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Daily Archives: May 6, 2009


TARP: The Tragedy Deepens

Michael’s post immediately below deserves to be addressed in some more detail.  Not only is the TARP program pernicious to the banking and financial sector, but it’s implications go much deeper than that, and corrupt the rest of the economy as well.  And most importantly, this is only the beginning.

The corruption expresses itself in a number of ways.  Take a look at the GM/Chrysler situation.  In both cases, the UAW emerge as the clear winners in the bankruptcy proceedings.  In the case of GM, bondholders with $27 billion in bonds are supposed to accept 10% of the company’s equity, while the UAW’s retirement fund, which holds $10 billion in bonds, is supposed to receive 40%, with the Government taking the remainder of the equity. In what possible way is this supportable?

Likewise, in the Chrysler bailout, the UAW will receive 55% of the equity, while Chrysler’s bondholders receive 30 cents on the dollar for their $7 billion investment.

OF course, Chryslers bondholders are balking at this, throwing the compnay into banklruptcy court.  Not that that will save them.  Why?  TARP.  As Thomas Cooley explains:

Chrysler’s dissident lenders have on their side the “absolute priority” bankruptcy rule, which holds that value must be distributed according to the legal priorities of the stakeholders.

Unfortunately, the bankruptcy code also holds that the absolute priority rule can be modified if a two-thirds majority can convince the court that it makes legal or business sense. Two-thirds of the lenders can force the holdouts to go along with them in a procedure called a cram-down.

That is exactly what is likely to happen. Citi, JP Morgan Chase, Goldman Sachs and Morgan Stanley, all major recipients of TARP Funds, all deep in the pocket of the Treasury, agreed to the administration’s plan.

So, the government, holding TARP over the heads of the banks, can now abrogate the generally used bankruptcy rules, and force through a sweetheart deal for a favored political client, the UAW.  But, in so doing, they enlarge the damage to the country’s economy by sounding a warning that government funds are dangerous because the government’s first priority is to re-write the rules to reward their special friends.  The uncertaintly that creates keeps investors on the sidelines.

Many investors are sitting on the sidelines, as is much money. Why? Because it is impossible to know what the rules of the game are. And that’s because the administration and the Congress keep changing the rules in capricious ways in pursuit of larger political objectives.

Megan McArdle make some of the same points, highlighting the danger inherent in such an approach by the government.

Countries that use their banking systems this way don’t get good results.  If you’re a fairly uncorrupt developed country, you get slower growth and bloated “critical” sectors that are usually more critical in providing campaign support, lavishly remunerated make-work jobs, and photo ops, than any products the public actually wants.  Then, if something like Japan happens, you have a twenty-year “lost decade” while everyone pretends as hard as hard can be that everything is all right, in the sincere but misguided believe [sic] that wishing hard enough will make it so.

One wonders if Ms. McArdle now thinks back on her support of Mr. Obama during the last election as “sincere but misguided”.  But I digress.

IN any event, the government has moved full steam ahead with the approach Ms. McArdle decries.  And it will continue to do so. How do we know this?  because of the way the Chrysler bankruptcy is being handled.

I heard repeatedly from progressives, in the run-up to the bankruptcy case, that the holdouts were unreasonably holding out for a trivial improvement–about 500 million dollars.  But if it was so trivial, why didn’t the government just put the extra money in, rather than jeopardizing confidence in the bankruptcy system–and the creditworthiness of a large swathe of unionized firms?  $500 million is about the price of one cup of coffee per American, a trivial sum relative to the overall budget.  This move has shown potential partners that government funds are dangerous, and potential lenders that union firms are risky bets; both have probably cost American citizens more than they saved.  So why did the government risk so much for so little gain?

You know the answer, don’t you?  Because they’re planning to do it again.

And to the extent they keep doing so, and keeping the financial sector in line via the TARP funds, investors will increasingly keep their money out of the game.  Why should they do otherwise?  Any investment in any entity with any relationship to TARP, either directly, or via creditors, is a target for the government to re-write the rules of investment and bondh0lding to ensure their special friends get a nice cut of the action.

