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.