Q. What will not remove the bailout tarnish applied with a broad brush to all bankers?
A. TARPentine
It is often said that truth comes from the mouth of children. Not necessarily my kids, but kids in general. Actually, I’m not sure whether this is a real idiom, but it leads nicely into my subject so I’m going with it. My son’s high school economics class was asked to compare and contrast TARP and an earthquake. If you don’t think the future taxpayers of America are paying attention, you probably don’t have a Gen Y strategy either. Here is a partial listing of what they came up with.
Only the communities near the epicenter of an earthquake are destroyed
Contrary to popular belief, TARP actually stands for Taxpayers Are Railroaded by Paulson. Originally, the Troubled Asset Relief Program was intended for GovCo to buy toxic assets from banks to help clean up their books and get credit flowing again. 
Treasury’s Interim Assistant Secretary Neel “I really was a rocket scientist” Kashkari was given a blank check to hire CFOs, CIOs, CTOs and CROs to buy some mortgages that were soon to be OREOs via some to-be-determined reverse dutch auction. He rented space in D.C., hired accounting firms and was building a fine little empire until “Don’t thank me when I yank” Hank pulled the rug out and decided it was wiser to invest in the banks that had these toxic assets than to clean up their balance sheets. I wonder whatever happened to old Neel and GovCo TARP Inc. Hey Neel! I hope I’m not blowing your cover. If you are still skulking around, you might become a casualty of those $100 million in administrative savings the White House is trying to find.
So TARP, like a spring butterfly, morphed into the Capital Purchase Program, better known as CPP, which stands for Capitalism’s Prolonged Punishment. According to the Excel spreadsheet Treasury is using to manage this third-of-a-trillion dollar program, 577 institutions have received $362 billion in investments or debt obligations. These 577 include private and public banks, investment banks, insurance companies, car makers (I guess a Chevy Aero with an oil leak could be considered a toxic asset) and mortgage companies. Of these 577, seven carpe diem’ed and paid back $467 million in late March and early April. I suppose having Secretary Geithner playing camp out with a flashlight under your bed covers is not as attractive as Paulson made it out to be in October 2008. In fact, in a show of underwhelming support for the program, the Financial Stability Oversight Board, also known as the Let’s Throw Ken Lewis Over Board, recently announced that 250 approved TARP applications were withdrawn by banks. Given banks’ new-found, long-term, core earnings power through dividend reductions and mark-to-market accounting rule changes, this is hardly surprising. One has to wonder, if the accounting rules changes were made last year when the reform clamor was loudest, would TARP have even been required? And how many failed banks like Wachovia and WAMU might still be around?
When analyzing the CPP recipients, it is quite interesting to note that the banks headquartered in areas that have caused all the foreclosure mess are the same ones receiving all of the bailout funds. That really ticks me off. Reminiscent of the Sarbanes-Oxley catalysts, the only firms to benefit (how big was your external audit fee check last quarter?) from Enron/Worldcom fallout were the same accounting firms that caused it due to pure ineptness. From the lenders side, either the banks in these states were predatory lender scumbags pushing loans that borrowers couldn’t afford, or they were incompetent credit risk underwriters.
|
Ranking by Amount of TARP Received |
Ranking by Ratio of Foreclosures to Housing Units |
Overall Combined Ranking |
|
| California |
3rd |
1st |
1st |
| Michigan |
4th |
8th |
2nd |
| Georgia |
9th |
4th |
3rd |
| Illinois |
10th |
7th |
4th |
| Ohio |
7th |
10th |
5th |
While Treasury and Congress are rewarding either of these types of decision making skills, the rest of America has been vocal in opposition.
