Since everybody in the media and in Washington wants to know where the TARP money went, I've been thinking about the mechanics. (Please note: I'm not an accountant or an auditor and, although I am an IT person, I don't know how bank systems are designed.)
As I believe the CEO of BofA told one committee, the government's money doesn't get a color-code. And some in Congress do recognize that money is fungible. This, however, only makes them angrier (as if being angry would make money less fungible or more trackable).
Input
So, anyways, in this thought experiment, let's start on the input side. I assume it is easy to set up a new account called "TARP" and, for all I know, that is what the banks have done. It's the output side that is the problem.
Output
I suppose one could tag the TARP money, but that would mean changing who knows how many computer systems in these banks. It would probably take years and cost a bundle. Not a realistic idea. And this is why, I assume, it is so hard for Treasury or anybody to answer the question of "where did the TARP money go?"
But let's take a very simple, and unrealistic, system. One input account labeled "TARP". All the hundreds or thousands of loan officers in all the branches of these banks are given access to this account. (Practically speaking, programmers would have to add all the controls needed to assure only authorized access and limits and to prevent waste, fraud and abuse. Naturally, the implementation of even this simplified system would take at least months - but for this thought experiment we will ignore this little problem.)
So, what do the loan officers do next? Well, given the mood in Washington and the country, they will be told to make all their loans from this one pot until they have reached their limit. Wonderful. Now we know where the TARP money went. Problem solved.
No, it isn't. Why? Because TARP was supposed to make it possible for banks to lend more than they would have lent without it. But in this very simple case, all we know is that the TARP money was spent. Had it not existed, the banks might have made all of those loans from their own non-TARP money. We would have no way of knowing if that was true or not.
What we need to know and why it's not easy to find out
Basically, we really want to know two things. First, who got the loans. Second, did the bank's lending increase over what it would have been otherwise.
We could answer the first question in my simple system. But I suspect that answering it in the real world is imposssible because of the complexity of the systems involved. (See Input and Output above.)
What about the second question? Well, one could compare loans this year to loans last year and if more are made now than before, we could assume that TARP was the cause.
Not so fast. We're in a major recession. For 4 months in a row, over 600,000 jobs have been lost. (There have been only 10 such months since records began.) An enormous amount of wealth has disappeared (predominantly in homes and 401Ks). People are saving, not spending. And they are not borrowing either. So, total loans could still be down this year - because people are not borrowing or because the borrowers are no longer credit-worthy - even though the TARP money is letting banks make more loans than they would have made otherwise. That is to say, one can't reach any conclusion about whether or not more loans have been made simply by comparing loan rates or amounts because the recession muddies the waters.
No doubt there are ways to track the TARP money (to some degree) that do not require a massive redesign of computer systems and that can take into account reduced borrowing, but I suspect they are not easy to implement and will, therefore, take time to develop and put in place.
Unfortunately, complexity is not something the media or Washington understands.
Showing posts with label TARP. Show all posts
Showing posts with label TARP. Show all posts
Thursday, March 12, 2009
Wednesday, March 11, 2009
TARP and the Congress: Neel Kashkari vs. Dennis Kucinich
Well, Mr. Kashkari underwent another multi-hour grilling by, this time, Kucinich's Oversight Subcommittee on Domestic Policy, and one wonders why he has chosen to subject himself to this continuing abuse.
The more I watch committee hearings on C-SPAN, the more I wonder how our country has survived. Although there are some smart people in the Congress, the number of idiots and ideologues (sometimes the same, sometimes not) surely exceeds their presence in the population (I hope).
First, Mr. Kashkari must deal with the incredible ignorance of the people who are questioning him. They know next to nothing about banking, about finance, about economics in general.
Second, they are like children who want their candy NOW! The stimulus package, passed less than a month ago hasn't worked yet! (The money has only started to trickle out the door). The 1/2 of the TARP given to the banks in the Fall hasn't stopped the recession. (Note: that wasn't its job. Its primary purpose was to stabilize the financial system.) And they don't understand that our financial institutions are in a precarious balancing act: they want to lend but they also have to maintain their capital levels (Tier 1 and, now, TCE)to avoid going bankrupt. Doesn't matter to these financial geniuses. The banks are supposed to do both.
Third, some are still angry because Treasury injected capital rather than bought up the bad assets - no matter that multiple people from the FED, FDIC and Treasury have explained what happened on multiple occasions. They still don't realize that buying up those assets has turned into a hugely complex problem - and Treasury, to its credit, realized it had to do something fast, something specifically authorized by the legislation (capital injection).
Fourth, he is constantly required to respond to conflicting ideological demands between the "free market over everything" and the "throw the bums out" groups.
