Treasury paid $100 for every $66 in assets in top-ten TARP deals

February 19, 2009 8:40 PM

The Congressional Oversight Panel, headed by Harvard Law professor Elizabeth Warren, notes in its third monthly report that for every $100 Treasury spent on its ten largest TARP deals, it received back only $66 worth of assets -- significantly less than for roughly comparable private parties.
posted by shivohum (23 comments total)

That's $66 at their best guess of present valuation. It could be a lot worse, and probably is. You can bet the banks shoveled shit at the government and demanded top dollar.
posted by Malor at 8:45 PM on February 19, 2009

We're getting cheated. We've propped up a handful of banks with a market value (in stock price) significantly less than over half a trillion we've already spent just on those banks.

And now it's clear we're being cheated on the deals, and that our money is being spent on obscene executive compensation an to lobby Washington.

We've once again, just as with the Patriot Act, been scammed by Chicken Little panicking us into "acting fast!", this time to ensure the ill-gotten gains of the plutocrats who mismanaged the economy for their personal profit. We funded the banks ostensibly to un-block the commercial credit market, and the banks still aren't lending.

Enough! Nationalize the banks, already! And start prosecuting the bankers.
posted by orthogonality at 8:51 PM on February 19, 2009 [9 favorites]

So they set up a fund to buy up crap assets, and they got ... crap assets.

From the linked report:

For purposes of our analysis, Fair Market Value is defined as the price at which property would change hands between a willing buyer and a willing seller when neither is acting under compulsion and when both have reasonable knowledge of the relevant facts. As such, our analysis attempts to address the question, “What price would a third party pay for the Subject Investments, given their terms, on their respective valuation dates?” Our analysis does not address what terms or price the Treasury should have or could have accepted...

This makes sense; although the assets were bad, they weren't and aren't totally worthless — they're worth something, it's just that the banks have resisted selling them (and taking the loss) at the price the market would actually bear. And the market wasn't interested in paying the banks' asking price. So the Treasury stepped in and basically overpaid, versus what any reasonable independent actor would have done, in order to get the stuff off the banks' balance sheets.

Frankly I'm surprised the Treasury only got taken for ~33%; I would have thought the spread to actual FMV would be even greater than that.
posted by Kadin2048 at 8:56 PM on February 19, 2009 [2 favorites]

Kadin is right: if this was a market where profitable deals were commonly possible, Federal intervention wouldn't have been needed.
posted by Chocolate Pickle at 9:05 PM on February 19, 2009

yeah, what is the point of this?

Of course these assets suck, that's why the government had to step in and buy them, to prevent their suckiness from Fucking Up The Whole World Pretty Much.

My apologies to Messrs Limbaugh and O'reilly but I just don't think I'm going to be able to muster the outrage they'd like out of me on this one.
posted by drjimmy11 at 9:07 PM on February 19, 2009

Mega-duh, if they were good deals Treasury wouldn't have had to pick them up. (What's that? Liquidity trap something something?) I hope Liz Warren isn't pretending to be surprised about this.
posted by grobstein at 9:07 PM on February 19, 2009

TARP Oversight Panel Chair Elizabeth Warren on The Rachael Maddow Show
posted by homunculus at 9:08 PM on February 19, 2009

A different point: what she's talking about is the current value of those assets. There's no way to know what they'll be worth after recovery.
posted by Chocolate Pickle at 9:11 PM on February 19, 2009

That's $66 at their best guess of present valuation. It could be a lot worse, and probably is. You can bet the banks shoveled shit at the government and demanded top dollar.

Hey, what's $115.5 billion between friends?

Anyway, this is the "market" price, but I think the theory is if you could really hold these things to maturity, they might yield more.

And of course there's the added bonus that as the economy continues to deteriorate, it means people who wanted to keep their houses lose their job and default, making the assets worth even less.
posted by delmoi at 9:19 PM on February 19, 2009

There's no way to know what they'll be worth after recovery.

This is sort of the elephant in the room — the sixty-four billion dollar question, you might say. Right now it's impossible to say how badly the taxpayers have gotten ripped off. We're in the hole right now, but we knew we'd be going into the deal.

If the market recovers back to where it was before the Crunch, then the Treasury could actually stand to clean up. They bought when nobody else was buying, admittedly overpaying, but still got a bargain! Of course, it's unlikely (and would probably be a Bad Thing anyway) that the assets will ever go up to what they were at the R.E. bubble's peak.

