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With Nearly $2-3 Trillion in TARP Expsoure 10 Banks Look To Repay $50 Billion
Let’s celebrate. Here is a background story
Comments »(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.”
Treasuries Give Up Rampage Move This Morning On Assumptions Bernanke Will Do Nothing For A While
Comments »By Daniel Hauck and Justin Carrigan
June 9 (Bloomberg) — Treasuries rose for the first time in four days on speculation an improving global economy won’t prompt Federal Reserve Chairman Ben Bernanke to increase interest rates soon. European stocks advanced, led by technology shares after Texas Instruments Inc. forecast higher earnings.
The two-year Treasury note’s gain drove its yield down 7 basis points to 1.33 percent at 11:27 a.m. in London. The Dow Jones Stoxx 600 Index of European shares added 0.2 percent, while futures on the Standard & Poor’s 500 Index fluctuated between gains and losses as tensions escalated between North and South Korea.
“What are the chances that Ben Bernanke, the grade A student of the 1930s depression, raises rates early?” said Gary Jenkins, head of credit research at Evolution Securities Ltd. in London. “Unlikely in my opinion.”
Paul Krugman, the Nobel-Prize winning economist, said yesterday that the U.S. economy may emerge from recession by September, while Texas Instruments, the second-largest U.S. semiconductor maker, forecast second-quarter sales and earnings that exceeded analysts’ estimates. The Treasury will allow 10 American banks to buy back shares acquired by the government under the Troubled Asset Relief Program, people familiar with the matter said.
Nokia, Infineon
Nokia Oyj, the world’s biggest maker of mobile phones, gained 3.7 percent to 11.28 euros. Infineon Technologies AG, Europe’s second-largest maker of semiconductors, increased 1.8 percent to 2.49 euros.
Texas Instruments’ profit will be 14 cents to 22 cents a share on sales of $2.3 billion to $2.5 billion. Analysts projected profit of 10 cents a share on sales of $2.21 billion, according to a Bloomberg survey. Shares of the Dallas-based company climbed 7.8 percent to $21.32 in Germany.
A gauge of energy producers increased 1.4 percent for the second-biggest advance after technology shares among 19 industry groups in the Stoxx 600. Crude oil for July delivery gained as much as 1 percent to $68.80 a barrel in New York.
The Stoxx 600 is valued at 24.9 times the earnings of its companies, the most expensive level since 2004, after a three- month, 33 percent rally, weekly data compiled by Bloomberg show.
Futures on the Standard & Poor’s 500 Index slipped 0.2 percent after earlier rising as much as 0.4 percent.
South Korea has doubled the number of naval ships deployed around the disputed maritime border with North Korea, the Associated Press said, citing unspecified reports. North Korea said it would carry out a “merciless offensive” with nuclear weapons if provoked, according to the AP.
Lead, Gold
Lead advanced to its highest level since October on the London Metal Exchange. Gold for immediate delivery rose 0.2 percent to $953.59 an ounce, gaining for the first time in three days as the dollar weakened.
The dollar dropped 0.2 percent against the yen amid reduced bets on an increase in the Fed’s target rate. The three-month eurodollar interest-rate futures contract for December settlement slipped almost 10 basis points to 1.29 percent.
Ten-year Treasury yields declined five basis points to 3.83 percent amid speculation yields near a seven-month high will spur demand at debt sales this week, starting with a $35 billion three-year note auction today.
The difference between two- and 10-year yields narrowed to 2.50 percentage points, from a record 2.81 percentage points last week, indicating investors are betting the Fed won’t keep its target interest rate near zero indefinitely. Policy makers cut their target to a record low range of zero to 0.25 percent in December.
‘Some Time’
“Rate hikes will be some time in coming,” Andrew Balls, a London-based managing director at Pacific Investment Management Co., which runs the world’s biggest bond fund, wrote in a report on the company’s Web site.
Pimco’s views echo those of the Wall Street firms that trade directly with the Fed, which say bets on higher interest rates will turn out to be wrong. Fifteen of the 16 so-called primary dealers surveyed by Bloomberg News said they don’t expect the central bank to raise the target rate for overnight loans this year.
