TARP Costs

Morgan Kelly’s recent Irish Times article covers a lot of ground; this post is just about a single dimension of his contribution.

One point he makes is to look at the US TARP:

We can gain a sobering perspective on the impossible disproportion between the bailout and our economic resources by looking at the US. The government there set aside $700 billion (€557 billion) to buy troubled bank assets, and the final cost to the American taxpayer is about $150 billion. These sound like, and are, astronomical numbers.

The estimated cost of TARP has fluctuated quite a bit over time  (the US Treasury helpfully releases valuation updates four times a year).   The most recent release is from last Friday, with the current estimated cost at $105.4 billion.  It is especially noteworthy that the TARP components related to the banking sector per se are projected to make a profit, while the main losses relate to AIG, assistance to homeowners and assistance to the US automobile industry.

The release is here (see also the links there to the underlying calculations).

Of course, the realised fiscal cost of TARP does not provide sufficient information to judge the overall effectiveness of TARP, since it is important to take into account the impact of early repayment of TARP funds on the behaviour of US banks, plus other broader factors.

Finally, the main point remains – the size of the Irish banking intervention (relative to the size of the economy) is much larger than the TARP, reflecting the much more generalised banking crisis here.

38 thoughts on “TARP Costs”

  1. There is also the point to consider that TARP is not the sole US funding vehicle. The Maiden Lane LLCs that hold assorted dross from Bear Sterns, Merrill Lynch, AIG etc. hold the worst portion of their books, but not all are marked to market.

    ML1 holds 73,740 mn of notional assets, with -2,864.5 mn in interest rate swaps.
    ML2 holds 36,267 mn of notional assets.
    ML3 holds 55,213 mn of notional assets.

    http://www.newyorkfed.org/markets/maidenlane.html

    While TARP as originally envisaged is what NAMA turned out to be, the original intention was abandoned for TARP. The Maiden Lane vehicles provide a more equivalent comparison with NAMA in that they purchased assets at a discount from the banks (for the purposes of derivate hedging we may treat AIG as a bank holding company) and is intending to manage them to a sale or wind-down.

    Compared to the total assets in Maiden Lane, NAMA is indeed huge.

  2. And let’s not forget all the other bailout instruments the US Gov has resorted to using. I.E. Fed purchases of MBS, the TLGP from the FDIC, borrowing from the Federal Reserve Discount window, and zero interest rate policy. I can’t find the source right now but I’ve seen figures on these programs ranging from $7 trillion to $23 trillion in bailout funds. This is not to diminish the stupendous give away to Irish banks, but comparing the bailout in Ireland to the US one is very misleading if you only include the TARP funds.

  3. At the time when TARP was being introduced, I tried to figure out just how much money 700 billion was… This should cause people to stop and think…

    http://www.newyorkfed.org/aboutthefed/fedpoint/fed01.html
    There is about $829 billion dollars of U.S. currency in circulation; the majority is held outside the United States.

    And it was painfully obvious the theft of public money in Ireland is on a much greater scale given our relative sizes…

    Hopefully, the ringleaders will be shot for treason. I think it would be a suitable way to mark the 100’th anniversary of 1916.

  4. In the main TARP purchased/funded us mortgage & financial assets which have for the most part (although not today) rebounded ( see Case Shiller etc. ) and were pretty clearly oversold when it was enacted. NAMA has purchased loans backed buy Irish real estate which isn’t so encouraging

  5. Daniel

    $250m or so went to banks under the CPP and the TIP (to CITI). The Treasury has made a profit under these schemes and still has money in the regionals
    $70m went to AIG and about half has come back with more to come as assets are sold.
    The asset purchase schemes CBLI &PPIP are close to break even

    The injection into the Car companies and the morgage aid schemes a/c for the bulk of the losses. It is ironic that the bulk of the losses are in the last two schemes, yet it is deemed to be a “Bankers Bailout”.

