Wall St bill speeds TARP wind down - thank you Obama, Frank and Dodd

[jpak]

http://www.reuters.com/article/idUSN2115873120100721

The Wall Street reform bill signed into law by President Barack Obama on Wednesday accelerates the wind down of the $700 billion Troubled Assets Relief Program by reducing its spending authority to $475 billion.

Here is a breakdown of TARP's new funding authority and how it will impact the program:

FUNDING CHANGES IN WALL STREET REFORM LAW

* TARP spending authority reduced from $700 billion to $475 billion.

* Repayment of TARP investments, about $200 billion to date, must be dedicated to reducing U.S. debt.

* No new program initiatives or obligations after June 25.

FUNDING ALLOCATIONS UNDER NEW LIMITS

* No change in the Capital Purchase Program ($204.9 billion), the Targeted Investment Program ($40 billion) and the Asset Guarantee Program ($5 billion), which had already been effectively shut by Treasury. Treasury says it has recovered about $187 billion of the $245 billion in investments under CPP and TIP, which provided support to more than 700 banks and other financial institutions, and has made about $22 billion in income from dividends, interest and warrant sales.

<more>

[Skink]

1. Is this good or bad?

[jpak]

5. It's good

yup

[Subdivisions]

2. How does this resolve the issues that got us into this mess in the first place?

Answer: It doesn't. It only attempts to prevent it from happening again.

Meanwhile, all the insolvent banks, which includes nearly all of the major banks, still have to mark their books to market. And when that finally does happen, your little new law won't do a damn thing to prevent it.

You seem to forget that TARP is a vehicle by which to provide operating liquidity. It does not pay for the lost value of on-the-book assets that are now worthless or underwater.

[jpak]

6. TARP saved the US and global financial systems from collapse

That is what it did

Banks are paying TARP funds back - with interest.

Oh yeah...

"my little law" is the most far reaching finacial reform since FDR

too bad for U

:D

[Subdivisions]

7. You are still dodging mark-to-market. Oh well. n/t

[jpak]

8. I'm saying TARP worked - it did - and the financial reform bill will wind it down - sorreeee!

keep on doomin'

:hi:

[Subdivisions]

9. What happens when TARP runs out? That is what you are not getting. Sorreeeee! TARP

provides LIQUIDITY to bankrupt banks! But they are STILL bankrupt. They are holding assets on their books for which they have lost TRILLIONS of dollars. Those assets will eventually have to marked to the market! And when that happens, we're right back in the shithole.

[jpak]

14. umm....most of the original $700 billion allocated is not needed

why?

Because TARP did what it was supposed to do - save the financial system from collapse.

That's what it did.

Those are the facts

TARPs new authority is $475 billion - and $200 billion of that has been paid back

with interest

Good Luck with the doomin'

:hi:

[Subdivisions]

15. We'll see. Thread bookmarked. I'm out - for now. n/t

[jpak]

17. see ya!

:hi:

[Leopolds Ghost]

68. Save the financial system, or prevent big banks from failing? How, again, is the system now saved?

Who are all these people on DU who now support TARP?

[Statistical]

10. What faulty premise makes you think mark to market isn't in effect? n/t

[Subdivisions]

11. Because mark-to-market was SUSPENDED by the SEC. But, once

those assets are required to be valued, this whole house of cards will come down.

Do you think those now underwater assets just disappeared? Do you think CDSs have just disappeared? NO! They were allowed to leave those on their books. But they will eventually have to be valuated and when they are, down we go again.

[Statistical]

12. Once again what faulty premise makes you think mark to market was suspended?

Banks have been doing capital loss writedowns for last 2 years after FASB decided NOT to suspend mark to market.

[Subdivisions]

13. Is it or is it not suspended? n/t

[Statistical]

16. No and it never was.

Take a look at earning report from any bank for last 2 years and you will see

"xyz reports $xx million/billion mark to market loss on <insert financial product here>"

FASB testified before Congress in late 2008 on why they WOULD NOT suspend mark to market. Paraphrased version. Despite the rhetoric the crisis wasn't caused by mtm instead mtm allows regulators to see financial stress in the system.

