would have qualified for CPP funding at all). Moreover, in using TARP funds, there was no requirement that TARP funding be used in connection with the subsidiary thrifts� activities. As it happened, the insurance companies reported that they used little (in the case of Hartford) or no (in the case of Lincoln) TARP funds in connection with the subsidiary thrifts� activities but rather used the vast bulk of the funds to support their insurance businesses. Stated another way, simply by purchasing comparatively tiny thrifts, Hartford and Lincoln � companies whose primary businesses (unlike other CPP participants) have little to do with lending to consumers and businesses � gained access to more than $4.3 billion in taxpayer funds, an amount that is many multiples of the thrifts� total assets.Mish: Please note the following constitutional questions around the Legality of Executive Branch �Czars.�
On October 22, 2009, the Special Master, who was appointed without the advice and consent of the Senate, made determinations concerning executive compensation within AIG, Bank of America, Chrysler Financial, Chrysler, Citigroup, GM, and GMAC.Mish: Here is a table of funds subject to oversight.
Following the issuance of the Special Master�s determination, Michael W. McConnell, formerly a judge on the Circuit Court of Appeals for the Tenth Circuit, authored an essay entitled �The Pay Czar Is Unconstitutional� that was published in the Wall Street Journal on October 29, 2009. In his essay, Judge McConnell concluded that �[b]ecause he is not a properly appointed officer of the United States, Mr. Feinberg�s executive compensation decisions were unconstitutional.�
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Planned Expenditures Outstanding
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Mish: Looking for institutions in deep financial trouble? You can find them in table 2.10, CCP program missed dividend payments. There are 74 such troubled institutions. Here is a short clip.
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TARP Tutorial: How Taxpayers Lose TARP Money When Banks Fail
The creation of TARP elevated the taxpayers� exposure to bank failures by making them direct investors in more than 700 institutions � generally as preferred shareholders. The recent bankruptcies of CIT , UCBH, and Pacific Coast National Bancorp, all TARP recipients through CPP , are tangible examples of the risk that failing CPP banks pose to the U.S. taxpayer.Making Home Affordable Program
It is impossible to predict how many additional banks will succumb over the next
several years. According to the FDI C website, however, the number of institutions on its �Problem List� is at a 16-year high. As of September 30, 2009, there were 552 insured institutions on the list, the largest number of problem institutions since the fallout from the savings and loan (�S&L�) crisis resulted in 575 institutions being placed on the list by December 31, 1993.91 The FDI C does not publish the names of problem banks on its website for fear that disclosing such information would cause a �run� on the bank�s deposits.
As preferred shareholders, U.S. taxpayers fall in the category of shareholder in many of the Government�s TARP investments. If the institutions fail, the taxpayers, like the other shareholders, will typically lose their investment if there are no remaining funds after creditors have been paid.
On December 31, 2008, Treasury invested $2 billion of CPP funds in CIT , a bank holding company with various commercial finance businesses including lending to small and midsize businesses.112 CIT , which was founded in 1908, is a major lender to small businesses, with more than $60 billion in finance and leasing assets supporting more than one million borrowers.
On November 1, 2009, CIT filed Chapter 11 Bankruptcy. Its depository institution,
CIT Bank, however, did not file bankruptcy. December 10, 2009, CIT �s shares and
warrants were extinguished, and former holders of preferred shares received contingent value rights (�CVR s�). Theoretically, CVR s place Treasury in a position to recoup part of its investment in CIT .
If, in the future, the senior and junior debt holders are paid back 100%, then any residuals would go to the CVR holders. At this time, it is unlikely that there will be any residual to pay Treasury for its preferred stock investment; in its TARP Financial Statements, Treasury listed the value of its CIT investment as zero.
The Making Home Affordable (�MHA�) program was introduced by the Administration on February 18, 2009, as a collection of three major initiatives: a loan modification program, a loan refinancing program, and additional support for reduced mortgage interest rates.Mish: By now the failures of HAMP are well documented. Modifications are failing at a massive rate and foreclosures keep making new highs. HAMP is a lost cause. More importantly, Congress allocated unlimited funds to Fannie and Freddie even though losses are soaring.
TARP funds are primarily dedicated to one initiative within MHA, the Home Affordable Modification Program (�HAMP�). According to Treasury, HAMP is a $75 billion program that will lower monthly mortgage payments for homeowners by providing loan modification incentive payments to the servicers and loan holders (lenders or investors � referred to as investors in this section) and by protecting against further loss of collateral value. In addition, the MHA program now includes foreclosure alternatives for those not able to complete a HAMP modification.
Of the $75 billion reserved for HAMP, $50 billion will be funded through TARP and will be used to modify private-label mortgages.
Beyond the TARP support, the additional $25 billion in HAMP funding is provided under the Housing and Economic Recovery Act of 2008 (�HERA�) and will be used to modify mortgages that are owned or guaranteed by the Federal National Mortgage Association (�Fannie Mae�) and the Federal Home Loan Mortgage Corporation (�Freddie Mac�), two of the Government-sponsored enterprises (�GSEs�).
Because Congress have the Fed a blank check, the Fed is immune from losses that will pile up as a result of its bloated balance sheet as shown below.
According to Federal Reserve Vice Chairman Donald L. Kohn, the FederalMish: Kohn failed to mention the cost or what happens to interest rates as soon as the Fed stops the program. However, because Congress was stupid enough to write a blank check for Fannie and Freddie losses, the Fed can and probably will restart purchases as soon as the economy resumes its slide.
Reserve�s announced purchases of GSE-guaranteed MBS, GSE debt, and Treasury
securities �were successful in reducing long-term interest rates� and �increased the
availability of mortgages to households.�
Clearly TARP was a complete failure, that is assuming the goals of TARP were as stated.
My belief is the benefits of TARP and the entire alphabet soup of lending facilities was not as stated by Bernanke and Geithner, but rather to shift as much responsibility as quickly as possible on to the backs of taxpayers while trumping up nonsensical benefits of doing so. This was done to bail out the banks at any and all cost to the taxpayers.
Was this a huge conspiracy by the Fed and Treasury to benefit the banks at taxpayer expense? Of course it was, and the conspiracy is unraveling as documented in this report and as documented in AIG Coverup Conspiracy Unravels.
In spite of massive, predicted in advance fraud, the Treasury still refuses to require information barriers or walls in PPIP.
The result was what many of us predicted all along: TARP fraud, accounting fraud, securities fraud, insider trading, bank fraud, mortgage fraud, mortgage servicer misconduct, fraudulent advance-fee schemes, public corruption, false statements, obstruction of justice, money laundering, and tax-related investigations.
No one should be surprised by these investigations. Indeed the real surprise is there are not more of them.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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