  6. The US credit-liquidity crisis was mostly a liquidity crisis rather a credit crisis (the mortgage default rate had gone up dramatically, but not enough to account for the crisis). The Irish crisis is mostly or entirely a credit crisis rather than a liquidity crisis. This distinction is important in forecasting likely bailout costs. A taxpayer-backed infusion of funds to purchase illiquid assets can actually produce a decent return if the taxpayer is able to buy-and-hold when the market fails to produce sufficient liquidity for its needs. Injecting funds into a credit crisis may just saddle the taxpayer with low-quality debt-based assets. So the expected costs are substantially higher in this case. Of course this assumes that the low-credit quality of the assets is an accurate assessment not a misperception by the market.

  7. Notwithstanding what yoganmayhew says above, Morgan Kelly would appear to be spot on – NAMA may be on a per capita basis by far the most expensive bailout ever.

    Securum and Retriva (Sweden) had a loss in 1997 when they were wound up but they held residual shares in banks and last year at the Oireachtas theSwede behind the bailout plan stated that on a nominal basis they had broken even.

    It is not known whether the UK or German bailouts will break even. Initial signs in the UK are encouraging.

    The French seem to be in profit to the tune of €5bn from their bailout.

    Nigeria embarks this month with the Asset Management Corporation of Nigeria but it will cost less than €10bn and is expected to breakeven.

    I have seen various estimates on TARP and the current one on wiki is for a cost of $89bn , but $89bn or the estimate above of $105bn, that’s the cost for an economy 70x bigger than Ireland’s and yet our bailout is costing (in acknowledged dead money) the best part of €25bn and if you factor in a loss for NAMA or for additional recaps it could certainly be far more.

    So even though we are 1/70th the size of the US we will have a bailout cost of about 1/2.

  8. @Jagdip
    “Notwithstanding what yoganmayhew says above, Morgan Kelly would appear to be spot on ”
    Don’t get me wrong, I think it’s the most expensive bailout ever too, on a per capita basis. I think the TARP was hijacked from being a bank bailout to being a stimulus measure. Maiden Lane is more analagous to NAMA and makes our bailout look even worse.

    My point is if you say recap = what TARP became, NAMA = Maiden Lane (what TARP was intended to be), we are huger on both sides, proportionately – both the recapitalisation required and the unsalvagely toxic assets that have to be taken away and shot.

    “Securum and Retriva (Sweden) had a loss in 1997 when they were wound up but they held residual shares in banks and last year at the Oireachtas theSwede behind the bailout plan stated that on a nominal basis they had broken even.”
    Well, he would say that, wouldn’t he. At the time that Securum was wound up (in 1999, I think) and rolled into Retrieva, securum had made a constant money loss of 40%, I believe. It only ever took on the debt of one bank (Nordbanken), which was the equivalent size of Anglo (proportional to the rest of the swedish banking system). The shares were held separately. There was an international asset boom while Securum and the other private banks were working out their bad debts – credit was cheap and getting cheaper, but more importantly, there were many buyers.

    @Adrian
    “omparing the bailout in Ireland to the US one is very misleading if you only include the TARP funds.”
    Sure, but we haven’t even started on the ECB liquidity funding, unlimited repo, borrowing at the refi rate etc. I believe that TARP and Maiden Lane between them constitute a comparison between NAMA and recapitalisation.

  9. Gregory

    I do not agree. The US crisis was a good old credit crisis on top of excessive leverage. Loan losses exceeded past recessions. However, regulators acted promptly to provide liquidity, a steep yield curve and encourage capital raising to repair balance sheets.

    @ jagdip,

    What German bailout?

  10. @Yogan,

    No, the German govt has injected little in the way of equity into their system. The injections into Commerz are more prefs if even at that level. Also the toxic assets in the Landesbanks have not been marked down. Private capital has not been mobiliesed to any great degree. Deutsche Bank is still the most undercapitalised of the global investment banks. Some estimates put the hidden losses in Germany at upwards of 200bn.