What seems more likely is that the market price will increase over time as the situation stabilizes, hopefully coming to some sustainable level below the bubble prices, which were irrationally high, but above the crunch prices, which were irrationally low. It's only when that happens and the Treasury finally unloads the assets that we'll be able to tell just how much the intervention cost.
posted by Kadin2048 at 9:27 PM on February 19, 2009

One thing I still don't get - what are these 'assets'? Are they bundles of mortgages, or are these the riskiest tranches from bundles of mortgages? If it's the former, I could see them yielding more, but if it's the latter these really could be worth nothing. Given how broken the market is here, I wouldn't trust "fair market value" to convey anything near the true risk.
posted by heathkit at 9:45 PM on February 19, 2009

Hey, speaking of recapitalizing banks, at least a couple seem to have figured out a way to turn economic lemons into lemonade, skimming unemployment benefits.

Yay capitalism!
posted by delmoi at 10:17 PM on February 19, 2009 [2 favorites]

Fuck delmoi, that's some evil shit. I can only hope that when times are good again, peopleremmeber how the banks kicked them when they were down.
posted by orthogonality at 10:42 PM on February 19, 2009

I frigging love Elizabeth Warren and am glad she's on the case.
posted by ao4047 at 11:26 PM on February 19, 2009 [1 favorite]

Ok, aside from changes in what the USD is worth compared to other currencies, are there reprecussions on other nation's economies based on the US printing and shoveling cash into these ventures?
posted by porpoise at 12:25 AM on February 20, 2009

This is obscene -- and the wingnuts are calling the stimulus bill generational theft. I am quite sure that when we build a bridge the next generation is going to get to use that bridge.

But what does the next generation get out of TARP? ¢ on the $.
posted by dhartung at 12:28 AM on February 20, 2009 [2 favorites]

Ah very interesting post. I have to admit I haven't been tracking performance under TARP as I would have otherwise liked, so many thanks for posting.

In terms of the TARP is itself, many people (in this thread and elsewhere) use the term monolithically; keep in mind a couple of points: 1) TARP exists to purchase both assets as well as equity, and 2) TARP itself is a phrase used to describe four separate programs:

• The Capital Purchase Program (CPP), initiated on October 14th 2008
• The Systemically Significant Failing Institution Program (SFFI), November 10th 2008
• The Automotive Industry Financing Program, December 19th 2008
• The Target Investment Program (TIP), December 31st 2008

This is a subtle distinction that many folks miss, mistakenly thinking TARP itself is just a program to purchase problematic assets from banks. Sidenote: I've previously mentioned I didn't favour parts of TARP, specifically the purchase of preferred shares.

TARP, as it is currently structured and operates is largely indistinguishable from a Hedge Fund on many levels; leverage, concentration risk, purchase of multiple assets classes and overall ill-liquidity of said assets. I'll toss secrecy in there as well, since I'm not sure we're really getting the complete picture of what Treasury knows / does / etc.


So what did we get for our money? To keep this concise, For each firm invested in I'll post the date the position was entered, under which program, the purchase price and the current estimated value expressed as a percentage of purchase price.

Keep in mind that purchase price represents what was paid for a "unit" of assets e.g., preferred shares, warrants, etc, and is expressed in billions of US $.

• Bank of America Corporation, CPP, 10/14/08, $15B , 77% to 89%
• Citigroup Inc. CPP, 10/14/08, $25B, 57% to 67%
• The Goldman Sachs Group, Inc. CPP, 10/14/08, $10B, 68% to 82%
• JP Morgan Chase & Co., CPP, 10/14/08, $25B , 76% to 89%
• Morgan Stanley, CPP, 10/14/08, $10B, 47% to 68%
• The PNC Financial Services Group, CPP, 10/24/08, $7.6B, 69% to 77%
• U.S. Bancorp, CPP, 11/3/08, $6.6B, 89% to 102%
• Wells Fargo & Company, CPP, 10/14/08, $25B 87% to 99%
• American International Group, Inc., 11/10/08, $40B, 36% to 38%
• Citigroup Inc. TIP, 11/24/08, $20B 41% to 59%

So bottom line: a total of roughly $184B was invested, with current valuation ranging from 61% to 71% of the investment. Looks like they're underwater to the tune of $53B to $71B.