Certainly, some banks were just jumping on the bandwagon of almost free money. Banks in these states received over one billion dollars in TARP funds while maintaining relatively moderate levels of foreclosure activity.
|
States Receiving TARP with Modest Foreclosure Ratios |
Ranking by Amount of TARP Received |
Ranking by Ratio of Foreclosures to Housing Units |
Overall Combined Ranking |
| Puerto Rico (huh?) |
20th |
50th |
37th |
| Iowa |
15th |
40th |
33rd |
| Maryland |
18th |
31st |
29th |
| Pennsylvania |
6th |
32nd |
18th |
The TARP money is not really free since dividends are 5% now and 9% after five years. But it is doubtful taxpayers will ever see those 9% dividends. Unless, of course, banks are unsuccessful in raising $250 billion in additional capital to pay off their CPP or if GovCo won’t let them pay it off. All said, banks in these states that were bandwagon-jumpers and may not have really needed the money are getting their just reward in the form of government intrusion, executive compensation restrictions, taxpayer animosity, and an overall bad taste in their mouths from the experience.
WANH WANH WANH…. BUT IT WASN’T US
I know some of you believe the banks were altruistic and that the fault lies with those damned buyers and sellers that fibbed on their mortgage applications, fudged their incomes, and offered the appraiser homemade frozen margaritas with the worm on a toothpick to inflate the value. To that I say, “What is it with you Ivy League, left coast, metropolitan bimbos? Can’t you pay your friggin bills?” The states that are under-populated and historically poor are paying their mortgages.
|
|
Ranking by Per Capita Income |
Ranking by Ratio of Foreclosures to Housing Units |
Overall Combined Ranking of TARP Received and Foreclosures |
| Mississippi |
51st |
47th |
42nd |
| West Virginia |
50th |
46th |
45th |
| Arkansas |
49th |
18th |
28th |
| South Carolina |
48th |
26th |
30th |
| Kentucky |
47th |
43rd |
41st |
These states that all you high-falootin’ bankers so vainly look at down your noses are not the ones on the government dole, and they are bailing your asses out.
As a final shout-out, there are only two states that have not received any TARP funds. Not a nickel. Zip. Zilch. Nada. And, interestingly, they also have the best ratios of foreclosures to housing units.
|
State |
Ranking by Ratio of Foreclosures to Housing Units |
Overall Combined Ranking |
| Vermont |
52nd |
52nd |
| Montana |
49th |
51st |
Seems like these sleepy little state bankers have been sticking to their knitting and executing best practice risk management and/or the communities they serve are a step above everyone else.
So where does this leave the average community banker? Considering there are 8,300 depository institutions insured by the FDIC, and only 577 institutions got TARP, this 7% sure is causing a lot of noise. Only a handful of the other 93% have been ballsy enough to proclaim, “Just say no to bailout banks.” 
I say if you took TARP as an opportunity to get a leg up on your competitor, then you ought not to whine when your competitor uses not taking TARP as an opportunity to get a leg up on you. Let the mudslinging begin. This could be more fun than WWE Friday Night SmackDown.
REALLY DEALING WITH TOXIC ASSETS
Since TARP is receiving mixed-to-negative reviews, it’s a little early to tell how warmly Treasury’s latest attempt to deal with toxic assets, the Public-Private Partnership Investment Program, will be received. All I know is that in Charlotte we recently had an investment banker arrested for exposing his private parts in public and that didn’t go over too well either. Seriously, with the announcement of groups like Halliburton, Carlyle, and Madoff Milken and Associates building up funds to participate, its time for Joe Six Pack Taxpayer to order a new box of checks and prepare like the Swine Flu is coming. Except for the nearly 100% guarantee and six-to-one debt-to-equity ratio, the use of third-party independent valuation firms selected by the FDIC all but eliminates the possibility of monkey business. The purchased asset pools are held in Public-Private Investment Funds, which will be required to maintain a Debt Service Coverage Account to ensure enough working capital… Wait a second!… If one of these PPIFs gets under-capitalized, can they apply for TARP? Is it just me or is this dead fish smelling worse every day that passes?
All in all, if you believe that everything is cyclical, whether it is the economy, climate change, or the availability of thin-crust pepperoni on the buffet line, then most banks, both TARP and non-TARP, will emerge from this valley. After all, banking is still about gathering deposits, loaning money, and investing or borrowing the difference. Maybe we have learned it’s not about rolling the damn dice. What may not bounce back as quickly, though, is the consumer’s and investor’s trust. With quarterly earnings announcements from banks touting ever increasing net income, all the public will remember is TARP bailouts to bankers.
-mc
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