Fifth, they don't understand that these multinational banks have customers and businesses around the world. They want the TARP money to be used "only" in the U.S. A few recognize that money is fungible, but still want to control how the banks conduct their business.
One of the dumbest questions/ideas came from Issa who thought it would have made more sense for the government to just buy up/renegotiate all the bad mortgages. It didn't occur to this doofus (although Kashkari did his best to gently point it out) that the government would have to hire thousands of employees who knew something about mortgages and those people would have to come from the very industries under scrutiny. Amazing, isn't it? Issa, foe of all government, convinced that the federal bureaucracy is the devil, thinks that same government should have gotten into the mortgage modification business down at the individual level.
The biggest complainer was Kucinich, appalled by the lack of oversight on how the money is being spent. Sure, it could probably be better. But since Sept., a new Administration has taken office, the economy has gone into a tailspin, banks are failing weekly, and the stock market may be headed toward 5000. You'd think it would have occurred to Kucinich that, just maybe, the Treasury has a lot on its plate and expecting penny-by-penny accounting of the money would be impossible under the best of circumstances and impossible given the speed with which the economy has deteriorated.
The more I watch committee hearings on C-SPAN, the more I wonder how our country has survived. Although there are some smart people in the Congress, the number of idiots and ideologues (sometimes the same, sometimes not) surely exceeds their presence in the population (I hope).
First, Mr. Kashkari must deal with the incredible ignorance of the people who are questioning him. They know next to nothing about banking, about finance, about economics in general.
Second, they are like children who want their candy NOW! The stimulus package, passed less than a month ago hasn't worked yet! (The money has only started to trickle out the door). The 1/2 of the TARP given to the banks in the Fall hasn't stopped the recession. (Note: that wasn't its job. Its primary purpose was to stabilize the financial system.) And they don't understand that our financial institutions are in a precarious balancing act: they want to lend but they also have to maintain their capital levels (Tier 1 and, now, TCE)to avoid going bankrupt. Doesn't matter to these financial geniuses. The banks are supposed to do both.
Third, some are still angry because Treasury injected capital rather than bought up the bad assets - no matter that multiple people from the FED, FDIC and Treasury have explained what happened on multiple occasions. They still don't realize that buying up those assets has turned into a hugely complex problem - and Treasury, to its credit, realized it had to do something fast, something specifically authorized by the legislation (capital injection).
Fourth, he is constantly required to respond to conflicting ideological demands between the "free market over everything" and the "throw the bums out" groups.
Fifth, they don't understand that these multinational banks have customers and businesses around the world. They want the TARP money to be used "only" in the U.S. A few recognize that money is fungible, but still want to control how the banks conduct their business.
One of the dumbest questions/ideas came from Issa who thought it would have made more sense for the government to just buy up/renegotiate all the bad mortgages. It didn't occur to this doofus (although Kashkari did his best to gently point it out) that the government would have to hire thousands of employees who knew something about mortgages and those people would have to come from the very industries under scrutiny. Amazing, isn't it? Issa, foe of all government, convinced that the federal bureaucracy is the devil, thinks that same government should have gotten into the mortgage modification business down at the individual level.
The biggest complainer was Kucinich, appalled by the lack of oversight on how the money is being spent. Sure, it could probably be better. But since Sept., a new Administration has taken office, the economy has gone into a tailspin, banks are failing weekly, and the stock market may be headed toward 5000. You'd think it would have occurred to Kucinich that, just maybe, the Treasury has a lot on its plate and expecting penny-by-penny accounting of the money would be impossible under the best of circumstances and impossible given the speed with which the economy has deteriorated.
Friday, February 13, 2009
Bankers vs. the House Banking Committee: Highlights & Lowlights
Opening Statements
Anybody who listened to the opening statements (Feb. 12, 2009) might have wondered what the fuss is all about. It appears that many of the banks were profitable last year and took the TARP money only as sort of a favor to the Federal government. This got shot down pretty much through later questioning when it turned out that although all the bankers promised to return the funds by 2012, with interest, and would like to do it earlier there was one small hitch: to return it they must replace it with private capital and that they don't have. Still, I give the bankers points for a lack of arrogance and a recognition of the concerns of the Congress.
Republican Talking Points
I almost felt sorry for some of the Republican questioners as they desperately tried to get these Captains of Capitalism to buy in to Republican philosophy:
Are the regulators keeping you from making loans? No.
Is this government intervention destroying the free market system? No.
Shouldn't we step back and wait and think things through before we proceed? No.
Was TARP really needed? Is it working? This question was asked several times in different ways and the answers were a bit more ambiguous. Still, the most favorable to Republicans were still pretty weak: one CEO said he hadn't thought at the time that it was needed but, in retrospect, yes it was. Another, Jamie Dimon I think, said they'd be arguing about it for years, but he thinks it was, and that (at worst) it kept things from getting much worse.
