If TARP Was So Smart, Why Are So Many Banks Failing?

So we taxpayers actually made money on the Troubled Asset Relief Program -- at least so far. Goldman Sachs (GS), JP Morgan (JPM) and others have repaid the loans from the government, with interest, and the equity stakes that we hold in Citigroup (C) and Bank of America (BAC) have appreciated since Hank Paulson and Tim Geithner got us in. The Wall Street Journal this morning estimates that Uncles Sam made $30 billion on the deal.

But things aren't going so well outside the pale of banks too big to fail. The FDIC faces losses of $21 billion from the 84 banks that have gone under so far this year -- more than in all of last year -- and another 400+ banks are on its watchlist, the most in 15 years. If TARP was such a brilliant success, why do so many banks keep failing?

The answer is all pretty much contained in this report from the Congressional Oversight Panel, the senate panel assembled under Elizabeth Warren to keep an eye on TARP's progress. The one sentence version is that that Troubled Asset Relief Program has not, to date, offered any relief to troubled assets. It has done a nice job of building up capital for banks that the Feds deemed too big to fail. But the troubled loans that were the program's original targets haven't gone anywhere. We have just kicked that can down the road.

At the time the TARP was proposed, remember, the idea was to buy the spoiled mortgage loans and derivatives that were crippling the banking industry and in doing so, arrest the deterioration of the banks assets. But the loans proved too hard to value, the purchases too tricky to make, and the crisis was moving too fast. So the Treasury and the Fed decided instead to use TARP money to shore up the banks' capital. That helped stem the panic, but it left hundreds of small and medium sized banks in a precarious position,for a few reasons:

• The toxic loans are still there and still toxic. An accounting rule change allows banks to carry illiquid securities at higher values than the market would put on them. But assets that default still have to be written down, and the only thing that would fix the continued deterioration of loans is a slowdown in home foreclosures, a drop in unemployment and a rebound in real estate values. We're not there yet.


• Smaller banks are hit hardest. Among other problems, they have a harder time raising capital in the securities markets, and hold a lot of commercial mortgages, which are about to be clobbered.


• That's bad for small businesses, which rely on regional banks for their borrowing needs.

Yes, it's nice for taxpayers to get some return on our investment in Goldman Sachs and JP Morgan and others whose outside profits and bonuses we've helped to fund. But let's not spend our payback just yet. Meredith Whitney, the celebrity bank analyst with Whitney Advisory Group, told the Federal Reserve presidents at their Jackson Hole retreat last month that 300 small and mid-sized banks would probably fail. We won't be seeing any ROI from them.

Continue on CBS MoneyWatch.com

 

 

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Comments

[mjtaylor22]

05:07 PM on 09/01/2009

more mortgages to adjust real soon.
and wath out commercial realestate, your bubble right around the corner.

[mjtaylor22]

05:05 PM on 09/01/2009

toxic assets were not purchased as paulson said they would be,
basicallyinterest free loans given by paulson
and the banks paid their bonuses.
while cutting credit lines.
deposits fallign as the enemployed start havign negative acct balances
the darn Goldman Sachs is nto failing.
they are re leveraging the field

[LADawson]

01:40 PM on 09/01/2009

They're still failing because you can throw all the money in the world at a failed business model, and it'll still continue to fail... plus, all that 'toxic' debt is still floating around out there. It hasn't actually gone anywhere. Some of it may have changed hands, but tossing the hot potato just means someone else gets burned. Plus, above all, the legislative problems that caused all the problems in the first place still haven't been even touched. So there is quite literally nothing stopping everything from going down the toilet all over again, in the exact same way - well, except the greed of the bank executives that don't want to lose anymore money, but seeing that they can just beg for tax payer money, even that threat isn't much.

[tompoe]

12:43 PM on 09/01/2009

Listen, this is the banking industry's jobless recovery strategy, so don't be badmouthing the dribblemouths and their feigned concern over small banks' demise. Why care about lending to small business, when there are no jobs created? Just accept that we no longer care about jobs and workers. Let the banking industry do what they think is best for them.

[spmcintyre]

12:02 PM on 09/01/2009

I don't think that we have seen the last of the toxic asset issue. There are still mortgages out there that may become unmanagable if they are not refinanced. Why has there been no additional stories about this problem? Why is there still TARP money unspent, and why is returned money not getting recycled back into this plan? I know I am not answering anything, just reiterating what I believe is the point of this article. Any help here would be nice. Have we only just put off this problem for a later date?

[tompoe]

12:44 PM on 09/01/2009

Too late, the mortgages are already unmanageable, until a moratorium is called.

[Rule Of Law]

01:16 PM on 09/01/2009

How true. Had the bailout money gone to consumers, or even to these hundreds of banks now in danger because of the hoarding of the cash we gave to Wall Street, we would not be facing this problem.

This is just another way for the big zombie banks to eliminate competition or buy up chains of regional banks so that they can become even bigger than too big to fail! And we will end up paying for it all, as usual.