Lloyd & Jamie’s Smoke & Mirrors


Lloyd Blankfein’s Goldman Sachs and Jamie Dimon’s JPMorgan Chase are two leaders of troubled banks who have come out to say they want to pay back Uncle Sam the TARP money.

Goldman has $10 billion and JPMorgan’s rang up $25 billion in capital injections even though both said it did not need the cash.

Both banks are a bit disingenuous in their pleas that the banks were forced to take the cash for the benefit of the country –– in order not to tip off the markets on which banks were in trouble.

Both Goldman and JPMorgan have used a little known piece of the TARP program, which is the FDIC-backed debt facility. The program allows the troubled backs to raise capital in the bond market with the FDIC backing the paper for investors.

JPMorgan has issued $40.5 billion in paper, which is the second most behind Bank of America’s $44 billion. Goldman has issued $21.1 billion using Uncle Sam backing.

According to the FDIC troubled lenders have issued $336 billion of debt since the program went into effect in November. In March alone $47 billion in debt was issued by 23 banks.

Now if you don’t want Barney Frank in the boardroom, then returning TARP funds, with interest, is not the answer. These banks need to stop using the backing of the government in all capital raising facilities.

Inflating TARP

What happen to the $700 billion that Congress authorized for the troubled financial institutions?

According to Neil Barofsky, the top TARP cop for Congress, the “total projected funding” for TARP is estimated to be almost $3 trillion.

How did that happen with all the sturm and dang on Capitol Hill over pay packages and such? Well that was the smoke and mirrors to distract the funneling of funds up I-95 to Wall Street.

Treasury’s constrained by the $700 billion, but the FDIC and the Federal Reserve have no constraints on funding the bailout. The FDIC is funding the above debt program as well the PPIP public private partnership in trouble asset sales (see below) and Ben Bernanke’s balance sheet has grown to $2 trillion with leverage.

Barofsky’s report laid out how the PPIP will work.

A bank in conjunction with the FDIC, determines it wants to sell a loan with the face value of $100 –– as priced on its balance sheet –– to be sold for $60. The FDIC will auction that loan, and a private investor makes a $60 winning bid.

The FDIC – granting a 6-1 debt-equity structure in the program – fully guarantees a $51 loan to the private investor. Then the private investor would put up $4.50, and the Treasury Department would put up $4.50, so the private bank receives the full $60 and the private investor must pay back the $51 loan over time.

If the loan fails entirely, then the private investor loses $4.50, Treasury loses $4.50 and the FDIC loses $51 since the FDIC provides a 100 percent guarantee on the loan.

Now who would not want those odds?

Uncle Sam takes the first loss and I have only a $4.50 downside worry. If the $60 paper can be sold later for anything north of $51, I have a handy profit.

I hear a 10-foot air hose hissing away trying to inflate this economy despite plenty of holes in the TARP.

For more on Wall and Washington and the economy see: http://mgray12.wordpress.com


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