Is a stimulus needed? Yes.
Isn't the idea of a systemic regulator bad? No. In fact, every single CEO welcomed the idea of more government regulation. That must truly have been galling.
Will those answers have changed the minds of the Republicans who asked the quesions? No. These Republicans are almost all ideologues who can't be bothered having their minds changed by simple facts. Indeed, in previous hearings I recall several basically admitting, when presented with facts they didn't like: "I know what I know". These Republicans are, politically, the equivalent of Creationists.
Quality of the Questions
I've watched almost all the hearings broadcast on C-SPAN since the start of this crisis last September and the questions, in general, from this committee were among the worst - to the point of being outright embarrassing. There were the grandstanders, of course. Ever since Ackerman got his 30 seconds of fame last Fall with the issue of private planes when the auto CEOs testified, an increasing number of his colleagues have decided they want their 30 seconds of fame, too. So we got a lot more blustering outrage than is usual - as well as the normal attempts to embarrass as much as possible those who are testifying. But the sheer ignorance of how the banking and financial systems work that was evident in many of the questions was truly appalling. Choosing the dumbest (in the sense that they demonstrated ignorance of how the system works) questions would be difficult, but Gutierrez (from Illinois, I believe) ranked among the least well-informed. It doesn't take much imagination to guess that probably all of the CEOs found themselves asking how they ever got in the position of having to politely answer questions put by such, to be kind, financially illiterate people (and they must have wondered how those Representatives managed to get elected let alone get positions on this committee - a question I was asking myself). On the positive side, the experience may be another spur for these executives to get their companies out from under government intervention asap. I doubt they want to go through a similar round of humiliation again.
My Favorite Comment
My favorite comment came from Emanuel Cleaver at the end of his questions (which fell into the outrage and "shame on you" category) when he remarked that he was "woefully unimpressed" by the diversity of the panel in front of him and for as many rows behind them [presumably filled by their staff] as he could see. Kudos to Mr. Cleaver. With the exception of Pandit from Citi, they were all white men. Otherwise there was not a woman, African-American, Asian or Hispanic in sight.
Overall Impression
Generally speaking, I was impressed by the bankers. These guys, for all the mistakes they've made, know change is needed and know that part of that change is increased regulation. Jamie Dimon, Mack, and Blankfein were especially fine witnesses. Pandit did the worse but then Citi is probably in worse shape than any of the other banks. And Lewis from B of A seemed to find the attacks harder to take.
Finally, I couldn't help but wonder how many years it has been since any of these men has had to raise a hand in answer to a question - let alone been subject to the level of abuse they had to absorb.
Anybody who listened to the opening statements (Feb. 12, 2009) might have wondered what the fuss is all about. It appears that many of the banks were profitable last year and took the TARP money only as sort of a favor to the Federal government. This got shot down pretty much through later questioning when it turned out that although all the bankers promised to return the funds by 2012, with interest, and would like to do it earlier there was one small hitch: to return it they must replace it with private capital and that they don't have. Still, I give the bankers points for a lack of arrogance and a recognition of the concerns of the Congress.
Republican Talking Points
I almost felt sorry for some of the Republican questioners as they desperately tried to get these Captains of Capitalism to buy in to Republican philosophy:
Are the regulators keeping you from making loans? No.
Is this government intervention destroying the free market system? No.
Shouldn't we step back and wait and think things through before we proceed? No.
Was TARP really needed? Is it working? This question was asked several times in different ways and the answers were a bit more ambiguous. Still, the most favorable to Republicans were still pretty weak: one CEO said he hadn't thought at the time that it was needed but, in retrospect, yes it was. Another, Jamie Dimon I think, said they'd be arguing about it for years, but he thinks it was, and that (at worst) it kept things from getting much worse.
Is a stimulus needed? Yes.
Isn't the idea of a systemic regulator bad? No. In fact, every single CEO welcomed the idea of more government regulation. That must truly have been galling.
Will those answers have changed the minds of the Republicans who asked the quesions? No. These Republicans are almost all ideologues who can't be bothered having their minds changed by simple facts. Indeed, in previous hearings I recall several basically admitting, when presented with facts they didn't like: "I know what I know". These Republicans are, politically, the equivalent of Creationists.