  11. @tull
    Why must you argue? Wikipedia is on my side 😉
    http://en.wikipedia.org/wiki/Hypo_Real_Estate
    “government support for the company had reached €102 billion.”
    That was March 2009; it was followed by nationalisation.

    Sachsen LB required a 17 bn euro bailout by its fellow banks organised by the Bundesbank. LBBW required about 6 bn partly from the state of Baden-Wurttenberg. BayernLB needed 30 bn. West LB got 8.2 bn.

    Now, in relation to the size of the German banking system, it is small beer, but it does exist nonetheless; the Germans set up a 500 bn euro fund to bail their small and medium banks out.

    So, Yes, the German got has injected…

  12. @ yogan,

    Most of this looks to be debt not equity. Possibly even further up the capital structure than the useless prefs injected here.

  13. The amounts that a kleptocracy can afford to lay out are truly enormous and these are just the beginning …… Eventually these stop.

    The effects on the body politic need not be guessed at, as we are destined to experience them. We can estimate them and should. More important is what will stop this theft and looting?

    It should be triggered soon else the consequences will be most unpleasant for the weakest. Those who consider their position to be strong may find they have miscalculated. Those who find that suddenly like a lot of others, they have nothing further to lose, may react badly and without pause for thought. Going postal may become fashionable.

    How much of our future are we prepared to destroy in this way? It is important to realize that productivity has been wasted by the malinvestment to date caused by the bubble. Further attention to recreating growth along these lines is a further waste. Until we know where the sustainable is now located, we shall continue to waste resources. Some resources, labour, will be permanently lost. Investment will cease. Reflation can then begin. But how to minimize the waste?

    Producing something is essential to social cohesion and may also make profit, or savings possible. Extracting paper value from capital fluctuations by the IFSC will be of little benefit to Ireland?

    Food production even if surplus to requirements, should be increased, if storage is possible. Forestry may be very productive, especially if hardwoods are planted. Mining may also be pursued although exploration is certainly beneficial. Ireland must cease rent seeking, although it can tolerate fairly high levels through Tax treaties and the IFSC. Land policy has to be turned on its head and the best way is to impose a tax on a sq ft basis, for ease of calculation and to bring down the capital values to enable sensible development.

    Given the lack of maturity of leadership and corruption permitted and even encouraged by those who know better, I see the potential for social division. The law has to be applied in Ireland, come what may. There are ways to force those who know better to do their duty.

  14. @Pat Donnelly – “Going postal may become fashionable”

    What does “going postal” mean?

    @Brian Lucey – “Its good we have turned a corner isnt it…..”

    The problem with corners is they are sharp, hurt when you bang into them and you usually don’t know what’s around them. If TPTB seriously think we have turned a corner then can I have some of what they are smoking/drinking please?

  15. @Yoganmayhew

    “he would say that wouldn’t he” [Bo Lundegrun claiming Securum/Retriva broke even] – Perhaps a fair point but you can read what he told the Oireachtas last year in full here

    http://debates.oireachtas.ie/DDebate.aspx?F=FIJ20090707.XML&Ex=All&Page=3

    And in particular he said

    “Five years later we got back from these bad banks approximately half of that amount and from the nationalised Nordbanken (Nordea), due to dividends and the selling of some shares, in absolute terms we have recovered everything”

    And from Dep Frank Fahey

    “While Sweden has had a 100% recovery of the money injected by the Swedish taxpayer…”

  16. @Brian Lucey

    Have TCD students not produced research comparing our bailout with TARP, the current UK, French and German bailouts and historically the Japanese and Swedish and 1930s US bailout?

    What Morgan Kelly is saying in relation to TARP is that on a per capita basis, the Irish taxpayer (or citizenry) is paying far more than the Americans. But is it the case that we’re paying far more than anyone anywhere at any time?

