Tracking the Bailout

UPDATE: Are the Republicans forming a spine to fight the battle for our taxes?

The decision on whether or not to allow the second half of the TARP funds to be released is the main headscratcher currently facing our Congress. President-elect Obama is threatening a veto if Congress passes the resolution to not allow the funds to be released. The political posturing seems to have our Congress quivering. They couldn't possibly expect to overturn The One's first major veto, could they? Perhaps if they understood just what's happening with all that money, they'd make the right decision without hesitation. Perhaps if we understood it better, we'd really be able to let them know what we thought! That said, follow me down the rabbit hole...

First and foremost, the absolute most outrageous statements I've ever heard emanated from the mouths of the slimy bastards running these banks, shortly after they deposited billions and billions of our future tax dollars (upon which they also cashed in their bonuses). Let's revisit a few of the classics, shall we?

"We're not providing dollar-in, dollar-out tracking."
-- SunTrust Banks spokesman Barry Koling on the receipt of $3.5 billion

"We manage our capital in its aggregate."
-- Regions Financial spokesman Tim Deighton on the receipt of $3.5 billion

"We've lent some of it. We've not lent some of it. We've not given any accounting of, 'Here's how we're doing it.'"
-- JPMorgan Chase spokesman Thomas Kelly on the receipt of $25 billion

Now, I am personally 99.99% sure that these are flat-out lies. In my own line of work, construction management, we need to know where every penny of every job we build is at all times. As a company, we invested a significant amount of money in an Enterprise Resource Planning software called Viewpoint V6 that allows us to do this. I can open up the program, go to any project I've got access to, and know within a minute how much money we have spent, how much we are owed, how much we need to pay out and to whom, and project how much profit we should make on the job. This program cost our company six figures, and it is a DUMBED DOWN version of multi-million dollar programs like SAP and Oracle that service supremely large companies like, say, banks. But I didn't need to tell you these spokesmen were lying. Tommy Kelly was good enough to do it himself in the first place when he kindly let us know that "We have not disclosed that to the public. We're declining to."

Well la-di-da, Mr. Banker. If that's the way you wanna play it, fine. Because I learned how to distinguish and deal with evil bankers long ago, and I was taught by the one and only Hot-Rod:

Since the banks obviously couldn't be bothered to let the taxpayers know where their tax dollars are going, and since the government agency in charge of giving away all this money doesn't have the slightest clue, I decided to do some digging.

The first thing that struck me as disconcerting about the bailout amidst my morning Googling was this handy Bailout Tracker produced, amazingly enough, by the New York Times (apparently this is what their real reporters have been up to). It lists every organization that's been discussed as having received, or potentially receiving, TARP bailout funds.

What disconcerted me about the report was the nifty sortable attribute in the right-most column, called the Texas Ratio, and the fact that the US Government has risked our tax dollars by giving away $1.5 billion to banks with Texas Ratios over 40%. Why did I pick the 40% mark? Because of a common sense yet very poignant question: Are these the Texas Ratios of these banks before or after receiving bailout funds? If these are the banks' Texas Ratios after receiving bailout funds, then we can readily assume that their real Texas Ratios are actually much higher, meaning they are all in worse shape than it really looks! Should these be post-bailout Texas Ratios, how much closer to the 100% mark are these banks?

Upon recognizing this, I felt I had better do a bit more research. After all, here we sit with banks relying on newly printed money to stay afloat when their assets on hand potentially don't support the loans they've been given. What I came across was the government's own TALF program.

I'll spare you the headache of trying to piece together what all of the acronyms mean, especially when I can let The Curious Capitalist do it for me. The gist of it is that the government is accepting AAA-Rated Asset Backed Securities as collateral for the stock they are purchasing from each of these banks. In other words, the government is utilizing probable cash-flow from packaged loans as collateral to bail out large financial institutions that were buying up probable cash-flow from smaller financial institutions, which the large financial institutions thought were credible investments because due to the nature of trading securitized assets, the ratings were allowed to be artificially high. Curious Capitalist commenter (savor the alliteration) dotybj sums it up nicely:

Sounds great! I mean, what could go wrong with ABS's? After all, the risk has been quantified statistically and diversified away. Plus, they are AAA-rated by a reliable organization! Hey, all we need to do is buy some CDS's on these things and they'll be practically guaranteed!