True, it’s hard to have much sympathy for either GM or Chrysler.  But the issue now goes far beyond them.  Cooley, again:

There is at least some poetic justice in this outcome. The unions, whose years of work rules, and pension and health care deals helped sink the company, will have to eat their own cooking from now on. But their future success needs not only labor but capital.

Why would private capital get involved when the rules of the game are so capricious? No one would take that gamble when it is clear that, in dealing with the government, private capital will always take a back seat to politically powerful entities.

And that is the larger worry that current policy has neglected. Firms and markets can function quite well within a framework of rules. Indeed, rules are good for the orderly conduct of business. But when rules get imposed or dispensed with willy-nilly in the interests of politics, it is very dangerous. We have should have learned this lesson long ago.

But, apparently, we didn’t.  Don’t worry, though.  I’m fairly certain we’ll re-learn it in due course.

What really offends me the most in all this is not that the government is acting in the interest of favored clients, although that’s extraordinarily offensive.  That’s what governments do.

I think the thing that offends me the most is the sheer stupidity of the thing.


TARP as Shakespearean Tragedy

Does it strike anyone else as funny that TARP is a poor anagram for “trap”? If Shakespeare had written this play the name would have been much more clever, of course, but I think he would delight in the barely concealed irony of the federal government drawing banks into its lair with the pretense of saving their hides, only to use the money intended to do so as the means of yoking the industry. I’ll bet the banks who took TARP funds don’t find it so humorous.

Since last October when Hank Paulsen forced nine of the largest banks to take an initial injection of $125 billion in TARP funds (among other bullying), the federal government has committed about $12.2 trillion dollars to bailouts and spent about $2.5 trillion on such efforts (er, among other, other bullying). Aside from an increasing assertion of control over the financial and automotive sectors of our economy (among other, other, other bullying), there is very little to show for all this money. Which leaves the rather stark impression that government control was the goal all along — i.e. the method within the madness.

I must be naive. I really thought the administration would welcome the return of bank bailout money. Some $340 million in TARP cash flowed back this week from four small banks in Louisiana, New York, Indiana and California. This isn’t much when we routinely talk in trillions, but clearly that money has not been wasted or otherwise sunk down Wall Street’s black hole. So why no cheering as the cash comes back?

My answer: The government wants to control the banks, just as it now controls GM and Chrysler, and will surely control the health industry in the not-too-distant future. Keeping them TARP-stuffed is the key to control. And for this intensely political president, mere influence is not enough. The White House wants to tell ‘em what to do. Control. Direct. Command.

[...]

Here’s a true story first reported by my Fox News colleague Andrew Napolitano (with the names and some details obscured to prevent retaliation). Under the Bush team a prominent and profitable bank, under threat of a damaging public audit, was forced to accept less than $1 billion of TARP money. The government insisted on buying a new class of preferred stock which gave it a tiny, minority position. The money flowed to the bank. Arguably, back then, the Bush administration was acting for purely economic reasons [ed.: That's a highly charitable argument]. It wanted to recapitalize the banks to halt a financial panic.

Fast forward to today, and that same bank is begging to give the money back. The chairman offers to write a check, now, with interest. He’s been sitting on the cash for months and has felt the dead hand of government threatening to run his business and dictate pay scales. He sees the writing on the wall and he wants out. But the Obama team says no, since unlike the smaller banks that gave their TARP money back, this bank is far more prominent. The bank has also been threatened with “adverse” consequences if its chairman persists. That’s politics talking, not economics.

Think about it: If Rick Wagoner can be fired and compact cars can be mandated, why can’t a bank with a vault full of TARP money be told where to lend? And since politics drives this administration, why can’t special loans and terms be offered to favored constituents, favored industries, or even favored regions? Our prosperity has never been based on the political allocation of credit — until now.