Fed funds futures contracts show a 58 percent probability of a rate increase by November. Policy makers reduced borrowing costs as the collapse of the subprime mortgage market froze credit markets and pushed the global economy into the first recession since World War II. President Barack Obama and Fed Chairman Bernanke have pledged, committed or spent $12.8 trillion to spur lending and ramped up government spending to revive economic growth.
TARP Funds
New York-based JPMorgan Chase & Co. is among banks that will be cleared today to repay TARP funds, a person said on condition of anonymity. Goldman Sachs Group Inc. and American Express Co. in New York and Boston-based 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 an outcry against bailouts for Wall Street. At the same time, they contrast with warnings from International Monetary Fund Managing Director Dominique Strauss- Kahn that the financial system remains distressed.
Latvia’s lats strengthened the most in three years, spurring gains in eastern European stocks and currencies as central bank purchases eased concern the Baltic country would be forced to abandon its peg to the euro. The MSCI Eastern Europe Index climbed 1 percent, while Hungary’s forint strengthened 1 percent against the euro.
Japan’s Coincident Index Shows A Positive Move
First positive uptick in 11 months
Comments »By Jason Clenfield
June 9 (Bloomberg) — Japan’s deepest postwar recession is easing, according to the government’s broadest measure of economic health.
The coincident index climbed to 85.8 in April, the first advance in 11 months, the Cabinet Office said today in Tokyo. Economists surveyed by Bloomberg expected the gauge, a composite of 11 indicators including factory production and retail sales, to rise to 86.
Japan’s exports have gotten a boost from public spending in China and other countries, while Prime Minister Taro Aso’s record stimulus spending on tax incentives and cash handouts helped consumer sentiment advance to a 10-month high in April. Investor optimism that the worst is over for Japan has also spurred a 38 percent gain in the Nikkei 225 Stock Average since March 10, when it was at a 26-year low.
“We expect the economy to register positive growth between the second and third quarters, given the stabilization of the export environment,” said Takahide Kiuchi, chief economist at Nomura Securities Co. in Tokyo.
The Cabinet Office said the coincident index is showing signs of bottoming, raising its assessment of the measure.
Reports since the first quarter, when the economy shrank a record 15.2 percent, suggest the nation is recovering from its worst recession since World War II. Industrial production and exports have improved two months running and bankruptcies fell in May for the first time in a year. Finance Minister Kaoru Yosano said today higher stock prices indicate the economy may recover in six months.
Still, even as overseas demand shows signs of stabilizing, exports and factory output have fallen by more than a third since the global financial crisis deepened in September. Corporate profits tumbled a record 69 percent last quarter, putting pressure on companies to cut jobs and investment.
Economists surveyed by Bloomberg expect the unemployment rate will rise next year to an unprecedented 5.7 percent from the current 5 percent. Japanese companies plan to reduce spending on plant and equipment by 16 percent in the current business year, according to a Nikkei newspaper survey published yesterday. Automakers Toyota Motor Corp. and Honda Motor Co. will cut spending by more than a third, the survey said.
China Continues To Discuss a Super Sovereign Currency Over Time
The IMF also commented that this would take time
Comments »By Bloomberg News
June 9 (Bloomberg) — The world should discuss ideas to reform the global monetary system, though any talk of dumping the dollar is “unrealistic,” China’s Vice Foreign Minister He Yafei said.
“No one is talking about dumping the dollar,” He said during a briefing today in Beijing about Chinese President Hu Jintao’s visit next week to Russia. “Some experts and scholars have proposed the idea of a super sovereign currency. We should have such a discussion.”
Russian President Dmitry Medvedev last week proposed that nations use a mix of regional reserve currencies to reduce reliance on the dollar. The subject may be on the agenda when he meets his counterparts on June 16 in the Ural Mountains city of Yekaterinburg, the Kremlin said this month.
China’s central bank Governor Zhou Xiaochuan suggested using the International Monetary Fund unit of account, known as special drawing rights, as an alternative in March. His Indian counterpart Duvvuri Subbarao hasn’t commented on that plan. IMF First Deputy Managing Director John Lipsky said on June 6 it’s possible to take such a “revolutionary” step over time. Brazil said last month they may look at ways of replacing the dollar for trade between the two countries.
“The objective of reforming the international monetary system should be to ensure the safety of foreign exchange assets of all countries, stabilize the international monetary system and support economic growth,” He said.