    I started looking at this but it takes a lot of research and more than Internet or book research, it seems to need more basic research like speaking with economists and bankers – exactly the sort of research that a worldclass institution like TCD could produce?

  17. @ Joseph: “If TPTB seriously think we have turned a corner then can I have some of what they are smoking/drinking please?”

    I would make one smallish, you understand, correction to your above: delete, ‘think’, and insert, ‘know with absolute certainty’. Now, that’s better. If you have created an heroic successful failure, you are ‘honour bound’ to continue!

    What we have is a massive, global debt predicament due in most part by the need to conjur up ‘profits’ in the face of a huge over-supply of labour and consumer commodities, parallel to a slow, incremental decline in real incomes of the consumers! The latter are tuckered out and cannot repay their debts, so the only way to extract cash from unwilling debtors is to stiff them with taxes – hence the …. (insert your own versions). If you aggregated all the ‘stimuli’ in the eurozone – how much would it amount to for each citizen? And you don’t even have to print anything anymore – just send it by electronic delivery!

    The current debate about alphabet-style stimuli, (or whatever you want to name them) is a diversion. MK mentioned two gaping wounds – I reckon its more like a Thousand Cuts. But does it really matter? We’re going to succumb.

    B Peter

  18. @Jagdip
    Bo Lundgren:
    “in absolute terms we have recovered everything”
    Yes, but what about in real terms? We don’t have the ability to devalue to reduce the absolute cost. We don’t have an asset boom that is going to make our banks more attractive – we’ve just bought a load of shares at 1.80 in BoI. They are now trading at .68 …

    As for Mr. Fahey, you don’t really expect me to take him seriously, do you?

  19. @yoganmayhew

    Again you may be right – I’ll try to root out the source that said that by 2008 the Swedish bailout had broken even (I understood in real terms). But regardless would it be fair to agree that per capita the cost of Securum was minute compared with our estimated €25-30bn deadmoney bailout (€3.8bn + €8.3bn + €2.7bn + €0.1bn + €10bn + €?) (Anglo 09 + Anglo 10 + INBS 10 + EBS 10 + Anglo future + INBS/Anglo/EBS additional)?

  20. @ Yogan,

    Define bailout? To me its a subsidy below normal rates of return from one party to existing stakeholders. Clearly not every injection from public funds is a “bail out.”

  21. Joseph
    I am sure you can find going postal on Google. Like the corner! 🙂

    The really difficult part was the blowing of the bubble. Stopping it was always going to be hard to do as the stage had been set in many countries. Still, it might have happened that we could have stopped the waste then.

    Now it is mainly downhill. It should be much easier and the EU and ECB have been helping the GFF to govern. I will reiterate, the dislocation is between ownership and need. I am a libertarian, Austrian school type, but even the Jesuits believed in “each according to his need”. Note the sexist language? The papists shut down their communities in South America. Having homeless people is a sad reflection on pseudo-christian values. It also makes economic sense, for any hope of growth. I think the over emphasis on consumerism has been and will be dealt with by the deflation, but everyone needs certain basics and the economy is already reasserting itself. The best solution is to remove government, particularly one that is unsuitable, from all economic activity. It surely has convinced even supporters that it is hopeless in that area and high finance is well beyond it.

    NAMA, like all the other bodies, is never going to show a profit in a corrupt regime. Sell everything off and pay off as much debt as possible. It is a wasteful attempt at a rescue for sectors that badly need the chastening effects of a free unrigged market!