Quality of the Questions
I've watched almost all the hearings broadcast on C-SPAN since the start of this crisis last September and the questions, in general, from this committee were among the worst - to the point of being outright embarrassing. There were the grandstanders, of course. Ever since Ackerman got his 30 seconds of fame last Fall with the issue of private planes when the auto CEOs testified, an increasing number of his colleagues have decided they want their 30 seconds of fame, too. So we got a lot more blustering outrage than is usual - as well as the normal attempts to embarrass as much as possible those who are testifying. But the sheer ignorance of how the banking and financial systems work that was evident in many of the questions was truly appalling. Choosing the dumbest (in the sense that they demonstrated ignorance of how the system works) questions would be difficult, but Gutierrez (from Illinois, I believe) ranked among the least well-informed. It doesn't take much imagination to guess that probably all of the CEOs found themselves asking how they ever got in the position of having to politely answer questions put by such, to be kind, financially illiterate people (and they must have wondered how those Representatives managed to get elected let alone get positions on this committee - a question I was asking myself). On the positive side, the experience may be another spur for these executives to get their companies out from under government intervention asap. I doubt they want to go through a similar round of humiliation again.
My Favorite Comment
My favorite comment came from Emanuel Cleaver at the end of his questions (which fell into the outrage and "shame on you" category) when he remarked that he was "woefully unimpressed" by the diversity of the panel in front of him and for as many rows behind them [presumably filled by their staff] as he could see. Kudos to Mr. Cleaver. With the exception of Pandit from Citi, they were all white men. Otherwise there was not a woman, African-American, Asian or Hispanic in sight.
Overall Impression
Generally speaking, I was impressed by the bankers. These guys, for all the mistakes they've made, know change is needed and know that part of that change is increased regulation. Jamie Dimon, Mack, and Blankfein were especially fine witnesses. Pandit did the worse but then Citi is probably in worse shape than any of the other banks. And Lewis from B of A seemed to find the attacks harder to take.
Finally, I couldn't help but wonder how many years it has been since any of these men has had to raise a hand in answer to a question - let alone been subject to the level of abuse they had to absorb.
Monday, February 9, 2009
TARP - Give Paulsen a Break
Everybody, and I do mean everybody (left, right, center, Democrat, Republican) is dumping on Paulsen. The rescue plan didn't work: banks aren't lending. It was all ad hoc with no central planning. It was wasteful (we paid too much). Etc.
Everybody seems to forget a couple of important things.
1. There was a GLOBAL financial meltdown. The U.S. was not the only country pouring money into its major banks.
2. After Lehman Bros. failed, the financial crisis got worse by an order of magnitude over just a couple of days.
3. There was no "bait and switch". Yes, Paulsen asked for the money to buy the toxic assets. But a number of people, in and out of Congress, doubted the government's ability to do that - which is why Chris Todd and Barney Frank crafted the bill to permit other means, especially capital injection (as was being done in Europe). Paulsen, to his credit, realized that they couldn't put together a purchase of toxic assets fast enough to help. And, as the months have gone by and various suggestions have been put forth, it is clear that solving this fundamental problem is not something that could have been devised over a weekend.
4. Only half of the TARP money has been allocated so politicians should stop acting as if the whole 700 billion has been wasted.
5. TARP has accomplished its primary objective: the stabilization of the financial system. Compare it to Sully's landing of the Airbus in the Hudson. The plane's a goner. But the people lived. Maybe if he had thought about it some more, he could have devised a better plan - but in the meantime the plane would have crashed and all would have died. We were in a crisis. Paulsen and Bernanke landed the plane and the passengers got off alive. They lost their luggage, maybe their clothes were ruined. And they had some bruises. But they survived.
So, yes, we need to do better with the next rounds. But the reason we have a chance to do better is because Paulsen and Bernanke gave us the time we needed to do better.
Everybody seems to forget a couple of important things.
1. There was a GLOBAL financial meltdown. The U.S. was not the only country pouring money into its major banks.
2. After Lehman Bros. failed, the financial crisis got worse by an order of magnitude over just a couple of days.
3. There was no "bait and switch". Yes, Paulsen asked for the money to buy the toxic assets. But a number of people, in and out of Congress, doubted the government's ability to do that - which is why Chris Todd and Barney Frank crafted the bill to permit other means, especially capital injection (as was being done in Europe). Paulsen, to his credit, realized that they couldn't put together a purchase of toxic assets fast enough to help. And, as the months have gone by and various suggestions have been put forth, it is clear that solving this fundamental problem is not something that could have been devised over a weekend.
4. Only half of the TARP money has been allocated so politicians should stop acting as if the whole 700 billion has been wasted.
5. TARP has accomplished its primary objective: the stabilization of the financial system. Compare it to Sully's landing of the Airbus in the Hudson. The plane's a goner. But the people lived. Maybe if he had thought about it some more, he could have devised a better plan - but in the meantime the plane would have crashed and all would have died. We were in a crisis. Paulsen and Bernanke landed the plane and the passengers got off alive. They lost their luggage, maybe their clothes were ruined. And they had some bruises. But they survived.
So, yes, we need to do better with the next rounds. But the reason we have a chance to do better is because Paulsen and Bernanke gave us the time we needed to do better.
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