Asset Rehabilitation Center Or Tax Payer Trauma Center- TARP

Trouble Asset Relief Program commonly known as TARP was again in limelight after Bank of America recently announced full repayment of its obligation under TARP. The first anniversary of the rehabilitation by Federal Reserve was on 14^th October 2009. A year back Federal Reserve introduced TARP as a mode to preserve the troubled assets, banks and other financial institutions suffering from the disease of Sub prime.

We have tried to revisit the following: What was TARP? How good or bad the one year of anniversary of TARP has been? How well the scheme has sufficed the troubles of ailing economy? Whether TARP proved a rehabilitation center or Tax Payer trauma center?

Infusing Life In A Dead Duck:

The perils of housing sector was more like a dead duck which was being shot while swimming in the waters of rising housing prices and booming markets. The bullet was fired by sub prime crises. There was a dramatic rise in mortgage delinquencies, foreclosures started in US. US house prices peaked in the year of 2006 and as they started coming down rates of mortgage changed magnitude and defaults started to take driving seat. Layman Brothers, Freddie and Fannie’s, JP Morgan, Merill Lynch’s etc of the world suffer accidents with rising defaults and faltering rates of securities whose underline was housing sector.

Having seen the drastic impact the than US president signed law the Emergency Economic Stabilization Act of 2008 (EESA, Division A of Public Law 110-343) which created the scheme TARP on 14th Oct 2008. This scheme focused to purchase troubled assets to encourage financial institutions in surviving and building capital and to increase the flow of Dollars in the system. Treasury formalized to purchase $250 billion. For qualifying TARP the financial institution had to meet certain standards, which were as follows:

(i) To ensure that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution

(ii) It required clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate

(iii) It prohibited the financial institution from making any payment to a senior executive based on the Internal Revenue Code provision

(iv) Agreement not to deduct for tax purposes executive compensation in excess of $500,000 for each senior executive.

Treasury secretary Paulson tried to bring into life a dead duck to help Uncle Sam. However lot of people was against the scheme and pointing fingers on the decision. Usage of Tax payer money to help troubled banks was not been gobbled well by public.

Initial Tax Payer Trauma:

The initial reaction opposing the TARP scheme was huge. There was a huge outrage at the time of passing the scheme as people of US didn’t wanted their hard earned money to be utilized for saving bankruptcies and guaranteeing big 19 banks. TARP money went to organization which was under the situation of Layman brothers. The worrying factor have bee that the money under TARP was given without asking questions. The realty became atrocious when it was reported that 10 of the total of 19 biggest institutions in US needed a further combined finds of $ 74.6 billion in order to boost there cash reserves. The 19 institutions that were tested by Treasury Department and Federal Reserve officials account for two-thirds of the total assets of the US banking system, and more than half of the total amount of credit in the US economy.

Those that do not require extra funds are Goldman Sachs, JPMorgan Chase, Bank of New York Mellon, MetLife, American Express, State Street, BB&T, US Bancorp and Capital One Financial. The stress tests were conducted to overview whether the top institutions in US had enough money to withstand the recession in economy and trouble in financial markets.

Prof Nouriel Roubini of RGE monitor in a report said that” growth rate, unemployment rate, and home price depreciation are already worse than those in U.S. government baseline scenario for 2009 and were already very close to or worse than those for the more adverse stressed scenario for 2009. Thus, the stress test results are meaningless as actual data are already running worse than the worst case scenario.” However the latest data released from the US department of treasury has shown some positives of the scheme. The budget deficit which was once in doldrums due to TARP is expected to come down, which in turn may lower some eyebrows in the future.

Starts Fetching Some Returns In Anniversary:

The US department of treasury latest report summarizes that in 2009 under Troubled Asset Relief Programme (TARP) lowered projected costs and increased projected returns in its one year anniversary. The report highlighted that ” Treasury's investments to stabilize the system are delivering higher returns than anticipated. The impact of lower TARP investments and higher investment returns is projected to cut the impact of TARP on the deficit by about 60 percent or more from the August 2009 Mid-Session Review.”

During the period ended September 30, 2009, the treasury disbursed $364 billion of the authorized $700 billion, most of it in the form of investments. During that same period, the investments generated $12.7 billion in cash received through interest, dividends, and the proceeds from the sale of warrants. The US department of treasury recently received full and final payment of $ 45 billion from Bank of America as well, bringing the total amount of repayment of TARP funds to $ 118 billion. This amount is expected to reach $ 175 billion in 2010.

Total bank investments of $245 billion in FY 09 that were initially projected to cost $76 billion are now projected to bring a profit of $19 billion. Taxpayers have already received about $15 billion in revenue through interest, dividends, and the sale of warrants, and that profit could be considerably higher as Treasury sells additional warrants in the future.

US employment situation:

The employment situation in one year period 2008-09 has stayed alarming. The latest US report from bureau of statistics suggest that the unemployment rate edged down to 10 % but it is still quite high. US non farm payrolls stayed at -11000. In November the number of Unemployed persons was 15.4 million. There has been a considerable rise in the unemployment since the sub prime trouble emerged. US unemployment rate during December 2007 was 4.9% with number of unemployed persons at 7.5 million.

Outlook:

To put it in a nice manner we feel that Troubled Asset Relief Program (TARP) though initially criticized by the public has helped the economy from surviving the tautness which tax payers would have faced had no scheme was introduced. The scheme has so far been able to fetch $ 12.7 billion in cash received through interest, dividends, and the proceeds from the sale of warrants. Payments have been received from Bank of America while Citigroup is also under process to repay the amount to US treasury. The unemployment rate of 10% is a cause of worry for the policymakers and it will be interesting to see how TARP manages to affect the same as it has direct impact on the financial sector and the monetary system. Better credit facilities for small business will help generate businesses. Greater transparency is required in coming future so that the companies remain accountable not only for the tax payers but also towards the macro economy as a whole.