[Subdivisions]

18. Alrighty then. Score one for Paulson and bush. Looks like I have some brushing-up to do. n/t

[Cant trust em]

33. So what about all of the assets that the Fed purchased?

Aren't those still sitting on the books somewhere?

Most of this is greek to me, so I'm really looking to fill in the gaps here.

Thanks.

[Statistical]

41. Yes.

Fed purchase Mortgage Backed Securities however the fed can never go bankrupt. They make money.

If you could print your own money would you go bankrupt? :)

The only issue would be if (and this is a real potential risk) losses on the feds books required them to print sufficient amount of money to cause inflation. Essentially the fed would be forced to recapitalize at the expense of the value of the dollar.

Now I don't consider that a real risk for at least the next year and this is why:

Almost impossible to have crippling inflation with unemployment as high as it is and as a result consumer demand as low as it is. Prices rising requires people to be buying and they simply aren't (or not in enough numbers to make inflation a real concern).

Now 2012, 2013? Well that is another story.

[Cant trust em]

51. Any chance that those toxic assets can be reevaluated at some point and resold?

Or are they more likely to just sit there and we eat the loss?

[Statistical]

56. Certainly could.

Fed selling assets takes money out of supply (kinda complicated so just trust me on this one). - imagine burning trillions of dollar bills.

Fed buying assets adds money to the supply - imagine creating trillions of dollars out of this air.

As such Fed won't wasn't to unwind these transactions early unless the economy has recovered. If the economy recovers too quickly (runaway inflation) the Fed dumping these assets on the market could soak up a lot of liquidity and reduce inflation.


Remember taxpayer's don't pay for losses on Feds books, they also don't get the profits from gains on Feds books. The only way you would "pay" for losses on Fed books is via inflation.

[Cant trust em]

61. It's amazing that the fed bought up billions of dollars in assets

by printing their own money, yet there hasn't been any inflation. I guess that just goes to show the depth of the trough that we're in right now.

[Statistical]

64. It also shows why paying down the debt is next to useless.

They has been such a gigantic destruction of demand that even these record trillion deficits aren't enough to weaken dollar & push inflation higher.

In the absence of credit markets responding to growing the deficit it is not a good "bang for the buck" to pay down the national debt or try and cut the deficit.

My fear is more like 2013. Economies is recovery and the combination of ultra high liquidity combined with massive deficits means a real pickup in economy results in a significant spike in inflaiton.

Kinda like pouring gasoline on coals all it takes is a spark and woosh. The question is can the Congress and Fed both be responsible and quick in responding to get inflation under control? That is the trillion dollar question for 2013-2015 timeframe.

[Leopolds Ghost]

71. And yet all that $700 B (what little of it we get back) will be applied to debt reduction.

[Cant trust em]

74. Isn't there something to be said though for slowly decreasing the deficit

so that we don't have to pay so much interest on what we've borrowed?

I know that in the short term it makes more sense to spend and stimulate the economy, but there has to be a long-term reckoning so that we're not paying such a huge portion of our budget to interest payments.

[Statistical]

96. Yes I would agree with that.

However I think the short term is much more important. If the combination of fiscal and monetary policy doesn't get economy growing and employment up it will be very difficult (if not impossible) to reduce the national debt long term.

Higher economic output = higher tax revenue = lot easier to balance the books.

The people worrying about deficit today is like someone who house is on fire but doesn't want fire dept to use water house because it will make their yard muddy.

[Cant trust em]

97. I totally agree.

I've also used a variation on the house on fire analogy. The roof is on fire, but I don't want to buy a hose because its too expensive.

[Statistical]

100. I will remember that one. It is better fit. n/t

[Sgent]

87. Wrong

"Remember taxpayer's don't pay for losses on Feds books, they also don't get the profits from gains on Feds books. The only way you would "pay" for losses on Fed books is via inflation."

The fed most certainly does return profits back to the taxpayer. See http://www.washingtonpost.com/wp-dyn/content/article/2010/01/11/AR2010011103892.html

Wall Street firms aren't the only banks that had a banner year. The Federal Reserve made record profits in 2009, as its unconventional efforts to prop up the economy created a windfall for the government.

The Fed will return about $45 billion to the U.S. Treasury for 2009, according to calculations by The Washington Post based on public documents. That reflects the highest earnings in the 96-year history of the central bank. The Fed, unlike most government agencies, funds itself from its own operations and returns its profits to the Treasury.

