Remember how, back when Congress was negotiating with the Bush administration over the terms of the bailout, one of the major sticking points was Rep. Barney Frank's insistence that taxpayers receive equity in the companies we were saving, so that we could at least get our money back down the road? Well, Frank largely won on that point. We're now all part owners of Goldman Sachs, Bank of America, Citigroup, and all the rest.
But that only leaves more questions. What kind of a deal did Treasury Secretary Henry Paulson strike on our behalf with these firms? And more broadly, given the astronomical amount of money we're talking about and the massive deficits we already face, we need to know how we should think about what we've done. Have we invested the $350 billion that Congress has given so far, with a realistic expectation of at least being re-paid -- as Paulson, who has called it "an investment, not an expenditure," argues. Or is it more accurate to think of that sum as already spent and unrecoverable, simply the cost of preventing financial armageddon?
It's too soon to know how much of that money we'll get back, because the answer depends on the fate of the market -- something we all know better than to try to predict. But it's worth considering some of the key factors that will determine that answer.
In terms of Treasury's investment, it seems clear we got a bad deal.
TARP injected capital into the banks largely by buying preferred stock at a dividend rate of 5 percent per year -- that rises to 9 percent after 5 years -- in return for an equity stake in the companies. We also got warrants to buy common stock in the future at a fixed price.
But given the risk involved in the transaction -- investing in banks that were on the brink of collapse -- experts say we should have gotten more than 5 percent. "We could have gotten better terms," Simon Johnson, the former chief economist for the IMF, and now a fellow at the Peterson Institute for International Economics, told TPMmuckraker.
Demetri Papademetriou, president of the Levy Economics Institute, agrees. He points out that the governments of Britain, France, and Greece all conducted similar stock purchases, and got a dividend rate of 10 percent.
And Bloomberg recently calculated that, although Treasury invested twice as much as Warren Buffett did in Goldman Sachs, it gained only one fourth of the value.
Papademetriou believes that an ideological aversion to anything that smacks, however mildly, of central planning, partly explains why Paulson failed to drive a hard bargain. "There is a reluctance from the US government to be very involved in the private sector," he said.
Barry Ritholtz, the chief market strategist for Fusion IQ, an institutional research firm, says "incompetence" on Paulson's part is as much to blame. "There no such thing as half pregnant, and there's no such thing as half a virgin," he says. "If you're gonna do it, you can't say, we're gonna do it but we're gonna do a shitty job."
Of course, the department has argued from the start that making a good investment wasn't its goal. In a December speech to mortgage bankers, Treasury's bailout czar, Neel Kashkari, declared: "We're not day traders, and we're not looking for a return tomorrow. We are looking to try to stabilize the financial system, get credit flowing again."
But that gets us into the broader question -- for which there's no easy answer -- of how to think about the TARP money.
It's not right, say most experts, to think of this simply as government spending, akin to spending on, say, the Iraq war. The idea, of course, is that once the mortgage market stabilizes, the companies in which we've invested will eventually be able to write down their toxic assets, sell them off, and return to profitability. That will allow them to liquidate -- essentially, to buy back -- the stock we've bought, (something they're required by the terms of the deal to do before they can raise more capital). We'll have profited from the dividends, and will also be able to exercise our warrants to buy more stock at an advantageous price. That's why Frank insisted on equity in the first place.
But some say that may not happen. We simply don't know the true amount of bad debt that these banks have on their books -- and it's not clear that Treasury did either when it struck the deals.
But the signs aren't good. In early December, the Associated Press calculated that the warrants we bought via TARP, valued at a total of $27 billion, are now worth less than $18 billion. So if we exercised those warrants in December, we'd have been out over $9 billion.
And since then things seem to have gotten worse. Bank of America announced this week it needed a second bailout -- in the end, $20 billion -- because it hadn't realized just how toxic were the assets it took on in when it bought Merrill Lynch.
So even though Treasury says its goal wasn't to turn a profit but rather to stabilize the market, it's unclear whether it'll succeed in that -- right now, most signs suggest it hasn't yet. And that's the key question: If that longer-term stabilization doesn't happen, of course, we won't get much of our investment back, because the companies in which we've invested will fail, or be unable to turn a profit.
"These companies are insolvent. They have more liabilities than assets." says Ritholtz. The exact situations differ from firm to firm, but Ritholtz says that Citigroup, for example, in which we've invested $45 billion, "is sitting on tens of billions of toxic assets. So why would stock go up?" Ritholtz calls it "highly unlikely" that Citigroup will eventually have something to pay back. As for AIG, for which we're in $85 billion, he believes it's "inconceivable."
The situation isn't helped by the low level of transparency about their true positions that many of these companies appear to practice. Audit Integrity, which conducts accounting and governance risk analysis for public companies released a report last month finding that many of the big banks we've lent to -- including Citigroup, Goldman Sachs, Bank of America, and JP Morgan Chase -- "are likely in worse condition than publicly disclosed," because of the high likelihood that they'll restate their earnings, or provoke government regulatory action or stockholder litigation.
As if to prove the point, on Tuesday Goldman raised its estimate of expected losses stemming from its toxic assets to $2.1 trillion, up from $1.2 triillon last March.
So where does all this leave us? Congress is getting set to hand over another $350 billion for more bailouts, but this time it's insisting on more help for homeowners facing foreclosure. By stabilizing the mortgage market, that could also help Wall Street -- allowing us potentially to recoup our investment.
So that $350 billion already spent may not be gone. But it's by no means clear what we'll end up getting for it.