With Nearly $2-3 Trillion in TARP Expsoure 10 Banks Look To Repay $50 Billion

Let’s celebrate. Here is a background story

(CNSNews.com) – For many Americans, the $700-billion financial bailout was a tough pill to swallow, but the cost to taxpayers could reach $2.9 trillion – nearly on par with the entire federal budget – according to the watchdog agency charged with oversight of the Troubled Assets Relief Program (TARP).

Although the Treasury Department is only authorized to spend the $700 billion approved last year by Congress and signed by the president, the Federal Reserve and Federal Deposit Insurance Corporation (FDIC) will invest up to $1 trillion each in partnering with the Treasury Department’s TARP.

So the “total projected funding” for TARP is estimated to be between $2.47 trillion and $2.97 trillion, according to the TARP special inspector general’s report released on April 21. That’s not so much less than the Obama administration’s proposed federal budget for fiscal year 2010 of $3.6 trillion.

The report says, “TARP has evolved into a program of unprecedented scope, scale and complexity.”

So how could a $700-billion piece of legislation escalate into a potential liability of $2.9 trillion?

To be clear, Congress allocated only $700 billion to TARP through the Emergency Economic Stabilization Act of 2008 (EESA), which the Treasury Department is authorized to spend. Most of the remaining amount comes from the Federal Reserve and the FDIC partnering with the TARP program.

The total amount of funds from TARP and TARP’s partnership with other public funds are under the oversight of Neil Barofsky, special inspector general for the TARP program. (See Report, with breakdown of costs listed on pages 4 and 38)

“TARP does just include the EESA, but all the questions about how the money leveraged from other components is how it’s coming up to $3 trillion,” Kristine Belisle, director of communications for the TARP special inspector general’s office, told CNSNews.com.

Whether the money comes from the congressionally approved TARP or from the FDIC and Fed, taxpayers are still liable for up to nearly $3 trillion, Belisle said. While the program seeks to leverage private investment, that investment is not part of the final estimate, Belisle said.

The two elements of TARP bringing in the largest chunk of money from partnerships with the Fed and the FDIC are the Term Asset-Backed Securities Loan Facility (TALF) and the Public-Private Investment Program (PPIP).

TALF is a program under TARP created in November 2008 to make more credit available to consumers and small businesses. Initially, the Federal Reserve Bank of New York announced it would issue up to $200 billion in loans for this program, while the Treasury Department committed up to $20 billion in TARP funds (out of the $700 billion).

In February, Treasury and the Federal Reserve announced an expansion of TALF funds of up to $1 trillion. Of that, $80 billion would come from the TARP funds (out of the $700 billion).

A Treasury Department fact sheet from February touted this as, “A bold expansion up to $1 trillion.”

It is important to stress that the $1 trillion is the maximum amount the Fed will put into the consumer and small business loan program TALF and not a set commitment, said David Girardin, media relations assistant for the Federal Reserve Bank of New York.

“What we said originally is the program would be for a certain set of asset classes, and we would consider up to $200 billion in funding for the program,” Girardin told CNSNews.com.

“That was in November of 2008. As the program has progressed, we have not made a commitment, but in a board press release – the Federal Reserve Board in Washington put out a press release – alluding that we are considering expanding the program to include other asset classes, including funding up to as much as $1 trillion,” Girardin added.

The Federal Reserve is drawing the money from its current resources and will not have to print new money to cover the costs of its partnership with TARP, Girardin said.

“It goes on the Federal Reserve balance sheet,” Giardin said. “Our balance sheet has expanded quite a bit. It was probably somewhere in the range of $800 billion two years ago, and now it’s somewhere in the range of $2 trillion.”

The other big ticket item is the PPIP, using government money to leverage private investment. Under this program, the FDIC partners with TARP to loan money to private investors who want to buy real estate loans and securities from financial institutions.

This program includes $75 billion in TARP funds (out of the $700 billion), to guarantee a total purchasing power of between $500 billion to $1 trillion with FDIC loan guarantees included.

An example on page 108 of the inspector general’s report explained that the PPIP works like this: A bank, working with the FDIC, determines it wants to sell a loan with the face value of $100 to be sold for $60. The FDIC auctions that loan, and a private investor makes a $60 winning bid.

The FDIC – granting a 6-1 debt-equity structure in the program – fully guarantees a $51 loan to the private investor. Then the private investor would put up $4.50, and the Treasury Department would put up $4.50, so the private bank receives the full $60 and the private investor must pay back the $51 loan over time.