Copper: Dethroned from 16 month highs by China

China was the major trigger which took Copper towards 16 month highs of $ 7615 per tonne on LME. Weakness in dollar and strong imports data from China acted as major trigger for prices.

But as was expected it was China which dethroned Copper from the high levels and Copper corrected. The road for correction isn’t over yet and participants should be ready to see fresh corrective moves and liquidation.

Dollar has been on a bull run and tested six months highs of 1.393. However surprising shock for the markets were Chinese monetary tightening measures and fears that other banks might step in to negate the growth of cash flows. Reserve bank of India hiked CRR by 75 bps to 5.75% in its latest credit policy on 28^th Jan 2009. The Repo and Reverse repo rates were kept unchanged. CRR hike is expected to suck excess liquidity of 36000 crores from the system. Now as this will be a damaging for the equity markets it is also expected to bring change of dynamics of commodities especially Copper.

Inventory levels were on a high but that hardly made any difference to the prices early this year. But now as Copper started correcting and the markets on a negative mode stockpiles can act as one more bullets in arsenal of bears. Inventory levels of Copper are now at March 2009 highs.

World Copper markets in surplus:

International Copper Study Group (ICSG) in its recent released for the month of October 2009 showed a refined Copper surplus of 132000 metric tonnes. After making seasonal adjustments refined Copper surplus was 79000 metric tonnes.

World mine production grew by 1.9% in the first 10 months of 2009. Indonesia, Peru, Chile and Brazil were the main driver towards the growth where the production increased by 331000 tonnes. World refined production declined 0.1% during Jan-Oct 2009 unchanged from the same period during Jan-Oct 2008. Chinese apparent usage of refined Copper increased by 43 percent Overall apparent usage of world refined Copper was down 18 percent.

Chinese imports data beat economists expectations

Chinese imports data beat all economists expectations during the month ending December and for the whole year ending 2009. Even after speculations that the demand will slumber due to high inventories in Shanghai ports and warehouses the imports data continued to show substantial upsurge. Earlier during 2009 it was hefty stimulus packages of more than $ 580 billion by China which supported economy not to get off track. The buying of refined Copper for imports was on account of positive London-Shanghai arbitrage which lured arbitragers to gain due to higher prices in Shanghai. However as the markets have come down the arbitrage opportunities have shrinked. Excess cash flows are also taken care off by central banks and that will be bringing more pressure to metals on every rise.

Copper supplies to increase further as BHP Billiton announces expansion

At the start of January, BHP Billiton announced it has approved its share of the capital expenditure required to expand mining and processing capacity at the Antamina copper and zinc mine in northern Peru.

The expansion project will increase the site's ore processing capacity by 38% to 130,000 tonnes per day. Higher mineral ore reserves previously reported in combination with the expanded processing capacity will result in a mine life extension of 6 years from 2023 until 2029. First production from the expansion is anticipated in late 2011.

BHP Billiton is one of the world's top producers of copper, silver, lead and uranium, and a leading producer of zinc.

In domestic markets the supplies are set to increase due to expansion of Khetri Copper Complex of Hindustan Copper (HCL) will be enhanced from present level of 1.0 million tonne per annum to 2.6 million tonne per annum by 2015. This involves expansion of Khetri & Kolihan mine and development of Banwas deposit and Chandmari mine. Shri Handique has physically inspected the Banwas deposit area and directed the CMD, HCL to put the mechanism in place to start mining of ore at Banwas.

HCL is aggressively pursuing increase in mine production by expansion of current mines, re-opening of closed mines at Ghatsila and development of new deposit through green filed exploration in the Country. It has also kept the option open for acquiring copper deposit in other geographies. The company has prepared plans to increase mine production from current level of 3.15 million tonne per annum to 11.0 million tonnes per annum by 2017 with an investment of Rs 3500 crores.

The Company has sent a proposal for follow on public offer (FPO) to the Ministry for disinvestment of 20% of Company’s equity 10% for GoI and 10% for meeting its expansion needs.

This production increases will result in the price rise to take back seat as supplies will increase further. This will be adding on to the already high inventory levels due to lack of demand. For the coming months the speculation will govern the prices rather than pure demand-supply fundamentals. Demand-supply equation will emerge in the later half of the year.

Domestic and international markets correct significantly

Both LME and MCX consolidated during the initial period of January but a substantial fall was registered at the end of January. The prices of three month forward Copper lost 6.4% to $ 7465 per tonne on 8^th Jan 2010. The prices hit a 16 month high of $ 7615 per tonne on 6^th Jan 2010 from where the prices corrected towards $ 7267 per tonne down 5%. LME inventories registered a rise of 36200 tonnes from start of January to 538600 tonnes. Dollar movements bruised Copper sentiments as it tested 6 month highs of 1.393 against the EURO. In domestic markets MCX futures of Copper were at Rs 318.30 per kg down 7.5% as against Rs 344 per kg at the start of January 2009.

Outlook:

Copper were on a rise and testing new multi month highs in December and early January but market dynamics have changed drastically. Chinese monetary tightening measures and denial of fresh loans to loan seekers will be a cause of worry for metals. People’s bank of China has also asked bans to raise their reserve requirements. Indian premier bank already increased its CRR by 75 basis points. Cautious traders have made Copper unsustainable at higher levels. The prices have corrected and rising inventory levels will now emerge as a major cause of worry. Earlier during December the inventory levels were on a rise but participants completely seem to be completely ignoring the same. In domestic futures market Copper is expected to come down further towards 290-300 per kg.