In short, the real physical assets were never worth as much money as they were being traded for. So why is this all so terrible, you ask? Well, I'll let you in on the secret. BailoutSleuth.com lets us know what the payback terms are for the bailout loans! This is the first you've heard of it you say? Well I'm not surprised. I had to dig like hell to find that site in the first place to find out that:

The preferred stock the Treasury Department is buying carries an annual dividend of 5 percent a year for the first five years and 9 percent thereafter. The agency also gets warrants to buy common stock, which could provide a return to taxpayers if the value of the banks' shares rises as their financial condition improves.

I'm going to try to break down the importance of that statement into two parts. First, let's examine the annual dividends. Essentially what the dividend does is allow the bank that has received the bailout funds to treat the funds as an interest only loan. Since the bank had to put up collateral for the cash, the bank need only to pay the interest, so long as the government is holding the collateral. This means that the government remains a stockholder, owner of those assets, and while receiving interest payments. The principle of the loan doesn't necessarily ever need to be paid down because it is assumed to be covered by the bank's asset backed securities. The problem is that the government is gambling on these banks to succeed from here on out, not to mention on those asset backed securities to remain of high value. The banks have to succeed for their stock values to grow and for the principle to be recovered.

So what does this mean for you and me? It means that the only money the banks are really tied to paying back to the government is the dividend, and the dividend is never possibly going to give the government, and by correlation, the taxpayer, a reasonable payback period.

A 5% dividend on $350 billion for each of the first five years comes out to an amount of $17.5 billion dollars being returned each of the first five years, for a grand total of $87.5 billion returned to the government after five years. Each year following, the government is owed 9% dividend, or $31.5 billion. Assuming we've paid back the other $87.5 billion, that leaves us $262.5 billion, which will take another 8 years and 4 months to repay. That's a total of 13 years and 4 months, and we have purposely failed to consider either inflation or time value of money, both factors that will considerably extend that payback period. Also consider that even assuming these payments have paid back the American peoples' taxes by this point, the US Government still owns the stocks as collateral for the principle loans, meaning the US Economy would remain socialized via the government's ownership of the banks asset backed securities.

I've ignored the government's option to generate a quicker payback via its stock options in the banks up until this point, for the purpose of attempting to delineate principle from interest, and because the actual repayment of the principle rests again on the ability of the banks to perform more successfully in the future. Considering they're unwilling to disclose what they're doing with any of the money thus far, how confident can we possibly be in their ability to be profitable in the future, and subsequently repay the principle? If these banks that were driven to the brink of failure under poor management continue to be driven to failure, but with our tax dollars, they will still fail, and the government will be left with stocks that are worth every bit as much as the paper I'm writing this on.

Considering the state of the newly assembled Nasdaq Government Relief Index, a grouping of the 21 most-bailed out banks, the chance of the principle bailout funds being reclaimed sooner is not looking as likely as is later. The index first began tracking on January 5, 2009, and in the week and a half since then, has lost 20% of its value, plummeting to 800 points from 1,000. (Hat Tip: Option ARMageddon)

Everything is a moving target with the original $350 billion future tax dollars we as a people have been fleeced for. At a minimum, we're looking at over 13 years before the government realizes even the hope of a break-even situation. That said, it's likely safe to assume that the second half will require another 13+ years to be repaid. Add that to the potential 32 year payback for Obama's "stimulus" program, and we're throwing away the entire working lifetime (58 years!) of a complete generation of Americans.

Would the Private Market realize a recovery and a turnaround faster than this without being bailed out? There's no way to be sure at this point, but given the fact that if the Private Market were left to sort through its own wreckage and repair itself, along with actual oversight carried out by our recent failure of a government, one can only come to the conclusion that at least, left to its own devices, there's no way we'd be stuck with an entire generation of folks working simply to fund the bailout of our current mistakes via their hard-earned tax dollars.

I've been against the bailouts from the beginning, and still am. How about you?

Now that we've seen how they're structured, now that we are beginning to get the feeling that the first $350 billion really hasn't helped as much as the heavily politicized "crisis" indicated, how can we, or our representatives in Congress possibly even consider supporting the release of the second half, much less another crippling $775 billion?

Maybe I'm just too connected to reality. Maybe I'm just too connected to the facts. Maybe, as Barney Frank suggests, we shouldn't be as mean to Obama as we've been to Bush about the bailouts.

Maybe.

But then again, I'm all out of bubblegum.