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Latest Developments
Insurance Companies to tap TARP funds: the Wall Street Journal reports that the Treasury will announce the availability of TARP funds to aid insurance companies whose balance sheets are currently strained by the fall in value of their assets and significant near term obligations.
Treasury introduces public-private partnerships plan for troubled assets: the Obama administration announced the much awaited details on how the government plans to deal with the mountain of "toxic assets" sitting on banks' balance sheets. The plan calls for the government and private inspectors to co-invest in the purchase of $500 billion of legacy assets that can grow to $1 trillion. Several public-private funds will be set-up where the Treasury will participate with 50% of the equity ($1 invested for every $1 invested by the private investor) - up to $100 billion will be used for this purpose by the Treasury through the TARP. The government will also provide loan guarantees, and non-recourse loans through the FDIC and the Fed's TALF program.
Treasury and Federal Reserve launch the TALF: the government announced that it will start lending through the Term Asset-Backed Securities Loan Facility (check out of "Fed Initiatives" page for more info) that was announced late last year, and which is also a key component of the Treasury's Financial Stability plan. The first installment will be limited to $200 billion, but ultimately the facility is expected to enable the Fed to lend up to $1 trillion to financial intermediaries - the TALF will open direct Fed lending to almost all financial intermediaries including hedge funds. The idea behind the TALF is to provide liquidity to securitized lending markets that have for the most part shuttered since October. Initially, the Fed will accept as collateral new, high-quality (AAA) asset-backed securities (ABS) backed by car loans, credit card debt, student loans, and small business administration guaranteed loans. The Fed expects that by April it will be open to accept ABS backed by rental, commercial and government lease vehicle fleets, and also those backed by small ticket equipment, heavy equipment and agricultural equipment loans. ABS backed by residential and commercial mortgages will be next on the list once the Fed and Treasury figure out a mechanism to reduce the risk to the taxpayer..
More TARP money and losses? The government's proposed fiscal year 2010 budget has reserves $250 billion for potential losses on additional TARP investments of $750 billion. There is no certainty that the Treasury will ask for the money, but it wants to keep options open if the economy deteriorates further. Furthermore, the Congressional Budget Office now expects that losses on the $700 billion TARP will ultimately cost the government $356 billion.
The number of banks in trouble increased greatly in the fourth quarter. The FDIC indicated during its quarterly review that 252 banks were in trouble at the end of 2008, 81 more than in the third quarter. The agency is considering raising the fee it charges banks to replenish its coffers and sustain the amount of losses it expects to incur as many of these banks fail.
Report on bank lending by TARP recipients. The Treasury provided a report detailing lending activities for the top 20 banks receiving government aid. Lending was stable in the last two months of the year, with November down, but December made up the difference. In January, commercial and industrial lending was down significantly, new originations were down 35%, while renewals were down 18%; commercial real-estate fared worse with new originations down 41% and renewals down 45%. The bright spot was consumer lending that saw a significant increase in refinancing activity, which was up 110% due to low mortgage rates. This link takes you to the Treasury report; the details for each bank are found here.
GM and Chrysler looking into a potential bankruptcy and merger respectively, will receive government aid for the next 60 and 30 days respectively The US government will continue providing aid to the automakers but only for a short time. The auto task force declared that both companies submitted plans that were not viable; however, the task force estimated that GM could address the concerns of the task force and implement a plan that could put the company in the path of sustainability and profitability. On the other hand, Chrysler was deemed by the auto task force as too small and with the wrong product makeup and quality to be viable on its own, and recommended it partners with Fiat. In addition, the government forced the resignation of GM's CEO Rick Wagner. GM had indicated that it needs $16.6 billion in additional government financing to avoid bankruptcy (an option it estimates may cost the government over $100 billion to keep the company alive), and Chrysler is requesting an additional $6 billion ($27 billion is the price tag they estimate if they were to go through a bankruptcy process - assuming the government doesn't decide to let them liquidate). GM will be slashing payroll by 47,000 and phase out the Hummer and Saturn lines, and will try to sell its Saab brand. Chrysler looks to be positioning itself to be integrated into Fiat, the Italian automaker (though the last one does not want any merger to result in Fiat providing capital to Chrysler).