[Statistical]

94. I stand corrected. Seems kinda strange though.

I mean any money the Fed issues out increases the money supply and thus reduces value of dollar. So while Treasury gets $45 billion the money supply grew and each dollar is worth a tiny amount less.

I guess they have a reason but I can't think of why.

[Oregone]

19. TARP made toxic assets go away and banks become solvent?

True or not true?

[Subdivisions]

20. According to the other posters, the answer is TRUE. No more worries, mate. It looks like

maybe I was wrong about mark-to-market (I still need to verify that for myself, though I see now reason to doubt Statistical. After all, with a name like that...). Last I heard, I thought they had suspended it. If I'm wrong, which I admit I could very well be, then so be it.

But I'd like a detailed explanation of how TARP made the banks solvent and eliminated all toxic assets.

[Oregone]

23. Hurray!

:toast:

I wish cleaning my balance sheet was that easy!

[Statistical]

25. Not true.

TARP provided banks with emergency liquidity that allowed them to operate without collapsing.

The "toxic assets" are still there. Slowly non performing assets are being written down according to GAAP standards. One could argue the banks are being "conservative" with their right downs but TARP didn't buy or transfer any toxic assets. The % of assets non-performing at the major banks has slowly declined every qtr (this is a required metric reported in qtrly earning reports).

Non-performing assets will be unwound slowly; over the course of a decade. It won't be a magical transition from 100% toxic to 0% toxic. Rather overtime the toxicness of the banks balance sheets will become dilluted as dead assets are written off, the loss taken, and more "clean" assets are accumulated through normal business operations.

Without TARP most banks would have frozen in a liquidity crisis and failed. They wouldn't have the time or ability to allow time to heal the financial damage.

[Subdivisions]

27. I defer to your experience and knowledge. Thanks for the explanation. There are

still people whom I thought knew what they were talking about out there saying this ain't over.

I guess they're full of shit.

[Statistical]

36. Well there is some truth to that.

The banks still have a lot of toxic crap on the books. That is going to take a long time (my guess a decade) to write down.

Eventually all loans will either be
a) sold
b) mature
c) be refinanced/paid off early
d) default

I figure it will take a decade for that to happen for 100% of the loans.

Now the "toxicness" of the banks books is slowly being reduced. However I am not saying we are "out of the woods". The banks make projecitons on how many loans will fail and how fast. both are important metrics this is called a loan loss reserve. It is money they put aside to cover losses when they need to be realized due to default. So far this has been good. Losses have been coming in lower than the reserve. This isn't to say the losses aren't high compared to historical standards, they are. Almost off the charts I would say they just happen to be less than the banks are projecting.

As long as that continues it is unlikely any major bank will default. However say the economic takes another leg down and losses accelerate. Loans which would have failed 3 years from now (when bank had less toxic crap and more $$$ lying around) fails next month. The losses exceed banks loss reserves and we start running into a liquidity crisis again.

Not sure if that was as clear as mud or not but hope it helps.

[Subdivisions]

39. No, it helps. I may be misguided and slightly behind in events, but I

roughly understand some of it.

Thanks for your input.

[jpak]

32. thank you

:thumbsup:

[Oregone]

34. "as dead assets are written off"

So TARP allowed banks to stay alive long enough for tax payers to start absorbing their losses from their gambling?

[Statistical]

38. No. TARP allowed the banks to stay alive long enough for the banks to absorb their own losses.

Here is a secret when you have a steep upwardly sloping yield curve it is virtually impossible for a bank not to be profitable.

Upwardly sloping yield curve is one where short term interest rates are very low and long term interest rates are very high. This is the Holy Grail for banks. I mean you could put a monkey in front of a dart board and he could make record profits. Banks borrow at low rate (almost 0%), lend at a much higher rate and pocket the difference. The larger the yield spread the more cushion banks have for losses. Doesn't take a rocket scientist to make money in this environment.

Those profits are being used to offset losses on the books. As long as the yield curve remains steep and economy doesn't get worse the banks will be fine. It is virtually impossible for a significant number of them to fail.

