Did We Really Waste $78 Billion on TARP?
Were taxpayers stiffed by the Troubled Asset Relief Program? Even if they were, that may not be what's important right now.
According to a Congressional oversight panel, the TARP program “wasted” $78 billion by overpaying for assets. It makes a good story — AP can report it as the Bush administration overpaying Wall Street, while Fox can use it as proof that the government doesn’t know what they’re doing. Perfectly suited for both outlets. But is it true?
That’s a little less clear.
Let’s remember the original purpose of the Troubled Asset Relief Program. The problem, as I discussed back in October, is primarily that underneath all the covers, hedges, credit default swaps, and securitized mortgage portfolios, there are a whole lot of mortgages on a whole lot of properties that no one knows quite how to value. They can be certain the assets are worth something — but it might be 25 percent or it might be 95 percent of the book value.
If you don’t know how to value an asset, you have to look at the price you could sell it at now. That price is driven down by perceived risk. I haven’t seen a real fire sale in years, but this is where the term “fire sale” came from: after a fire, a company needed to sell off inventory, and some of it might be smoky or water-damaged, so they sold it at a low price to get it out. Forced sales push the price down.
Right now, panic — and President Obama’s talk of impending “catastrophe” isn’t helping — is making everyone perceive really big risks, while companies that are selling these assets are pricing them at fire sale prices to get them to move. There are mathematical means of turning your subjective evaluations into a price you’re willing to pay, but in this situation, it’s always going to mean prices will end up at the lower end of the range.
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Charlie Martin is a Colorado computer scientist and freelance writer. He holds an MS in Computer Science from Duke University, where he spent six years with the National Biomedical Simulation Resource, Duke University Medical Center. Find him at http://chasrmartin.com, and on his blog at http://explorations.chasrmartin.com.
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9 Comments
1. Dougf:Well I don’t know about ‘overpaying’ but I sure would like to see an in depth analysis of why we can’t simply let the incompetent greedy institutions that created and purchased these ‘assets’ go to the wall and LOSE EVERYTHING. Why should I have to pay for some idiot bankster while he continues on as if nothing has happened except for the the fact that he has to struggle on with only $200.00 for his lunches instead of his usual $400.00. How ‘business as usual’ can be a recipe for future success is way beyond me. I would have thought that ‘business as usual’ would be about the last thing we needed. All that seems to be happening is that there is a panicked attempt to re-inflate the collapsed debt/credit bubble, at whatever cost. This is doomed to be an EPIC FAIL. Even if successful, it is a disastrous social policy which will simply fail again. Sooner rather than later taking the last possible social reserves of ‘real’ money with it. And then where will we be ?
This is not even remotely funny any longer. Bankrupt them all and start over. It’s the only FAIR way to go at this point. If these are the ‘geniuses’ running the thing then fire them and get some randompeople off the street, and see if the results can be improved. They probably can’t be worsened.
Feb 11, 2009 - 6:12 am 2. uburoisc:I would not buy a 2-bedroom cracker box for $450k in Los Angeles because, to my mind, it was not worth a dime over $220k, I don’t care how many real-estate hucksters said otherwise. I looked at how and when the house was made and what the real estate prices were up until about 2000, and it was not worth what the “make big money in real estate” scammers claimed, period. Now, I am vindicated, and the market is sliding right back to it’s real and natural value (before 10 years of fraud pumped it up), and I am waiting to buy a great house for a fair price. But now the Fed is meddling in the market and is trying to prop up the price back to the level that I will not purchase it. Why? So they can save the banksers and real estate fraudsters from the shit sandwich I intend to feed them as payback for having to endure their lies and arrogance and smug “house prices only go up” rhetoric for the past decade. I’ll just sit here on the sideline with my money and wait. Right now, you can find hundreds of idiots who will practically beg you to rent their folly for a good price in order to save them from going under. The smart money will wait.
Feb 11, 2009 - 7:01 am 3. Sneedle Flipsock:FASB 157 (the “mark to market” rule).
To quote the sage Sultan of Agrabah from Aladdin:
“It’s that Law that’s the problem.”
Would be nice to have a Sultan that could fix it by decree.
Feb 11, 2009 - 7:13 am 4. Charlie (Colorado):Doug, you’d do well to go back and read the October piece, then. The banks and institutions that had the most toxic assets are gone: Washington Mututal, Wachovia, Merrill-Lynch, Bear-Stearns, AIG, and so on. But the issue was the banking system being pulled under; if that had happened — well, when it happened in Argentina, the result was 25 percent unemployment and middle-class people reduced to rag-picking to eat.
Sneedle, I think you’re right than the overly agressive mark to market has a big share of the blame.
Feb 11, 2009 - 8:24 am 5. Bender:why we can’t simply let the incompetent greedy institutions that created and purchased these ‘assets’ go to the wall and LOSE EVERYTHING
Well, there is great attraction in the idea that the individuals who ran the institutions into the toilet should be the ones to pay to clean things up. But the problem is that those individuals and those intitutions are not one and the same thing. Most of the shareholders of those institutions (i.e. the owners) are innocent of any wrongdoing. So letting the institutions sink into a black hole of nothingness means harming not only the bad guys, but innocents as well.
Feb 11, 2009 - 9:00 am 6. Charlie (Colorado):Oh, I think an orderly bankruptcy or other reorganization for some of them is in order. Citi, I just heard, has $1 trillion in assets and a a market value of $18 billion; the market clearly “thinks” there’s $982 billion in liabilities hanging around somewhere. Some kind of reorganization seems in order. Much the same with GM: their cost structure isn’t improved by any amount of bailout money, or by forcing the executives to wear sackcloth and ashes in Congressional hearings either.
But that’s different from letting the banking system collapse; the attendant massive deflation would not be a Good Thing.
Feb 11, 2009 - 9:15 am 7. Marc Malone:Mark-to-market is the obstacle here. It exacerbates trends towards bubbles and busts. Remove it, then these guys can unload their assets without making themselves unviable or vulnerable. This is the source of the credit freeze. They are trying to adhere to their required ratios of lending to assets. Mark-to-market makes it impossible to unload their bad assets, because as soon as they do, the rest of their values sink, then their ratios are off and Bad Things happen. I said this same thing back in September when the ‘crisis’ broke.
Feb 11, 2009 - 9:50 am 8. deguello:YES YES AND YES!
Feb 12, 2009 - 7:46 am 9. George:Wrong, we wasted $350,000,000,000 and aren’t finished yet.
Feb 18, 2009 - 4:12 pm