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"""" ?I doubt there will be a TARP II,? he said. ?If any of these banks get in trouble again, they will probably be dissolved, management fired and the shareholders wiped out.? """"
As banks repay TARP, Obama loses levers
U.S. President Barack Obama's ?fat cats' remark didn't go over well on Wall Street. Now there's a move by bankers to escape Washington's grip.
Barrie McKenna
Washington ? Globe and Mail Update Published on Tuesday, Dec. 15, 2009
The last of the major U.S. banks is exiting the federal government's controversial financial aid program, but the lingering question is whether the banking system is prepared for a new wave of losses.
In the short term, the industry and the government are breathing a collective sigh of relief as Bank of America, Wells Fargo and Citigroup make plans to repay their loans from the Troubled Asset Relief Program. Wells Fargo sold $10.7-billion (U.S.) in stock Tuesday to help repay a $25-billion bailout from the government last year, following similar moves by Citibank and Bank of America.
The big puzzle now is whether the banks can withstand another credit crisis or a double-dip recession, and how the government will treat these banks, which many now assume are too big to let fail.
TARP may have saved the U.S. financial system from ruin, but it was never well liked.
For President Barack Obama, TARP became an unfortunate symbol of a bailout nation ? of ?fat cat? bankers on the dole.
It wasn't any more popular with the banks; many forced against their will to take the government money at the height of the credit crisis in late 2008.
The funds came with tough restrictions on executive pay, and as long as they kept the cash, it fostered a lingering suspicion among investors that something was amiss with the banks' balance sheets.
Financial stocks have rebounded sharply along with the broader stock market, and so the banks now are ?taking advantage of the opportunity to raise capital,? said Bill McBride, a financial analyst with Calculated Risk.
The banks, however, aren't entirely off the government dole, he pointed out. The government is still propping up key financial markets with programs such as the U.S. Federal Reserve's purchases of mortgage-backed securities. In the past two months, the Fed has been buying $17-billion (U.S.) a week of these securities. These and other programs have limited losses at most of the large banks.
The downside for shareholders is that by selling more shares, the banks are diluting the value of their existing shares.
In spite of that, many analysts quickly upgraded the outlook for these stocks, and bank shares have moved sharply higher in recent days.
Deutsche Bank Securities analyst Matt O'Connor, for example, called Citigroup's TARP repayment plan ?a big positive step? in the company's turnaround, allowing the company to build capital while it deals with some of its problem assets.
And Mr. McBride dismissed concerns that Citigroup and the other banks will come running back to the government if the economy takes an unexpected turn for the worst.
?I doubt there will be a TARP II,? he said. ?If any of these banks get in trouble again, they will probably be dissolved, management fired and the shareholders wiped out.?
But other analysts aren't so sure the government is entirely off the hook. Henry Blodget, the former star Prudential Securities analyst and now a financial blogger, said paying back the loans allows the banks to ?get all the benefits of government help with none of the drawbacks.?
Mr. Blodget argued that the banks still enjoy implicit bond guarantees and subsidized super-low interest rates.
The government, on the other hand, has lost any leverage to push through tough reforms to ensure that these large financial institutions never again threaten the whole financial system.
?As long as the banks were on the hook for that TARP money, the government had some ability to dictate reform,? Mr. Blodget said. ?Now it has none ... All it can do to shape their behaviour is make disapproving noises about ?fat cats.'?
The missing piece of the financial reform package now making its way through Congress is an effective way to protect the financial system from these massive financial institutions.
One of the solutions is to compel the banks to build up special reserve debt that would automatically convert to equity if the institution ran into trouble. The result is a form of privatized TARP.
?Contingent capital is a form of self-insurance for systemically important firms,? Goldman Sachs analysts argue in a new report: Ending Too Big Too Fail.
?Correctly structured, it would force firms to recapitalize early and quickly, before localized problems could spiral into a systemic crisis.?
But the report warns that the key is mandating the right triggers for the conversion of contingent capital. Badly designed, the idea could ?actually exacerbate bank runs, rather than prevent them,? the report concluded.