So who is paying for the losses? Well indirectly depositors. The ultra low rates on the short end of yield curve are helping banks recapitalize at the expense of those who rely on interest payments.

Right now in real terms (inflation adjusted) depositors have a negative rate of return. 1 year CD is say 0.7% but inflation is 2%. At the end of a year you actually are 1.3% poorer.

[Cant trust em]

70. This is another reason that the recession has been kicking my ass.

I'm a saver. My money in CDs is returning crap.

[jpak]

80. What inflation? There is none - and TARP and the Stimulus prevented *deflation*

Central banks increase interest rates during periods of high inflation (e.g. Paul Volker and Carter in the 1970's and early 80's)

That's not happening today cuz there ain't no inflation.

and teh Fed is keeping interest rates low to stimulate the economy

yup

[Cant trust em]

83. Typo. That should have read recession, not inflation. nt

[jpak]

84. OK

n/t

[Leopolds Ghost]

85. Inflation was recalculated by Clinton in the 90s to include *computing power*

Since computers double in speed every five years, the net "per unit cost" of all electronics merchandise and re-calibrating the purchasing impact of bare necessities (by basically assuming no one in the US is poor) was used to essentially zero out inflation at a time when it was skyrocketing. Everything you think you know about the purchasing power of the Dollar vs. yesteryear is based on these falsified Fed formulae.

It's the same tactic that was used to allow toxic assets to build up. Change the rate at which they were marked on the books.

[Statistical]

90. Meh.

http://www.bls.gov/cpi/cpid1006.pdf

Components & Sub-components of CPI

Food
* Food at home
* Food away from home
Energy
* gasoline
* fuel oil
* electricity
* gas service
Commodities
* Vehicles
* Apparel
* Medical Car Commodities
Services
* Shelter
* Transportation
* Medical care services

[Leopolds Ghost]

81. And that yield curve is inherently usurious and, from the 1770s until the 70's, illegal.

No wonder Wall Street Dems are so wedded to pinning religion down as a Right Wing phenomenon. They wouldn't want religious liberals calling them out.

[Cant trust em]

3. TARP is the wet blanket of this administration.

Having to take this on tained the whole operation from the beginning. It placed Obama in a no-win situation from the get-go.

[zipplewrath]

4. Fortunately not this part

* The Making Home Affordable Program is reduced to $45.6 billion from $48.8 billion. The program designed to help areas hit hardest by the housing crisis and help homeowners who owe more on their mortgages than their home is worth is still being implemented.

They didn't wind this down so fast that they stopped trying to do this. They haven't been very successful to this point.

[Leopolds Ghost]

21. "Repayment of TARP investments, about $200 billion to date, must be dedicated to reducing U.S. debt"

So this is really a program to suck $700 billion out of discretionary spending, give it to Wall Street, and use the dividends to pay off bond holders, like Reagan wanted to do?

[Oregone]

24. Ouchy

Why now, thats a cloudy take on it

:)

[jpak]

26. It was not "given away" - it has to be paid back - and $200 billion already has been

and the consequences of NOT doing this would have been the collapse of the global financial system and a Great Depression.

it worked

period

sheesh

[Statistical]

29. TARP didn't reducing spending.

TARP was in addition to regular spending. Also we borrowed the money for TARP (and for most spending) thus wouldn't you agree that as TARP is repaid it is used to repay the money we borrowed to fund TARP to begin with.

To use an analogy say you have a loved one with bad credit. They are going to get evicted, you don't have any cash but you want to help. So you put $5,000 on a credit card and loan them the money. A year later they have repaid $2,500. Would you say "sweet $2,500 in free money to spend" or would you use that $2,500 to pay down the $5,000 (plus interest) that is on your credit card?

[Subdivisions]

35. If a bank is holding a house that they loaned $600,000 on and on which

they have foreclosed, and that home's market value is now just $400,000 (or less), how does the bank recoup the loss of $200,000?

[Statistical]

43. They don't.

Their balance sheet gets reduced by $200,000. However if at the same time by borrowing money at 0% and lending it at 18% (credit cards, car loans, new mortgages) they make $300,000 in interest they are ahead right?

The combination of TARP (kinda hard to go bankrupt tomorrow when someone hands you $700 billion in cash) and a steeply upward sloping yield curve essentially give banks the time & ability to generate revenue to offset losses as they occur.