  22. @Jagdip
    “Have TCD students not produced research comparing our bailout with TARP, the current UK, French and German bailouts and historically the Japanese and Swedish and 1930s US bailout?”
    No, theyre too busy doing their exams and getting results at present. But if you want to give me 30k for a masters student to investigate this over two years, or 50k for a phd, go ahead 🙂

  23. i weep for the unborn edit function again…
    as I was going to say.
    Another cheaper alternative is to go here :http://www.imf.org/external/pubs/ft/wp/2008/wp08224.pdf
    If we look at the main variables : gross fiscal cost as % of GDP (cue argument on this now) we see that losses above 20% are
    Chile 1981 43%
    Cote D’Ivoir 98 25%
    dominica 03 22%
    Ecuador 88 22%
    Indonesia 97 57%
    Jamaica 96 44%
    Israel 77 30%
    Korea 97 31%
    Macedonia 93 32%
    Thailand 97 44%
    Turkey 00 32%
    Uruguay 81 31%, 00 20%

  24. @Tull
    “Define bailout? To me its a subsidy below normal rates of return from one party to existing stakeholders. Clearly not every injection from public funds is a “bail out.””
    If the cost of the injection of public funds is below market rate, it is a bailout.

  25. @Jagdip
    “would it be fair to agree that per capita the cost of Securum was minute compared with our estimated €25-30bn deadmoney bailout ”
    No question with that!

    The point I am really trying to make is that the swedish bailout was not costless, despite it being spun as such after the fact. This was obscured in the run-up to NAMA. In particular, Securum lost money that was regained in nominal terms by the sale of Nordbanken, but they were separate transactions. To say that Securum broke even is profoundly false. The best you can say is that the swedish banking crisis broke even in nominal, non-inflation, non-opportunity cost adjusted terms for the state. But then, you’d also have to say that the swedish state made the terms of the bailout so onerous that 75% of the banking system preferred to take their own medicine and set up their own bad banks.

    Perhaps there are fewer cissy bankers in Sweden?

  26. @Brian,

    I suppose 30k for a masters grad to examine whether as a country we are spending more per capita than anyone else ever anywhere would be good value because it would prompt the question why? but not if it took two years – by that time another €10bn may be injected in Anglo and God knows how much more into INBS and EBS and the only value of the research would be a historical comment on our actions today.

    Thanks for the IMF numbers but I think your colleague, Morgan Kelly, was talking about per capita comparisons and as all those countries which you have listed have today (don’t have the time for historical investigation into GDPs and national inflation rates) per capita GDPs significantly below Ireland’s then are we not back to possibly being the most expensive € per capita bailout in history?

    I obtained the per capita GDPs from wiki here

    http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)_per_capita

    Ireland according to the IMF had USD 51 356 per capita nominal GDP in 2009. The closest other country on your list above is Israel who had USD 26 797.

    I know there are some many holes in the above but you get the idea.

  27. I see that Brian Cowen has rebutted Morgan Kellys arguments in an RTE interview reported in the IT today:
    http://www.irishtimes.com/newspaper/breaking/2010/0526/breaking25.html?via=mr

    For instance he says:
    “I think it is obviously true that one has to try and deal with some of the narrative that has been allowed to be formed which i think doesn’t reflect a comprehensive or balanced commentary of where we are at,” said Mr Cowen.

    “Really implicit in some of the argumentation is the idea that it would be better for Ireland to default. But we simply don’t accept that at all and I think all of the implications from other countries where that happens greatly undermines, not just in terms of financial credibility but also the ability to retain confidence at home,” he added.

    I just wonder where MK implied such a thing?

  28. I see that Brian Cowen has rebutted Morgan Kellys arguments in an RTE interview reported in the IT today:
    http://www.irishtimes.com/newspaper/breaking/2010/0526/breaking25.html?via=mr

    For instance he says:
    “I think it is obviously true that one has to try and deal with some of the narrative that has been allowed to be formed which i think doesn’t reflect a comprehensive or balanced commentary of where we are at,” said Mr Cowen.

    “Really implicit in some of the argumentation is the idea that it would be better for Ireland to default. But we simply don’t accept that at all and I think all of the implications from other countries where that happens greatly undermines, not just in terms of financial credibility but also the ability to retain confidence at home,” he added.

    Which MK article did Brian Cowen read?

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