If the loan fails entirely, then the private investor loses $4.50, Treasury loses $4.50 and the FDIC loses $51 since the FDIC provides a 100 percent guarantee on the loan. (To continue this read from link)

10 Banks To Repay $50 billion in TARP

By Robert Schmidt and Christine Harper

June 9 (Bloomberg) — The Treasury is preparing to announce today it will let 10 banks buy back government shares, people familiar with the matter said, signaling confidence some of the largest U.S. lenders won’t again need a taxpayer rescue.

JPMorgan Chase & Co. is among those cleared to repay Troubled Asset Relief Program funds, a person said on condition of anonymity. Goldman Sachs Group Inc., American Express Co. and State Street Corp. are also among those that have sold shares and debt unguaranteed by the government, demonstrating they can raise funds without federal aid.

The approvals may relieve investor concerns about government ownership after a popular outcry against bailouts for Wall Street. At the same time, they contrast with warnings from International Monetary Fund chief Dominique Strauss-Kahn and others that the financial system remains distressed.

“None of this means that we’re out of the woods yet; there’s a lot of work that the banks have to do and the regulators have to do,” said Richard Spillenkothen, a director at Deloitte & Touche LLP in New York who served as the Federal Reserve’s head of bank supervision from 1991 until 2006.

The Fed yesterday also approved capital-raising plans at the 10 banks judged to have shortfalls after last month’s stress tests on the 19 biggest U.S. lenders. That list includes Citigroup Inc. and Bank of America Corp., firms that have had more than one round of federal rescues.

Compensation Guidelines

On June 10, the Treasury will likely release its guidelines for executive compensation at banks that retain government shares, a person familiar with the matter said.

Treasury Secretary Timothy Geithner may be asked about the TARP repayments, compensation rules and the outlook for financial markets in a Senate Appropriations Committee hearing at 10:30 a.m. today in Washington.

Nine of the 19 banks subjected to stress tests by U.S. regulators were told last month they needed no additional capital to withstand a deeper economic downturn. Officials later told some of the banks, including JPMorgan and American Express, they still needed to boost their common equity.

The number of banks likely to be allowed to retire government shares indicates the Treasury will receive more than the $25 billion of repayments that the department anticipated this year. JPMorgan alone received $25 billion of TARP funds last year and Goldman Sachs got $10 billion. American Express has received $3.4 billion, Bank of New York Mellon Corp. has taken $3 billion and State Street has $2 billion.

Morgan Stanley

Morgan Stanley has raised $6.8 billion in two separate common equity offerings since May 7, exceeding the $1.8 billion it was required to raise by the stress tests, as the company sought to be included in the first round of banks allowed to repay the TARP money. Morgan Stanley received $10 billion from program last year.

The repayments come almost eight months after the Treasury, seeking to quell market panic that followed the Sept. 15 bankruptcy of Lehman Brothers Holdings Inc., provided nine banks with the first $125 billion of $700 billion in money allocated to the TARP.

Banks have unveiled plans to raise a total of $100.2 billion since the stress tests found 10 of the 19 biggest lenders needed $74.6 billion in additional capital buffers.

Financial shares have surged on rising confidence that the financial crisis is past its worst and that banks are viable enough to survive the deepest recession in half a century. The Standard & Poor’s 500 Financials Index has gained 49 percent in the past three months.

Retire Warrants

Even after paying back the preferred shares issued to the government, banks that took TARP money will still need to retire warrants given to the government to allow taxpayers a potential return on their investment.

Herb Allison, the Obama administration’s nominee to run TARP, told lawmakers last week that the Treasury would soon announce details of its policy handling the warrants. The total value of the warrants is about $5 billion, according to Treasury calculations made last month.

Some analysts estimate that banks will still face mounting losses as defaults on credit cards rise and commercial property values sink.

Jan Hatzius, chief U.S. economist at Goldman Sachs, said at a conference in Montreal yesterday that “U.S. banks probably need to recognize another $500 billion or so in losses.”

Strauss-Kahn, managing director of the IMF, said at the conference that banks must disclose any losses on their balance sheets to help restore confidence in the global financial system.

“If the banking crisis is not resolved, growth will not come,” Strauss-Kahn, speaking in French, told reporters after his speech. “What strikes me today is that the credit market is not yet functioning normally.”