"""" ?I doubt there will be a TARP II,? he said. ?If any of these banks get in trouble again, they will probably be dissolved, management fired and the shareholders wiped out.? """"
As banks repay TARP, Obama loses levers
U.S. President Barack Obama's ?fat cats' remark didn't go over well on Wall Street. Now there's a move by bankers to escape Washington's grip.
Barrie McKenna
Washington ? Globe and Mail Update Published on Tuesday, Dec. 15, 2009
The last of the major U.S. banks is exiting the federal government's controversial financial aid program, but the lingering question is whether the banking system is prepared for a new wave of losses.
In the short term, the industry and the government are breathing a collective sigh of relief as Bank of America, Wells Fargo and Citigroup make plans to repay their loans from the Troubled Asset Relief Program. Wells Fargo sold $10.7-billion (U.S.) in stock Tuesday to help repay a $25-billion bailout from the government last year, following similar moves by Citibank and Bank of America.
The big puzzle now is whether the banks can withstand another credit crisis or a double-dip recession, and how the government will treat these banks, which many now assume are too big to let fail.
TARP may have saved the U.S. financial system from ruin, but it was never well liked.
For President Barack Obama, TARP became an unfortunate symbol of a bailout nation ? of ?fat cat? bankers on the dole.
It wasn't any more popular with the banks; many forced against their will to take the government money at the height of the credit crisis in late 2008.
The funds came with tough restrictions on executive pay, and as long as they kept the cash, it fostered a lingering suspicion among investors that something was amiss with the banks' balance sheets.
Financial stocks have rebounded sharply along with the broader stock market, and so the banks now are ?taking advantage of the opportunity to raise capital,? said Bill McBride, a financial analyst with Calculated Risk.
The banks, however, aren't entirely off the government dole, he pointed out. The government is still propping up key financial markets with programs such as the U.S. Federal Reserve's purchases of mortgage-backed securities. In the past two months, the Fed has been buying $17-billion (U.S.) a week of these securities. These and other programs have limited losses at most of the large banks.
The downside for shareholders is that by selling more shares, the banks are diluting the value of their existing shares.
In spite of that, many analysts quickly upgraded the outlook for these stocks, and bank shares have moved sharply higher in recent days.
Deutsche Bank Securities analyst Matt O'Connor, for example, called Citigroup's TARP repayment plan ?a big positive step? in the company's turnaround, allowing the company to build capital while it deals with some of its problem assets.
And Mr. McBride dismissed concerns that Citigroup and the other banks will come running back to the government if the economy takes an unexpected turn for the worst.
?I doubt there will be a TARP II,? he said. ?If any of these banks get in trouble again, they will probably be dissolved, management fired and the shareholders wiped out.?
But other analysts aren't so sure the government is entirely off the hook. Henry Blodget, the former star Prudential Securities analyst and now a financial blogger, said paying back the loans allows the banks to ?get all the benefits of government help with none of the drawbacks.?
Mr. Blodget argued that the banks still enjoy implicit bond guarantees and subsidized super-low interest rates.
The government, on the other hand, has lost any leverage to push through tough reforms to ensure that these large financial institutions never again threaten the whole financial system.
?As long as the banks were on the hook for that TARP money, the government had some ability to dictate reform,? Mr. Blodget said. ?Now it has none ... All it can do to shape their behaviour is make disapproving noises about ?fat cats.'?
The missing piece of the financial reform package now making its way through Congress is an effective way to protect the financial system from these massive financial institutions.
One of the solutions is to compel the banks to build up special reserve debt that would automatically convert to equity if the institution ran into trouble. The result is a form of privatized TARP.
?Contingent capital is a form of self-insurance for systemically important firms,? Goldman Sachs analysts argue in a new report: Ending Too Big Too Fail.
?Correctly structured, it would force firms to recapitalize early and quickly, before localized problems could spiral into a systemic crisis.?
But the report warns that the key is mandating the right triggers for the conversion of contingent capital. Badly designed, the idea could ?actually exacerbate bank runs, rather than prevent them,? the report concluded.
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