A few other caveats in terms of the methodology employed:

• When pricing warrants, they are using a fairly sophisticated and conservative model. This model takes into account cancellation of the warrants by the issuer - specifically, the issuance of common stock at a later date should market conditions favour the issuer.
• Preferred shares are valued as if they were perpetual securities with an embedded call option; clearly each has carries market value.
• Preferred shares are cumulative in terms of dividend payouts (i.e., if an issuer were to miss a payment they'd have to make this up at a later date). This complicated valuation to an extent as most publicly traded preferred is non-cumulative
• They've had to make several, very conservative assumptions regarding relative ill-liquidity of shares / warrants purchased.

They had some very interesting spin on Warren Buffett's investment into Goldman Sachs, specifically they discuss "... the intangible benefit associated with Mr. Buffett ... " and go on to note

"We believe that Berkshire Hathaway is able to achieve terms that are unavailable to other private investors because of Mr. Buffett’s history and reputation in the capital markets. In effect, Berkshire Hathaway is offering more than just capital; it is also selling the “Buffett” name as imprimatur on the viability of the entity receiving Buffett capital."

Many thanks for an interesting post; lots of good reading there.
posted by Mutant at 1:50 AM on February 20, 2009 [6 favorites]

Wow I gotta tell you these documents are a Quants dream come true!!

Someone upthread asked exactly what we were getting for the taxpayers money; I got curious as well and started piling through all the documents. While looking at Appendix II [ .pdf ], I can provide some details.

But curious: I'm not sure the headline accurately describes the current value of the Treasury's portfolio.

Specifically, the values in the first document, that I extracted above and which reflect an unrealised loss of (worst case analysis as I detailed) of some 39%, but this DOES NOT include dividend or coupon income. In some cases this is indeed significant. I haven't seen anything that documents the suspension of payments, so here's what I've got so far.

First we'll look at the various preferred shares purchased. To refresh, preferred shares are equity / debt hybrids, and pay a dividend (coupon) while offering the upside of a common equity share. For each I've presented the Issuer, Security Description, Coupon, Dividend Type, Face Value, Market Price at time of purchase, Current Yield at time of purchase

American International Group, Inc.
AIG International Group 6.45% VARIABLE $25.00 $6.69 25.1%
AIG International Group 7.70% VARIABLE $25.00 $7.60 26.4%

Bank of America Corporation
Bank of America Corporation 6.625% FIXED $25.00 $18.83 8.9%
Bank of America Corporation 7.250% FIXED $25.00 $19.77 9.2%
Bank of America Corporation 6.204% FIXED $25.00 $17.10 9.2%
Bank of America Corporation 8.200% FIXED $25.00 $21.69 9.5%
Bank of America Corporation 7.250% FIXED $25.00 $22.94 7.9%

Citigroup Inc
Citigroup Inc 8.500% FIXED $25.00 $18.10 11.9%
Citigroup Inc 8.125% FIXED $25.00 $16.70 12.5%


Goldman Sachs Group Inc
6.20% FIXED $25.00 $20.25 7.8%

JPMorgan Chase & Co
JPMorgan Chase & Co 6.150% FIXED $50.00 $42.69 7.2%
JPMorgan Chase & Co 5.720% FIXED $50.00 $37.50 7.7%
JPMorgan Chase & Co 5.490% FIXED $50.00 $35.30 7.8%
JPMorgan Chase & Co 8.625% FIXED $25.00 $24.72 8.8%

U.S. Bancorp

U.S. Bancorp 7.88% FIXED $25.00 $24.50 8.1%


Next up is senior debt. For these I'll present the average yield across the debt securities purchased. There is some information missing so I can only calculate this on face value i.e., this IS NOT weighted according the various securities purchased and which comprise the position held by Treasury.

For each I've extracted Coupon, Maturity, Debt Type (seniority), callable and issue date.


