Posts Tagged ‘Ted Kaufman’

TARP: Money Well Spent

Wednesday, March 23rd, 2011

A top Treasury official defended the federal government’s $700 billion bank bailout financial crisis-response program at a hearing where the effort was criticized by members of a watchdog panel insisting that it did more for Wall Street than Main Street. “The cost of TARP is likely to be no greater than the amount spent on the program’s housing initiatives,” said Timothy Massad, acting assistant secretary of the Treasury for the Office of Financial Stability, to the Congressional Oversight Panel that oversees the Troubled Asset Relief Program (TARP).  “The remainder of the programs under TARP — the investments in banks, credit markets and the auto industry — likely will result in very little or no cost,” he said.

Panel member J. Mark McWatters, a Dallas-based CPA ad tax attorney, argued that it is difficult to call TARP a success when the unemployment rate is still approximately nine percent and millions of Americans are fighting foreclosure.  Panel Chairman Ted Kaufman – who was Vice President Joe Biden’s chief of staff of 19 years and temporarily replaced him in the Senate – said that Wall Street bankers ended up in better shape than Main Street.  “It’s not a tough economy on Wall Street, it’s a tough economy everywhere else,” Kaufman said.

According to Massad, TARP will end up spending no more than $475 billion; 86 percent of which has been disbursed.  To date, Treasury has received $277 billion back, including $241 billion in repayments and $36 billion in additional income. The Treasury expects to receive an additional $9 billion, which will leave $150 billion outstanding through various investments.  The department hopes to recover those funds over the next several years.  “TARP helped bring our financial system back from the brink and paved the way for an economic recovery,” Massad said.  “Banks are better capitalized, and the weakest parts of the financial system no longer exist.  The credit markets on which small businesses and consumers depend — for auto loans, for credit cards and other financing — have reopened.  Businesses can raise capital, and mortgage rates are at historic lows.  We have helped bring stability to the financial system and the economy at a fraction of the expected costs.”

William Nelson, deputy director of the Federal Reserve’s division of monetary affairs, agrees with Massad. In testimony about the Fed’s program to restart the asset-backed securities markets with backing from the Treasury’s TARP program, Nelson said even that program is unlikely to experience any losses.  “The Term Asset-Backed Securities Loan Facility (TALF) program helped restart the ABS markets at a crucial time, supporting the availability of credit to millions of American households and businesses,” Nelson said, adding that of the more than 2,000 loans worth $70 billion that were extended through the Fed’s facility, 1,400 totaling $49 billion were repaid early.  Remaining loans are current, and the collateral backing the loans is retaining its value, “significantly reducing the likelihood of borrower default.”

“As a result, we see it as highly likely that the accumulated interest will be sufficient to cover any loan losses that may occur without recourse to the dedicated TARP funds,” Nelson said.  Europe, by contrast, did not act as aggressively to apply stimulus with the result that financial crises occurred in countries like Ireland and Greece.

Are Banks Really Too Big To Fail?

Wednesday, April 21st, 2010

Former IMF chief economist opines on whether banks are too big to fail and possible solutions.  Simon Johnson, a professor at M.I.T.’s Sloan School of Management and former chief economist at the International Monetary Fund, raises the question of “As we move closer to a Senate – and presumably national – debate on financial reform, the central technical and political question is:  What would prevent any bank or similar institute from being regarded – ultimately by the government – as so big that it would not be allowed to fail?

Writing in the New York Times, Johnson believes that there is sharp disagreement on what would be needed to end “too big to fail” – or, as he terms it, “T.B.T.F.”  From the viewpoint of Senator Christopher Dodd (D-CT), “creating a ‘resolution authority’ would, at a stroke, effectively remove the perception and the reality that some banks are too big to fail.  The basic idea here, as elaborated by Sheila Bair, the head of the Federal Deposit Insurance Corporation (FDIC) would expand the powers it currently has to ‘resolve’ – i.e., take over and liquidate in an orderly manner – banks with federally insured deposits; it could do this for any financial institution.”

The Republicans, on the other hand, believe that this approach would formalize the existence of T.B.T.F. banks.  They believe that the FDIC lacks the skill to wind down complex financial institutions as this job differs from closing small- and medium-sized banks to protect depositors.  The “counterproposal, which seems to also have the support or Senate Richard Shelby (R-AL), is that we should just allow big financial firms to fail outright, i.e., to run through the usual bankruptcy procedures.  At a rhetorical level, ‘let ’em fail’ has some appeal.  But as a practical matter, it is a complete non-starter,” according to Johnson.

The third suggestion, proposed by Senator Ted Kaufman (D-DE), is quite simple.  “Break up these megabanks.  As even Alan Greenspan said in October 2009,” Johnson says, “‘If they’re too big to fail, they’re too big’.  There is no evidence for economies of scale or scope – or other social benefits – from banks with assets above $100 billion.  Yet our largest banks have balance sheets around $2 trillion.”

Johnson concludes:  “Making our largest banks smaller is not sufficient to ensure financial stability.  There are many other complementary measures that make sense – including higher capital requirements, more transparency for derivatives and generally more effective regulation.  But reducing the size of our largest banks is absolutely necessary if we are to reduce the odds of another major financial catastrophe.”