TARP

Just read the recently released CBO Report on the TARP. There is some very interesting information in this report.

1.) How Much the Government is on the Hook For.

The report details the TARP as of Dec 31, 2008. At that point $247 billion of the $350 billion allocated had been disbursed to about 218 institutions. Based on a Present Value model, the CBO believes the government has subsidized $64 billion (or 26%) of all loans, purchases, and infusions. This means that the $247 billion invested is worth $183 billion today.

2.) How Companies will Pay the Government Back.

An odd characteristic is the structure and repayment scheme. Most are structured in a way that the government purchased preferred shares that pay a dividend (that increases its yield after 5 years), and the government has the ability to convert those shares to common stock at any point in time.

Although that is the most common structure, there is a higher yield from AIG, a different asset warrant structure for part of Citi's injection, and loans to the automakers on different terms.

Throughout the various terms the government will be repaid through dividends, repayment, conversion and sale of common, or a combination of all three.

3.) Success

It seems as though, this program has helped stop the bleeding. Although moral hazard and political influence have run rapid, the financial system has been slowly but surely improving. To be perfectly honest, it is hard to say how far we would have slid without this injection.

And if things improve the government could get much of the money back.

4.) Reforms

(a) First, there needs to be a systematic way to address each and every TARP application. The Citi deal was a complete diversion from the way other institutions have been treated. So, a more coherent policy that is tough and transparent, so banks know where they stand. I do not know exactly what this would look like, but it would not look like the bandage and duck tape system currently in place.

(b) Second, on the accountability and sacrifice front. These companies are all (including the automakers) coming to the government because of bad business decisions and because of an unprecedented financial crisis. These companies should have to give up a considerable amount (like $1.2 million redecorating, yes you John Thain). Oddly enough the only standard that looks close to correct is the one imposed on the automakers. The rules should be adopted should include no dividends, no share repurchases, severely restricted executive compensation, report plans for restructuring, report the on the financial viability of the company (either publicly or to the FED Chair and the Treasury Secretary), and renegotiated severance packages.

Also, the terms on the deals should be much more favorable for the government and the taxpayers. An example is that in exchange for government money, these banks should have to start lending to credit worthy consumers and businesses. This will look like temporary nationalization, but that may be what it will take to jump out of this crisis.