So say hyptothetical bank S.
Has $500 million worth of suspect loans (loans likely to eventually default).
In this qtr the bank has $20 million of them get written off. However the bank makes $30 million in ongoing operations.

The pool of toxic junk has been reduced to $480 million and the bank avoided collapse for another qtr. 20-30 qtrs later the toxic junk should make up a very small % of banks overall asset structure.

[Subdivisions]

48. So, what's the bottom line. Banks gambled and lost. Who picked up the tab? n/t

[Statistical]

52. Everyone?

Most directly depositors. Anyone who can't take risk and needs to plunk money into bank accounts, CD, money market accoutnt, etc. Currently those assets have a negative rate of return. That is a nice way of saying a guaranteed loss. Take a 1 year CD. Say it is 0.7%. Well inflation right now is about 2%. So inflation adjust (only measure of wealth) you are 1.3% poorer by putting your money in a CD.

Example:
Start of 2010 you put $1,000 in a 1 year CD @0.7%. January 1, 2011 you have $1007. Woot! However $1007 in 2011 will actually only $987 worth of goods in 2010 dollars. So in reality you are "poorer" than your were before depositing the money.



Indirectly everyone lost because the crisis spilled over into the real economy. high unemployment, people having to burn off their savings to make ends meet, reduced production output. All indirectly is where the country is absorbing the loss.

If you are looking for a direct transfer of funds... like govt hands the banks a big bag of money well that doesn't exist.

[Leopolds Ghost]

65. And yet, discretionary spending is being slashed at all levels.

Money is fungible.

[Statistical]

66. Where?

US federal spending in 2009 was the highest in history of the United States. That record was only eclipsed in 2010 by even higher spending. Obama has asked for a freeze not cut in spending for 2011 so likely that budget by the time it is signed will break 2009 & 2010 records.

[Leopolds Ghost]

69. Every single local gov't is slashing EVERYTHING. Feds are promising not to make up difference

In schools, mass transit (actual commitment not to increase operational funding here) and public housing, among others.

But for politicians' favorite programs of course more money will be available.

Only NIH to my knowledge is coming out ahead, and that is because Bush zeroed out research funding. But Obama has zeroed out transit operations subsidies and public housing and wants to "fix" Social Security to pay for our supposed insolvency so what can you say.

Apparently we weren't too insolvent to pay $700 B loan to Wall Street and get $200 B back.

[phleshdef]

88. Using TARP repayments on the national debt is basically putting it right back where it came from.

Why accrue more interest on the debt unnecessarily?

[Skink]

22. Might as well recommend this.

[Subdivisions]

28. Same here. I learned something today. =) n/t

[Subdivisions]

30. K&R for a learning experience. n/t

[Cant trust em]

77. I agree. It's really refreshing to have a substantive conversation on DU.

Most of the finances stuff is greek to me, so it's great to actually learn something.

[DCBob]

31. I wish someone would dig out all the comments from GOPers and others who insisted TARP would fail..

miserably or even make matters worse. They look awfully stupid now.

[Leopolds Ghost]

67. How is this a success? People who think spending $700B on Wall St & debt reduction sound like Reagan

[Lochloosa]

37. And, other than a small percentage of people that pay attention, no one will ever know.

I'm sure this will be the lead story on all three networks tonight:sarcasm:

[jpak]

42. This story was posted July 21st - so your sarcasm is right on target

unfortunately

[Subdivisions]

40. Why are you thanking President Obama? TARP was a bush measure, was it not? n/t

[Lochloosa]

44. I think he was thanking him for the Finacial Reg. Bill that passed under Obama

[Subdivisions]

45. But that law has done nothing yet. It was only just signed last week. n/t

[jpak]

49. ugh

:wow:

[Lochloosa]

63. Thanks....saved me the time.

[jpak]

46. Senator Obama voted for it

Presisent Obama and Senator Dodd and Congressman Frank are wind it down...

[Subdivisions]

50. But bush gets the score on TARP, right? n/t

[jpak]

53. No - Bush gets the full fucking EPIC FAIL that made TARP necessary in the first place

yup

[Subdivisions]

55. Oh, I thought that would be Clinton and Greenspan. My bad. n/t

[jpak]

58. Yeah blame Clinton for the best econony in my lifetime and a budget surplus

Greesnpan is a asshole

yup!