Despite the government’s bullying, it is difficult to feel much pity for the institutions who accepted TARP funds. Surely they must have at least suspected an iron hand inside that velvet glove attempting to feed them. However, if they truly don’t need the money, and have the means to pay it back, then onerous seems too slight a word to express how gripping the government’s control has become:

Financial firms eager to return infusions from the $700 billion Troubled Asset Relief Program will have to demonstrate that they can operate without debt guarantees provided by the Federal Deposit Insurance Corp., a senior government official said Tuesday. The FDIC program allows financial institutions to borrow money at lower costs.

The new requirement will make it harder for some institutions to get out from under government rules attached to the bailouts, another shift in a changing landscape for banks. It also illustrates the government’s desire not to have banks abandon the bailout program if they are not financially prepared to do so.

The government’s desire? I don’t recall exactly where that is accounted for in the Constitution. Is it buried somewhere in the penumbras and emanations of the commerce clause? Clearly the “government’s desire” must have some force of law that it can unilaterally decide to allow banks to sink or swim on their own. Otherwise, such desire is wholly irrelevant.

Nonetheless, banks did take the money, and so the government gets to call the tune. Institutions who would have collapsed absent the bailout have little to grouse about in such circumstances. But other firms, who didn’t need the money in the first place, rightfully bristled at the demands being placed upon them and the opprobrium casually tossed their way by the government.

Kim Price’s Gastonia bank accepted $20 million from the Troubled Asset Relief Program to help keep credit flowing as the economy faltered.

Now the Citizens South Banking Corp. chief executive and other community bankers feel that Congress is treating them like villains.

Proposed new TARP rules that could limit bankers’ pay have upset many bank executives here. And the congressional effort has prompted some banks in other states to give the money back.

Paying back the government (although coming at a pretty price) not only seems like a right the banks should have, it just makes good business sense for the healthy ones:

TCF Financial Corp, a Minnesota lender, said it repaid a $361.2 million capital infusion that it took from the U.S. government’s bank bailout program, becoming the largest recipient to repay its funds.

[...]

Regulators, banks and investors once viewed participation in the program as a positive, figuring that it would help healthy banks lend more and perhaps buy struggling rivals.

But participation is now often viewed as an albatross, subjecting recipients to restrictions on such things as executive pay and dividends.

Investors now consider some banks that hold onto their aid as being too weak to return it. Large banks such as Goldman Sachs Group Inc ( GS – news – people ) and JPMorgan Chase ( JPM – news – people ) & Co have said they want to repay their aid soon.

TCF Chief Executive William Cooper this week said holding TARP money put the bank at a “competitive disadvantage.”

He said repaying the aid and eliminating the associated dividend payments will boost earnings by more than 14 cents per share annually.

By inducing banks to take TARP money, whether through tactics or intimidation, the government has neatly cornered the capital flow of the country. Much like Hamlet surreptitiously forced his uncle to publicly face scorn for his act of regicide (by having performed the “Murder of Gonzago,” aka the “Mouse-Trap”), the government has successfully lured failing banks into the public square for ridicule. Whereas Hamlet sought to elicit a sign of guilt in order to justify his vengeance, however, the government seems intent on effusing guilt throughout the banking industry so as to justify its controlling moves. By tainting the public view of the financial sector, the government seeks to undermine public confidence and build a chorus calling for its heavy-handed involvement. As mentioned above, protestations by the beggars for such action protest too much, methinks, but those who truly have no need of the interference have much cause to cry foul.

Hamlet ends with nearly every character dead, and the country being turned over to its greatest enemy. Unfortunately, the financial sector seems destined for a similar result as the government has made clear it will not allow certain institutions to fail, and is callously indifferent to fate of the unchosen. No matter how well those banks who managed to avoid TARP altogether do, the government is now the major mover in game, and the only one with the power to force its will on all the other players. It can, and will, pass laws that favor the winners its chosen, thus leaving the non-assisted banks out in the cold. In the end, firms who conform to market forces (i.e. respond to the desires of its customers), will be supplanted by those which conform to will of the government’s agenda. The trap was set, the mice did enter, and thus their fates were sealed.