American International Group, Inc., three securities.
5.050% 10/1/2015 Sr Unsecured Y 8/23/2006
5.600% 10/18/2016 Sr Unsecured N 10/18/2006
5.850% 1/16/2018 Sr Unsecured N 12/12/2007

For a mean price of $55.05 and yield of 15.7%

Bank of America Corporation
6.000% 9/1/2017 Sr Unsecured N 8/23/2007
4.750% 8/1/2015 Sr Unsecured N 7/26/2005
5.750% 12/1/2017 Sr Unsecured N 12/4/2007
5.650% 5/1/2018 Sr Unsecured N 5/2/2008
5.125% 11/15/2014 Sr Unsecured N 11/7/2002

For a mean price of $88.45, and yield of 7.4%


Citigroup Inc
5.850% 8/2/2016 Sr. Unsecured N 8/2/2006
6.125% 11/21/2017 Sr. Unsecured N 11/21/2007
6.125% 5/15/2018 Sr. Unsecured N 5/12/2008
6.000% 8/15/2017 Sr. Unsecured N 8/15/2007
5.300% 1/7/2016 Sr. Unsecured N 12/8/2005

For a mean price of $86.40, and yield of 8.2%

Goldman Sachs Group Inc
5.150% 1/15/2014 Sr. Unsecured N 1/13/2004
5.500% 11/15/2014 Sr. Unsecured N 11/15/2002
5.125% 1/15/2015 Sr. Unsecured N 1/12/2005
5.750% 10/1/2016 Sr. Unsecured N 9/19/2006
6.250% 9/1/2017 Sr. Unsecured N 8/30/2007
5.950% 1/18/2018 Sr. Unsecured N 1/18/2008
6.150% 4/1/2018 Sr. Unsecured N 4/1/2008

For a mean price of $85.22 and yield of 8.5%


JPMorgan Chase & Co

5.300% 10/30/2015 Senior Unsecured N 10/31/2005
4.750% 3/1/2015 Senior Unsecured N 2/25/2005
6.400% 10/2/2017 Senior Unsecured N 10/2/2007
5.700% 11/15/2014 Senior Unsecured N 11/6/2002
6.000% 1/15/2018 Senior Unsecured N 12/20/2007
7.250% 2/1/2018 Senior Unsecured N 2/1/2008

For a mean price of $88.72 and yield of 8.0%


Morgan Stanley
6.000% 4/28/2015 Senior Unsecured N 4/28/2008
5.375% 10/15/2015 Senior Unsecured Y 10/21/2005
5.750% 10/18/2016 Senior Unsecured Y 10/18/2006
5.550% 4/27/2017 Senior Unsecured Y 4/27/2007
5.450% 1/9/2017 Senior Unsecured Y 1/9/2007
5.950% 12/28/2017 Senior Unsecured N 12/28/2007
6.625% 4/1/2018 Senior Unsecured Y 4/1/2008

For a mean price of $77.45 and yield of 10.0%

US Bancorp
6.300% 2/4/2014 Subordinated N 2/4/2002

For a mean price of $98.74, and yield of 6.6%


Wells Fargo & Co
5.625% 12/11/2017 Senior Unsecured N 12/10/2007
For a mean price of $91.56, and yield of 6.9%


A few caveats: I've captured price and yield only at purchase. The documents detail performance of the assets weekly across the term, but that isn't really of interest.

Also there seems to be lots of information missing. Its not really possible to arrive at a clear picture of the current value of the Treasury's portfolio. For example, I can't find any reference to funding cost in these documents. And to head off the doom & gloom brigade, NO, they aren't just printing money. They are funding these trades somehow; what is their cost of capital, and what is the opportunity cost ?

These questions are difficult to answer. Also I can't calculate issue weightings, so this is just an indicative view.

But it does seem like Treasury has significant coupon income that will defray unrealised losses.

Very interesting post; thanks again.
posted by Mutant at 4:07 AM on February 20, 2009 [5 favorites]

Elizabeth Warren for president!
posted by AwkwardPause at 5:58 AM on February 20, 2009

* The Capital Purchase Program (CPP), initiated on October 14th 2008
* The Systemically Significant Failing Institution Program (SFFI), November 10th 2008
* The Automotive Industry Financing Program, December 19th 2008
* The Target Investment Program (TIP), December 31st 2008

Dude... CPPSFFIAIFPTIP doesn't spell anything cute and takes up too much space on the front page of a paper. If it can't be wrapped up in a cute little bow then nobody cares. As far as most people in this country will ever know, TARP is just 'we gave 900 billion dollars to banks'.
posted by spicynuts at 7:20 AM on February 20, 2009

Is there no serious discussion about the possibility of trustbusting? I haven't heard any, although I could have easily missed it.