China’s yuan was little changed against the dollar on speculation policy makers will keep the currency stable to help exporters survive a global recession. The currency traded at 6.8354 per dollar as of 5:30 p.m. in Shanghai, compared with 6.8371 yesterday, according to the China Foreign Exchange Trade System.
Your Uncle Just Became The Black Sheep In The CDS Market
Comments »By Dena Aubin and John Parry – Analysis
NEW YORK (Reuters) – Is Campbell’s Soup a better bet than U.S. government debt?
No, we’re not talking about stocking a bunker for survival. This is talk about safe investments.
U.S. Treasuries, traditionally considered the safest of all investments because the debt is backed by full faith and credit of the U.S. government, is losing favor among derivatives traders to Campbell Soup Co, Microsoft Corp and Intel Corp as concerns over the government’s massive deficits and costly bailouts mount.
Investors are apparently concerned that sovereign debt of the United States, the world’s biggest economy, is more vulnerable to a huge sell-off than bonds of these three companies amid the most protracted economic downturn in decades, strategists said.
Those concerns are reflected in the pricing of credit default swaps, which are used both to insure bonds against default and to place bets on the likelihood of default, of Treasuries and of the three companies.
The cost to insure debt of the United States with credit default swaps for five years was 43.7 basis points on Monday, versus just 27.4 basis points for Campbell Soup and 29.8 basis points for Intel Corp , according to data from CMA DataVision. Higher prices for credit default swaps, or CDS, reflect a greater perception of a risk of default.
Microsoft’s insurance costs were just 32.5 basis points on Friday when they last traded, according to CMA.
“Some of those names have better-looking balance sheets than any sovereign in the developed world, so I don’t think it’s totally irrational,” said Jay Mueller, senior portfolio manager with Wells Capital Management, in Milwaukee, Wisconsin.
However, “the sovereign CDS market is perhaps not as liquid and efficient as it is in a lot of corporate credits, so I wouldn’t get too wrapped up in the specific quote level in the sovereign space,” Mueller added.
FALSE SIGNAL POSSIBLE
Pricing in the nascent credit default swaps market for the U.S. sovereign, which did not trade actively until two years ago, could be sending a false signal that conflicts with its top credit rating’s higher status than some corporate bonds.
Even so, the relative explosion of U.S. government indebtedness compared with some major companies does give analysts some cause for concern.
Intel, the world’s largest chip maker, and Microsoft, the world’s largest software company, both have minimal levels of debt, while Campbell Soup, the world’s largest soup producer, has been reducing debt.
U.S. President Barack Obama forecast a $1.75 trillion deficit for 2009 in February, about 12.3 percent of gross domestic product, the most since World War Two.
Campbell is rated A2 by Moody’s Investors Service, five steps below the United States AAA rating. Microsoft is rated AAA while Intel’s senior unsecured debt is rated A1, four steps below the United States.
U.S. government bond insurance costs expressed via credit default swaps have widened from about 27 basis points just a month ago, according to CMA.
“It definitely reflects the concerns that people have over the trajectory of our budget deficit,” said Mary Ann Hurley, senior Treasuries trader in Seattle at brokerage D.A. Davidson.
“Do I think it reflects that we are closer to default on our debt? No. However I think there is some concern about how big the deficit will be (as a proportion) of GDP,” she said.
TREASURY SELL-OFF FEARED
The large deficit ratio is still a big worry. Widening credit default swaps on highly rated governments such as the United States reflect the danger that foreign investors may balk at the low level of yields on offer and spark an acute government bond market sell-off, analysts say.
Since foreign investors hold about half the U.S. Treasuries outstanding, that outcome could also cause a major dollar crisis, adding to any inflationary pressures buffeting the economy.
Though a default by the United States is viewed as highly unlikely, investors may have used credit default swaps for trading opportunities as concerns about budget deficits mounted.
Foreign holders of U.S. Treasuries such as foreign banks and sovereign wealth funds also may be using credit default swaps to hedge their exposure to Treasuries, said Bob Bishop, senior portfolio manager at SCM Advisors in San Francisco.
Credit insurance costs on U.S. companies, meanwhile, have fallen amid signs in recent weeks that the worst of a recession may be past.
“Certainly after the economic data we saw in May there was big reduction in the market’s concern about credit risk,” Bishop said. “We’ve seen a big move out of government bonds into corporate bonds so it’s not surprising that CDS reflects that.”