Energy Policy – “There Is No Productive Debate”

Here at the Offshore Technology Conference in Houston, we were able to hear from a very distinguished panel concerning the energy “debate”. I put the word “debate” in scare quotes because it seemed that the consensus of the panel was there really isn’t a productive debate going on.

Roger Ballentine of the Progressive Policy Institute says that the two sides are talking past each other with little real effort to engage in anything which would actually address strategic energy policy.

Sen Lisa Murkowski, addressed the audience by video and spoke of a “comprehensive” plan which would include all types of energy, obviously including oil and gas. She spoke of a “scarcity of will” on the part of Congress to aggressively go after our own natural resources and cited the Gulf of Mexico as an example. There, she said, lays 45 billion barrels of oil and 320 trillion cubic feet of natural gas that we seemingly refuse to tap.

Yet as API’s President and CEO, Jack Gerard pointed out, when polled 67% of the American public want the exploitation of the oil and gas assets to be found on the Outer Continental Shelf (OCS), and that last week the Florida House passed a bill authorizing drilling off the coast of Florida by a 70-43 margin. That is a huge margin and speaks loudly about the public’s sea change in attitude concerning offshore drilling.

But it seems like no one in power in Washington is listening. And that brings us to the second point this panel made – it is necessary to engage the public/consumer and get them involved in this debate. It is they who will live with and pay for whatever Congress cobbles together regarding energy policy. So far, however, the only thing that has accomplished that level of public engagement is the price of gasoline at the pump. When it was at $4 a gallon, the public emphatically weighed in saying “this is unacceptable” and “do what it takes to fix it (to include drilling in the OCS). Since the price of gas has retreated, to be replaced by the economic recession, the public’s attention has been diverted elsewhere.

But we’re at a critical juncture right now. Legislation is being written and moved ahead within the Congress even while panelists in Houston on both sides of the political spectrum are saying the debate needs to begin in earnest, in a bi-partisan and productive way and the public needs to be engaged.

This was a wide ranging panel and I took 16 pages of notes. This particular post covers 2 of them at best. However this gives you a sense of the frustration to be found among those there representing government, industry and think tanks. Both sides of the broad political spectrum on the panel agreed that the bi-partisan “civil discourse” that would move this sort of policy forward in a positive way doesn’t at present exist even while the legislation outlining future policy is being written.

I’ll have much more to say about this as I wade through the pages of notes I took, but this suffices to give the general impression of where we are when it comes a well thought out and comprehensive strategic energy policy. In a word, nowhere. I’ll get into the “why” of that (“climate change” is the “cultural wedge” that is being used to muddy the energy debate), and the implications in another post.

Others writing about this are Gateway Pundit, Bearing Drift, Little Miss Atilla, the Heritage Foundation, Ecopolitology, Donklephant and others.

~McQ.


Student Prevents Mass Murder

Or so it would seem. 11 students gather at a friend’s apartment for a birthday celebration. Two armed masked men burst in:

Bailey said he thought it was the end of his life and the lives of the 10 people inside his apartment for a birthday party after two masked men with guns burst in through a patio door.

“They just came in and separated the men from the women and said, ‘Give me your wallets and cell phones,’” said George Williams of the College Park Police Department.

Bailey said the gunmen started counting bullets. “The other guy asked how many (bullets) he had. He said he had enough,” said Bailey.

That’s when one student grabbed a gun out of a backpack and shot at the invader who was watching the men. The gunman ran out of the apartment.

The student then ran to the room where the second gunman, identified by police as 23-year-old Calvin Lavant, was holding the women.

“Apparently the guy was getting ready to rape his girlfriend. So he told the girls to get down and he started shooting. The guy jumped out of the window,” said Bailey.

Lavant was found dead near his appartment. Apparently he lived in a neighboring building.

The student hasn’t been identified, but when you have armed, masked men counting bullets to ensure they had enough, I think I’d have probably reached the same conclusion as he did. And, for a change, the story ends with someone successfully defending themselves because they were armed instead of being victims in some “gun free zone”.

~McQ