On February 10, 2009, the Treasury Department introduced the "Financial Stability Plan" - the next generation of the Troubled Asset Relief Program (TARP). The plan is designed to address the credit crisis by taking a multi-pronged approach that provides capital injections to banks that need it, creates a mechanism to purchase "toxic securities" through a public-private fund, supports business lending through the purchase of business loans in the secondary markets, and aids homeowners impacted by the steep decreases in home prices. By the end of March, the TARP had disbursed over $303 billion, and committed over $667 billion, of which it expect to actually use a bit more than $590 billion as indicated in the table below. We'll expand on the details below and in the linked pages.
It targets the credit crunch by providing assistance to financial institutions. In effect it continues the process started with the TARP during the last administration and provides a mechanism for the Treasury to inject capital in the banking system (the tables presented later in this page provide a listing of who the largest recipients of the close to $300 billion that have already been committed are). Unlike the first half of the TARP, where capital was disbursed to institutions in a rather ad-hoc fashion (in large part because the liquidity crisis that ensued after the collapse of Lehman Brothers did not provide much time for careful analysis and deliberations), the Capital Assistance Program details the process through which banks will access the government's capital. The program calls for:
The CAP page provides further details on the program.
The Treasury will set-up Public-Private Investment Partnerships whose mission will be to acquire the legacy assets - loans and securities (i.e. toxic assets) that the banks now hold. These funds are expected to purchase securities worth up-to a trillion dollars, with an initial goal of $500 billion. The Treasury expects private market participants to provide half of the capital, and thus by sharing in the risk/reward be better able to provide a fair valuation for the toxic assets. Of course, valuation has been the crux of all the problems with "legacy assets" - the private markets have so far been unable to do this efficiently as banks believe they are worth more than potential buyers are willing to pay which in some cases is zero. The new plan hopes to solve the problem by providing incentives to market participants to participate by providing the liquidity they need.
The plan calls for the government and private inspectors to co-invest in the purchase of $500 billion of legacy assets that can grow to $1 trillion. Several public-private funds will be set-up where the Treasury will participate with 50% of the equity ($1 invested for every $1 invested by the private investor) - up to $100 billion will be used for this purpose by the Treasury through the TARP. The government will also provide loan guarantees, and non-recourse loans through the FDIC and the Fed's TALF program.
The Public-Private Investment Partnership (PPIP) page, contains further details on the program.
The Treasury, financed by the Fed through its Term Asset Backed Security Loan Facility (TALF) will support a Consumer and Business Lending Initiative with up to $1 trillion. This initiative will allow the government to purchase small business loans, student loans, consumer and auto financing securities and commercial mortgages in the secondary market. The purpose is to provide liquidity in the market and to lower the interest rates charged to the end users. For small businesses, the Small Business Administration will increase and expedite loans through its network of community and large banks. This part of the new TARP seems modeled after the successful effort by the Fed and the government to lower mortgage rates by buying consumer mortgages in the secondary market through Fannie Mae and Freddie Mac. Investors, including mutual funds, hedge funds, and others will have access to these facilities at very low rates. While this is probably the riskier of all the facilities that the Fed is implementing, its reach is the largest as it will try to revitalize the consumer market directly by providing liquidity to those facilities most associated with consumer spending. The importance of these markets is very large; the Fed estimates that securitized markets provided approximately 25% of all the lending for many of these consumer and small business loans. The Treasury has made available an interesting white paper on the TALF that is worth a read.
The HASP provides assistance to homeowners by providing lower rates to individuals that can not refinance their homes because of the reduction in home prices; help for homeowners facing foreclosure and capital injections to Fannie Mae and Freddie Mac to keep mortgage rates low.
The Treasury has set-up a site http://financialstability.gov/ to provide the public with information on the evolution and success of the plan, including providing online access to all the contracts with recipients of aid.
A look at what has already been done: the TARP (it's only been 6 months, but there's been plenty of action...)
