State is the lender of the last resort to bail out nationally important institutions of any charter. However, there are some significant differences in the way a state in a socialistic fabric or capitalistic fabric acts/should act in bailing out institutions that, are ‘too big to fail' or, left to market forces can lead to systemic collapse. Those differences seem to be disappearing.
I wonder if Treasury Secretary Henry Paulson's intent in saying that the full resources of the Treasury Department are being used to ensure the success of its $700 billion Troubled Assets Relief Program (TARP) is genuine. Let's agree his intent was/is genuine, but then are his hands tied that he is unable to ensure ‘reasonable returns on TARP investments'? I raise these questions for five reasons. One, TARP investments seem to be evaporating with the beneficiaries reporting significant losses in the last few reporting periods. Second, TARP is scheduled to expire on December, 31, 2009, although it can be renewed by the Treasury Secretary through October 3, 2010 upon submission of a written request to Congress. Third, the White House is reportedly intending to use some of the remaining TARP cash for deficit reduction, while also keeping some funds available for emergencies. Fourth, Federal Reserve Board (FRB) on Monday said that 9 of the 10 Bank Holding Companies (BHCs) that were stress tested recently have increased their capital sufficiently to meet or exceed their required capital buffers. Fifth, the White House indicated that they will close Capital Assistance Program (CAP), one of TARP's several programs, to focus on spurring lending to small businesses. Let's examine all these concerns one by one.
As of June 19, 2009, TARP investment ($510.7 billion net of repayments till that date) was down approximately $148.2 billion. A total of 690 financial institutions received combined capital injections of $204.68 billion through TARP as of Nov. 10. More than 40 banks have repaid a total of $70.88 billion, and Treasury has pocketed $10.1 billion in dividend, interest and fee payments from TARP recipients. However, dividend, interest and fee payments from TARP recipients are not enough to offset TARP losses. Till date in 2009, 123 banks have collapsed. Among those announced last week was Pacific Coast National Bancorp, a San Clemente, Calif., bank that sold $4.1 million of preferred shares to the Treasury Department in January 2009. In addition to these failed banks, Federal regulators have had to seize or threaten at least 27 banks that received capital infusions from the TARP program. Four such actions were imposed this month. TARP investments in Bank of America Corp. (BAC) and Citigroup Inc.
