Friday, May 8, 2009

TARP Too: Where do We go from Here?

As I saw the headlines about the banks needing to raise more capital, I started to cross-reference things in my mind.
FACT: many banks want to return TARP money.
FACT: some banks need more money, according to results of the Stress Tests that the government has just reported on.
FACT: The administration does not want banks to return the TARP money right now. Some may be allowed to start soon, but not yet.
FACT: The government arraigned a bankruptcy for Chrysler in which the first bond holders got about 30 cents on the dollar, while the UAW got $55billion worth of equity in the company, and the government got a significant stake in the company as well.
FACT: The First Bondholders who invested in Chrysler offered to take a 50% loss on their investment, but the Administration insisted on them taking a 70% loss.
FACT: the government wants the banks to raise private capital to be capable of passing the stress tests, or else they may need to pump more government money into those banks.

Now why do I mention Chrysler in context of the banks? Simple: the Administration is the entity in ultimate charge of the banks that need more money, and the banks may have a hard time convincing private companies that investing in those banks under control of the Government will not result in their bond contracts being overridden by the Administration in some future move that the Government thinks is best for the "rightful owners of the nation's wealth". Chrysler investors are no different than bank investors. When companies, people, hedge funds or whoever, decide to invest, they trade off return, risk, and other pertinent factors. There is a huge risk when this administration is in control of the banks that they will make some move that will negatively impact the investors who happen to not be the Government. If the banks do not raise all of the capital in six months, the Administration will take a voting stake, and then the investor who stuck their necks out now will be screwed. Never mind that most hedge funds are collections of ordinary citizens trying to provide for their retirement, trying to provide for themselves and their families' livelihood. Businesses try to raise capital to finance their growth, and if they are to be persuaded to invest in banks, they need to know that their rights will be protected. Confidence is the key to investment.

Sure, there are greedy investors who only want to be filthy rich. Who would not want to be rich? I don't begrudge them that, but those are not the majority of the investors the banks are seeking. I mean, if Warren Buffet were to invest his money, with the goal of being filthy rich, would the Administration have a problem with that? Oh, wait, they love him. So why is it bad for others to want to invest and become like Buffet? Oh yes, that's right. Warren Buffet must be one of the "Rightful Owners of the Nations Wealth", at least in President Obama's eyes. I take a simple approach: the "Rightful Owners" in the business world are those who bought the bonds, whose contracts specify that they have rights of ownership or first payment in a bankruptcy proceeding.

So where do we go from here? If a few of the banks (Citi, GMAC) need more capital, we need to approach it from a fiscally responsible perspective, and allow some banks that passed the "Stress Tests" to return TARP money, and the Administration needs to reinvest that money in the other banks that need it. We also need written assurance from the Obama administration that there will be no further interference in the banks which could result in the coveted investors losing their rights or property when they invest in American banks that have received TARP money.

Will this happen? as I sit here up at 2:30 AM on 8 May 2009, I seriously doubt it. But it would work, if done.