If these things really are "too big to fail", then yeah, let's prevent them from failing. But let's also make it so that, in the future, we no longer have anything that's too big to fail.
posted by Flunkie at 10:04 AM on February 20, 2009

Fascinating analysis, Mutant. Thanks!
posted by shivohum at 8:32 PM on February 20, 2009

Great analysis there, and great commentary from Mutant. The numbers and truly staggering.

Now, as I've said before in previous posts: Told you so.

A few items:

1. These are not "assets", they are better defined as securities or portfolios or hell, 'crap' would be a good term. In general, they're just pools of bad debt/loans.

2. The "assets" that they represent, ie: homes, have been horribly over-inflated in value over the past fifteen years as these homes changed from being places to habitate into investment vehicles. As a result, there was over-investment in an extraordinarily unproductive sector of the economy.

3. We are in the middle of a rebalancing act. As others have stated in other discussions, the key issue with mortgages is not so much the terms, but the affordability of the property. Most homes are still *way* overvalued, and until they come back down into a nominal bracket where the aggregate can purchase and qualify at 3x income, 20% down, 30% debt to income ratio, homes will still be overvalued.

4. There was a massive overbuilding of residential units. The result is massive overhang that is going to continue depressing home prices for years to come. Combined with job losses, loss of credit and changing attitudes toward debt, prices still have a way to fall.

The net result of the above is that many of these securities still have further to fall in value.

As to why government must step in to pick up the slack: there is a market for these 'toxic assets', simply not at the prices that the financial institutions want to accept for them. They want a dollar for a dollar, but at *best* they're worth $.66, and in many cases as little as $.15 - $.35 cents on the dollar. Should the banks be forced to recognize those losses, they go to zero. Hell, they should.

The open market will purchase these securities at between $.15 - $.35 on the dollar. They'll buy tons of this crap at that price, because it's the fair market price. Government intervention is acting as a stop-loss and is doing nothing but delaying the inevitable. Buy putting a hedge in place as they have, they're prolonging the pain in the hopes that the market will recover and allow the banks to recoup the loss. It just ain't going to happen.

And no matter what anyone tells you, the root of this isn't bad mortgages - that is merely the straw that broke the over-leveraged camel's back. The root of the issue is that government abrogated its responsibility to properly oversee the financial markets. We've had all of the legislation and tools in place to prevent this very situation from happening since the 1930s, but our government saw fit to begin repealing those laws and weakening the oversight bodies since the late 1990s. And yes, this is directed at both the Republican and Democratic parties - Clinton let the fox into the henhouse when he invited Larry Summers and Robert Rubin into government and George Bush accelerated the decline throughout his presidency, letting the lunatics run the asylum.

The bankers and financial heads leveraged themselves up, skirted the rules, essentially bought off Congress and have had their way with the public money and trust like we're two-bit whores. The entire country is now leveraged to the point where we're at 350% debt to GDP and math is math folks, we need to bring that back into line with reasonable trends because it is fundamentally unsustainable. Mortgages going bad were the last straw that laid bare the fundamental problem at our doorsteps: we are an overly indebted country whose government failed to properly oversee and regulate the financial markets who, throughout history have been proven to require strict controls and oversight lest they run roughshod over prudence.

There is simply no easy way out of any of this - but I can tell you that a few things must change to avoid a reoccurance:

1) Management in these institutions needs to be removed immediately.
2) Management needs to be thoroughly investigated and prosecuted for knowing misstatements and lies.
3) Shareholders and bondholders must be forced to take serious haircuts before government takes the loss.
4) Many of these institutions are functionally insolvent and should be treated so. Deposits must be guaranteed.
5) Leverage must be reduced to 12 - 1
6) Capital ratios strictly enforced at 8% or better.
7) Bonuses for 2006 - 2008 need to be clawed back. All of it.
8) Management may not receive pay higher than that of the President of the United States (as to those who say no banker would work for that amount: I'll do it for $100,000 and guarantee I'll still do a better job that these assholes).
7) Government would be better suited by taking $500 billion and chartering new banks, immediately IPOing them and guaranteeing the deposits of the failed institutions. They would then run-down the "toxic debt" over time.

It goes back to good government. Something we're sorely lacking and have been lacking for years. While we fiddle about worrying about Terri Schiavo, flag burners, abortion bans, gay marriages and everything else that government has no business meddling in, the bankers quietly and thoroughly looted the treasury and public trust.

And for the record: Yes, I'm pissed and mad as hell.
posted by tgrundke at 10:07 AM on February 21, 2009 [2 favorites]