[Subdivisions]

60. Who repealed Glass-Steagall? Anyway, I was being fecitious as

everyone knows everything the GOP did wrong during the bush years was Clinton's fault.

[jpak]

62. Who sponsored the bill that repealed Glas-Steagal?

I know - a bunch of asshole republicans

yup

[DCBob]

54. Yeah give it to Bush.. it was only smart thing he did in 8 years.

;)

[Statistical]

57. Also I doubt Bush had much insight.

He was likely scared shitless and utterly confused at what all the smart people were talking about so he did what they told him to do.

Most of the times he did that it worked out badly. This time (by blind luck on his part) it actually worked out good.

[DCBob]

59. Ha! No doubt..

:)

[Leopolds Ghost]

73. It's always smart to give money to Wall St, never inherently wasteful & immoral like, welfare moms.

[phleshdef]

89. It was a fucking loan. Loaning != Giving.

[MilesColtrane]

102. I guess seeing Paulson soiling himself and Bernanke rocking quietly in a fetal position...

got his attention.

"So, henh henh, you boys are tellin' me another round of tax cuts won't cure this thing. *smirk*"

[jpak]

47. Senator Obama voted for it

Presisent Obama and Senator Dodd and Congressman Frank are wind it down...

[Leopolds Ghost]

76. Obama also voted for FISA, and a number of other Bush measures.

Doesn't make those measures moral or prudent or correct.

[jpak]

103. Yeah Obama = Bush blah blah blah

and

yawn

[Warren DeMontague]

72. You need to be clearer in your OP: Specifically, which part of this can we use to bash Obama?

It's not entirely clear which part of this story will allow maximum anti-Obama venting. :shrug:

[Leopolds Ghost]

75. I love how the article uses typical propaganda technique to assert that a Bush program is "working"

As intended by Bush; And is therefore vindicated.

The Iraq war is a success by the same measure.

Demolishing public housing is a success by the same measure.

Kicking people off the welfare & unemployment rolls; same.

Fewer people on the rolls = success!

[jpak]

93. Breaking: Economists Say Intervention Prevented a Depression

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=8831944&mesg_id=8831944

:evilgrin:

[Warren DeMontague]

98. Yeah, and big pharma conspiracy corporo-fascist "doctors" say polio vaccines prevent polio.

Since we've never had polio, how do we reallllllly know, huh?

:eyes:

[jpak]

101. That's why they prevented the development of polio vaccine until AFTER FDR got it

to stymie the New Deal

and they gave Eisenhower the credit to boot

I see it clearly now!

:hi:

[Warren DeMontague]

95. If the entire financial system had collapsed in late 2008, we would have had a serious problem

that's all of us.

[inna]

78. Ridiculous distraction. Bankster Bailouts are in Trillions and ungoing.

"Wall St. bill" is a travesty. At least it was named correctly in the title of the OP - "Wall St. bill" (i.e., by Wall St, for Wall St.).

Disgusting.

[jpak]

82. wrong

enjoy the fantasy

:hi:

[Leopolds Ghost]

86. Yeh, Wall Street is not getting anything for free!

Why is it that conservative Dems are so eager to tell us stuff that a Republican would?

[jpak]

91. You are right - the Banksters have to pay back their TARP loans with interest 5-10%

yup

[inna]

92. no, you enjoy your fantasy. good bye.

[Leopolds Ghost]

79. See, what you guys are ignoring is the inherent immorality of giving $700 B to Wall Street

And saying "our pockets are empty, we have to reduce discretionary spending."

This is EXACTLY the ideological strategy articulated by Norquist and Reagan,
NOT to reduce the size of gov't overall but to eliminate programs for the poor
they don't like.

And lo and behold, under successive Neoliberal administrations and in Blue cities
across the nation, "cap rates" have been imposed as a doctrine of government.

Thereby COMPELLING us to spend no money on the poor unless it is revenue-neutral.

What have you to say about cap rates, hmm?

[Statistical]

99. 1) nothing was given. 2) discrecionary spending has not been reduced.