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Was TARP necessary


Guest Bronco
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Any experts here on the financials?  I am curious, on a bank by bank basis, how much were the cumulative writedowns (and writeups) on assets and did the banks (on an individual basis) have enough capital to survive before TARP?

 

My guess is that some, Citi and AIG (although not a bank) - no, but others like perhaps JPM would have been fine.

 

Again, just trying to initiate some perhaps new discussion.

 

 

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Shalab - I guess my point is, strictly looking at the numbers now (in hindsight)  - did JPM for example have enough capital before TARP to absorb the write-downs from approximately 2008 - 2010. 

 

I myself was in favor of TARP except maybe for AIG and some others but I think it is interesting.

 

How is Martin Sullivan not in jail?

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I think its foolish to add up total losses and look at pre tarp reserves. Do you think there would have been a recovery (as fast) without tarp? Do you think more people would be out of work? Do you think said people would be paying their debts? Do you think you can look at these things in a bubble with no regard to whats going on in the real world?

 

Bronco you are smarter than that.

 

We had 3 choices.

 

liquidate, liquidate, liquidate. - All Austrians

Nationalize all failing entities. - Krugman / Roubini

Some crappy mix of both options. - ???

 

We got choice 3, my goal isnt to analyze it, its to make money from it.

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I think my question is getting lost here, so it may be time to abandon.  I wasn't asking if TARP was good or not.

 

My question was strictly about the #'s - did banks have enough capital prior to TARP to absorb their eventual losses? 

 

I know there was a panic and I know things were marked to market but again that doesn't address my question.  In hindsight, did any banks have enough capital to cover their losses?

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I think my question is getting lost here, so it may be time to abandon.  I wasn't asking if TARP was good or not.

 

My question was strictly about the #'s - did banks have enough capital prior to TARP to absorb their eventual losses? 

 

I know there was a panic and I know things were marked to market but again that doesn't address my question.  In hindsight, did any banks have enough capital to cover their losses?

 

I understand you are not questioning the wisdom of TARP.

 

Nevertheless, your question is unanswerable. It is now impossible for us to evaluate what the impact on JPM would have been if TARP had not happened. Who can tell what losses JPM would have suffered if AIG had failed and brought more banks or insurers that JPM had large exposures to down with them? Who knows how JPM would have been affected if interest rates had shot up in response to credit fears? If, as you suggest, you look only at the actual losses JPM has suffered since then, it is not a true picture of a TARP-less scenario.

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I think my question is getting lost here, so it may be time to abandon.  I wasn't asking if TARP was good or not.

 

My question was strictly about the #'s - did banks have enough capital prior to TARP to absorb their eventual losses? 

 

I know there was a panic and I know things were marked to market but again that doesn't address my question.  In hindsight, did any banks have enough capital to cover their losses?

 

I think my answer answers your question.

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My question was strictly about the #'s - did banks have enough capital prior to TARP to absorb their eventual losses? 

 

No. They had lots of capital but they assumed that they could sell the assets in an orderly process, & get more for them than they actually could. A worst case TARP type intervention was always built in, but the expectation was that it would be temporary.

 

SD

 

 

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Interesting replies on this...so going back to JPM as an example - and pretending mark to market didn't exist - could they have survived?  Were the people not paying their mortgages overwhelming their obligations to deposit holders?

 

I agree about TARP b/c of the interconnectivity and domino effect.  But I surprised that everyone thinks unanamously that write-offs exceeded capital.  So although some banks claimed they didn't need to take TARP none of that must be true.

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I still think you are looking at it incorrectly.

 

No Tarp = Nationalization or Liquidating or some other derivative of both. If we go with the system will cleanse itself.

 

Then one has to assume real unemployment / underemployment of greater than 15% - 18% (many think the real rate of unemployment / underemployment is around those numbers). - Unemployed people dont pay mortgages especially for overvalued homes. Neighbors dont pay mortgages when the values fall too much (very subjective).

 

One also has to assume frozen credit markets, insanely low asset prices due to the lack of a bid, no backdoor AIG bailout, and huge losses based on derivatives and counter party risk due to interconnectivity.

 

Do you really think Uncle Warren is being coy when he says it all would have come down but he would have been last?

 

You cant just take losses to date and add them up. Then subtract them from pretarp capital. You have to take into account the macro environment. The assets on the banks balance sheets were worth substantially less in that panic and the liabilities were worth exactly the same. Add leverage of 10x - 40x and you have .......

 

---

 

I had significant CC debt while my assets were cut in half. If I had been laid off that would not have been repaid and Chase or JPM Chase would have reported a loss. I wasnt alone, as far as I know. I work in oil and gas. If gas and oil had stayed around $40 a barrel I am pretty sure much more people would have been let go. We let go hundreds at the company I work for and 1 person in my department.

 

What I am saying is you cant just run an excel program and say see tarp wasnt needed. Life doesnt work that way. As value investors we all know that "animal spirits" matter alot more in the short term than valuation or figures.

 

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If by TARP, you mean some kind of reliquidation of the overall banking system, I would say that is was absolutely necessary.  If by TARP you mean just the TARP itself, then surely not.  

 

TARP as it was executed was simply the PR portion of the overall bailout.  TARP was designed to make money while other less transparent and less obvious extensions of the US government did the heavy lifting.  

 

Good points John. Something I missed, I was including the overall bailout in my assessment when you say "TARP" Bronco. The real bailout was the back door bailout, AIG, Freddie, Frannie, and the alphabet soup of programs and agreements.

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[Good points John. Something I missed, I was including the overall bailout in my assessment when you say "TARP" Bronco. The real bailout was the back door bailout, AIG, Freddie, Frannie, and the alphabet soup of programs and agreements.

 

For those of you that did not see it... it's sickening.

 

http://www.khanacademy.org/video/geithner-plan-i?playlist=Geithner%20Plan

 

BeerBaron

 

 

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Interesting replies on this...so going back to JPM as an example - and pretending mark to market didn't exist - could they have survived?  Were the people not paying their mortgages overwhelming their obligations to deposit holders?

 

 

The question is whether illiquidity can lead to insolvency. What if, because of a failure of Citi, people worried about the safety of their deposits with JPM and withdrew them? Who could JPM have sold their illiquid assets to then and at what price even if they could find a buyer? These are imponderables - we simply have no way of knowing how things would have played out. I would bet, however, that if the govt had done nothing we would eventually have had runs on the banks which would have brought the system down.

 

The banking system lives or dies with confidence just as fiat money systems do but let's not start another discussion on gold. :)

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My question was strictly about the #'s - did banks have enough capital prior to TARP to absorb their eventual losses?

 

No.  With the amount of losses that would have to be absorbed, they would not have met adequate levels of funding for their Tier 1 and Tier 2 capital.  Thus their financing costs would have gone through the roof.  That is if they could even get adequate financing, since there was a scarcity of capital. 

 

We were close to full blown mortgage/loan calls if bank liquidity had shrunk any further.  You would have had huge runs on banks, including stalwarts like JP Morgan.  They would not have been able to meet those demands and still finance their lending businesses.  And we aren't even discussing counterparty liabilities that would have laid waste to many institutions.

 

TARP was single-handedly the most successful tool implemented during the downturn.  In my opinion, it is the primary reason we did not experience Great Depression 2.  I don't give a rat's ass what the CEO of JPM or WFC might say about whether they needed TARP or not.  They did.  They would have fallen...maybe later than most, but they would have gone down.  I disagree with Buffett.  I don't think Berkshire would have gone down.  It would have gotten hammered, but I think it would have survived...albeit with a barely operational A credit rating.  Cheers!   

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