REPAYING TARP: WHAT IT MEANS & IS IT GOOD?
A number of readers and emailers have mentioned that some of the banks could be repaying TARP as early as this week. These rumors have been circling for weeks now and have been widely celebrated as an overwhelming positive sign of bank health. The news is likely already baked into stock prices, but will have long lasting effects. We know in retrospect that Paulson forced many of the banks to take the TARP money regardless of their balance sheet strength. As has become an increasingly disturbing trend our government has been effectively taking stakes in U.S. corporations as the crisis has evolved (as opposed to allowing the free market system to function). Along with these stakes has come brutal new rules and regulations. As Jamie Dimon said, these banks despised doing business with the government so it’s not surprising to see the banks happy to avoid future government intervention. Getting out from under the government’s death grip via TARP paybacks will free up the banks to continue their usual ways: outrageous pay and a 3-6-3 model on steroids. This is great for the healthy banks such as JPM and likely a disaster for the unhealthy banks who will not pay back TARP.
In the long run, the impact has yet to be seen. I still maintain that the toxic asset issue has been a cash flow issue all along and will continue to hinder the banks for years to come. The extent of the weakness will rely mostly on how commercial real estate, residental and credit card delinquencies play out. Right now, it doesn’t look good. Moody’s recently released a report expecting nearly half a trillion more in losses and it’s now clear that the PPIP is a flop. This means the banks will try to earn their way out of this crisis and any signs of a double dip could prove to be disastrous.
The banks have gotten a bit overly confident in the near term after their record dip into the private market via the form of massive capital raises. Should the markets experience another downturn and confidence subside we could see the banks need to come back to the government for capital when the public finally shuns the banks once and for all. The fact that we haven’t resolved the toxic asset issue is disturbing. In my opinion this will almost guarantee a long and drawn out cash flow issue at most banks. Any signs of weakness in the economy will prove to be difficult hurdles for the banks to overcome. While paying back TARP is likely positive for a few it will prove to be a great hurdle for the many. And while it is a near-term positive, it could prove to be a huge mistake in the long-run.
TPC,
The precipitating event that led me to join you on the short side was the news coverage hinting that the strongest players are likely to pay off their tarp money very soon. I think that would lead them to stop making strategic purchases in the futures market, which have done a lot to pump up the market. I think the lack of the futures purchases, coupled with the rally of low-quality assets relative to high-quality assets, bad earnings and economic news in 2H 09, and analyst coverage favoring high quality assets, will lead to a reversion trade favoring high quality.
Why are we letting the banks continue tocthreaten the entire system by allowing them to keep the assets on their books? Like you said we should be forcing these banks to deal with them proactively.
@ Joe – great observations.
well, say you repay the tarp, but then due to writeoffs you need it again, wont it look just as bad as before???
then what??
the gov’t better make damn sure they send a signal to the banks that want to repay
“sure hand us the money back, but….if you need a bailout again, well, tuff luck”
too bad this will never happen
1. moral hazard too high
2. banks in cohoots with govt
3. its only tax payer money…..hey OPM baby
btw, i liked the layout of your old site better, but hey, what do i know
oh yeah, i know what it is now…
reading text on a blue background was a nice touch….(like your comment section now)
its easier on the eyes……
too many sites with while….
krap, no edit feature
meant
“too many sites with white”
Joe, excellent frigging point, kudos to you man. That, plus the recent interest of regulators in the “dark pools” and fucking bs Indication of Interest screens that flush out the buy interest… I think the jig may be coming to an end.
TPC, just as an aside, I think the myth that JPM is a “healthy” bank is too much ballyhooed. Reggie Middleton said they were insolvent and I trust that guy. But anyway, they have about a $1T plus in derivative exposure and an awful home equity book that is going to default in the 25% range at a minimum, likely. Those should be total losses I think. JPM will probably be able to survive, but they are going to be one of the only ones as they limp along.
WFC is going to need another bailout, just like BAC and C did. The pain in CA is nowhere near over my friend, WFC is probably one of the best long term shorts out there.
Prescient,
It’s all relative. JPM will no doubt survive this downturn. They’re healthy by comparison, but they still have the same cancer that all the other banks have. Just so happens that theirs isn’t terminal….
Anyone who shorts financials because they are paying back TARP is insane. Also…what makes you think that they are using their money to prop up the markets? The Federal Reserve cannot account for 9 trillion dollars and refuses to tell anyone what they did with it. How do you know that isn’t swimming in the markets right now? I don’t sense a true change in consciousness in retail investors/traders from bearishness to bullishness. Without that change, it is pretty dangerous to short in my opinion. But good luck anyway.
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