The by now famous (or infamous depending on your point of view) TARP came into existence just a few months ago, on October 3, 2008. The plan was first introduced by the then Treasury Secretary John Paulson as a mechanism to assist struggling financial institutions re-capitalize themselves and re-start lending by purchasing their toxic assets, so that they could take them off their balance sheets. The TARP was the Treasury's and Fed's response to the havoc that broke through the market in the aftermath of Lehman Brothers' bankruptcy and the "bailout" of the insurance giant AIG, which received a gigantic $85 billion loan in exchange for an 80% ownership stake in the company. A few days after these events, the credit markets which had been under severe strain, seized with the announcement that a money market fund heavily invested in Lehman's debt could not return 100% of the assets to its investors. This caused a run on money market funds and inter-bank lending went to a standstill. By the evening of Thursday September 18, Paulson and Federal Reserve Chairman Ben Bernanke announced plans to put together a facility to buy the troubled assets of financial institutions so that they could stop the string of continuous losses in their portfolios caused by bad mortgage and derivative bets and thus have a hope of recapitalizing themselves and start lending.
Congress approved a $700 billion package under the Emergency Economic Stabilization Act, which authorized the Treasury to take the necessary steps to address the credit crises. The funds were to be disbursed through the Troubled Asset Relief Program (TARP) in two tranches of $350 billion. Soon after the TARP was authorized, the Treasury decided that buying troubled assets was no longer the best course of action to take to help the financial markets. Rather it proceeded to inject capital directly to banks and other financial and non-financial institutions. The table below provides a summary of the top recipients of TARP funds (this table provides the full list).
| Financial Institution | TARP Funds Disbursed
($ million) |
| AIG | 70,000 |
| Citigroup | 50,000 |
| Bank of America | 45,000 |
| JPMorgan Chase & Co. | 25,000 |
| Wells Fargo & Company | 25,000 |
| General Motors Corporation | 10,284 |
| Morgan Stanley | 10,000 |
| The Goldman Sachs Group, Inc. | 10,000 |
| The PNC Financial Services Group Inc. | 7,579 |
| U.S. Bancorp | 6,599 |
| GMAC LLC | 5,000 |
| SunTrust Banks, Inc. | 4,850 |
| Chrysler Holding LLC | 4,000 |
| Capital One Financial Corporation | 3,555 |
| Regions Financial Corp. | 3,500 |
| Fifth Third Bancorp | 3,408 |
| American Express Company | 3,389 |
| BB&T Corp. | 3,134 |
| Bank of New York Mellon Corporation | 3,000 |
| KeyCorp | 2,500 |
While most of the funds went to banks, the former insurance giant AIG received $40 billion from the TARP (bringing the total investment from the government, Fed and Treasury, to $125 billion), and two of Detroit's "Big Three" received close to $21 billion in total ($5 billion going to GMAC, the financial arm of GM and Cerberus), so that they would avoid bankruptcy. To date the Treasury has parted with over $330 billion of the first $350 billion of funds approved, and a few days before the Obama administration took power, Congress approved the disbursement of the remaining $350 billion to the Treasury. Citigroup and Bank of America deserve special mention, to help them avoid insolvency in light of the large losses in their portfolios of assets (BoA's coming in large part from their acquisition of Merrill Lynch in mid September), the Treasury provided additional capital investments and loss guarantees.
All in all 362 institutions in 46 states have received TARP funds. AIG at top with $70 billion of capital in the form of common looking preferred shares, for an ownership stake of 77.9%, and at the bottom small banks receiving $1.3 million.
The distribution of banks by state receiving funds non-surprisingly sees New York on top as home of most of the investment banks and many a commercial bank. North Carolina, home of Bank of America comes a distant second. California, one of the epicenters of the mortgage crisis, comes in first with the "distinction" of having the most banks receiving funds from the TARP; North Carolina and New York are second and third. The following table provides a snapshot of the states whose banks have received the most aid; The full list is available here.
Total TARP Funds Disbursed ($ million) |
Number of Institutions Receiving Funds |
|
| New York | 175,156 | 22 |
| North Carolina | 48,560 | 23 |
| California | 27,414 | 53 |
| Michigan | 21,476 | 10 |
| Pennsylvania | 8,785 | 17 |
| Ohio | 7,761 | 14 |
| Minnesota | 7,000 | 5 |
| Georgia | 6,146 | 9 |
| Virginia | 4,076 | 19 |
| Alabama | 3,629 | 4 |
Information on this page is provided courtesy of TrackTheStimulus.com. More detailed information on the stimulus can be found on that site. All rights reserved.