Federal Spending Time to Face the Music: TARP Update and the Fiscal Cliff

Host: Eric Kavanagh

Amy Poster Strategic Advisor, Iron Harbor Capital

Robin Bloor Chief Analyst, The Bloor Group

Jessica Marie Analyst, The Bloor Group

Guests

The Crisis

The Solution

Troubled

Asset

Relief

Program

'Der

ek J'

by

Phil

Wat

t Now What?

TIME TO FACE THE MUSIC

TARP Update and Fiscal Cliff

Amy Poster Strategic Adviser-Risk Advisory Services Iron Harbor Capital Management LLC aposter@iharborcap.com (347) 578-1724

Amy serves as a strateg Amy is currently strategic adviser, non-investment activities for Iron Harbor Capital Management, a global macro strategy asset manger and start up. In 2010 Amy completed a term assignment at the US Department of Treasury, Office of the Special Inspector General - TARP, (SIGTARP) in Washington, D.C. and was responsible for the development and oversight of U.S. Treasury's Public Private Investment Program (PPIP). Amy was also the central subject matter expert for financial markets at SIGTARP, leading critical audits on TARP recipients and inter-agency investigations. Prior to her role at SIGTARP, she was a Director in Product Control at Credit Suisse, focusing on risk and valuation for global credit products within the Fixed Income Division and credit funds within the Alternative Capital Division. She is a regular contributor to Risk Professional, the magazine of the Global Association of Risk Professionals (GARP), and has been quoted by major news publications like the Wall Street Journal and Institutional Investor. Amy holds an MBA with Distinction from Pace University, Lubin Graduate School of Business. She is on the Board of Directors of High Water Women, and a sustaining angel and member of the Professional Leverage Committee of 100 Women in Hedge Funds.

TARP US TAXPAYER PRICE TAG

700.0  

475.0   467.0  417.3  

44.4  

327.5  

84.2  

Original TARP Amended TARP- Dodd/Frank

TARP Obligated- 13 Programs

Total Expenditures TARP Unspent Balance

Total Repayments Owed to Taxpayers

TARP TOTALS as of September 30, 2012

($B)

Source: SIGTARP Quarterly Report, October 2012

§  As of 9/30/12, 70% of TARP has been repaid §  59% or $193.1B have been Capital Purchase Program (CPP) repayments by

large and mid-size financial and bank institutions considered healthy and viable to stabilize US financial system and allow lending to consumers and businesses

§  In exchange for TARP funds, the US Treasury received preferred stock from CPP recipients. Repayments are stock buy-backs or stock auction sales

§  Only $5.5B of the $45.6B allocated to housing support programs have been spent. $40.0B of the $44.4B unspent TARP funds remain in housing.

§  The majority of TARP programs expire between 2017-2020

Housing  Programs  2%   Auto  Support  

Programs  19%  

CPP/PPIP/TIP/Term  Asset  Back  Programs  

63%  

SSFI  (AIG/CiH)  16%  

Community/Small  Business  

0%  

 The Forgotten Main Street TARP Disbursements by Category

as of September 30, 2012    

§  Four main component programs: ²  Housing Support Program: Making Home Affordable (MHA), FHA Short Refinance and FHA Hardest Hit Fund ²  Financial Institution Support: Treasury directly investing in banks, bank holding companies, and

systematical significant failing institutions (SSFI) ²  Asset Support Program: Provide funding to purchasers of assets (TALF, PPIP programs) to open

credit markets and foster market liquidity ²  Auto Industry Support Program: Stabilize US auto industry and provide market stability (ASSP and AWCP

programs) §  TARP skewed to Wall Street bailout (63% + 16%=79%), Main Street 2% for housing and <1% for

small businesses

Source: SIGTARP Quarterly Report October 2012

TARP OWED TO US TAXPAYERS

TARP BALANCES ($B)

Balance - Unpaid TARP 84.2

Realized Losses and Write-offs 22.1

TARP Owed to Taxpayers 62.1

Realized Losses 81%

Write-offs due to

Bankruptcy 19%

Realized TARP Losses and Write-offs as of September 30, 2012

$22.1B    

Realized Losses

Write-offs due to Bankruptcy

Source:  SIGTARP  Quarterly  Report  October    2012  

§  $22.1B of TARP funds will not be recovered §  Largest recorded losses on sale of AIG and GM common stock due to

unfavorable equity market conditions and volatility §  Many smaller to mid-size CPP participants continue to experience difficulties and high losses resulting in inadequate capital and liquidity. Treasury has opted to accept lower valuation or conversion to more junior form of equity to avert total loss on its investment

TARP  REALIZED  LOSSES  AND  WRITE-­‐  OFFS  Realized Losses/Write-offs ($B) % to Total Notes

Auto - Chrysler 1.3 6.0% Of $1.8B Tarp investment, collected .5B from sale of equity and stock of UAW Retiree Trust and collateral

Auto - GM 4.3 19.0% Sale of common stock at a loss

SSFI - AIG 4.6 21.0% Sale of common stock at a loss. Weighted average sale of $30.97 vs.

Treasury cost of $43.93

CPP – 23 Institutions 7.6 34.0% Sale of preferred stock at a loss

Subtotal - Realized Losses 17.9 81.0%

Auto - Chrysler 1.6 7.0% Of $3.5B debt, Treasury accepted $1.6 as full repayment. $1.9B write-

off

CPP - CIT 2.3 10.0% Bankruptcy, no recovery of $2.3

CPP .2 1.0% Bankruptcy/sale of preferred stock at loss

Subtotal - Write-offs 4.2 19.0%

Grand Total 22.1 100.0%

Source:  SIGTARP  October,  2012  Quarterly  Report  

TARP- Prospects 2013 and Beyond §  Office of Management and Budget (OMB) and US Treasury estimate TARP’s cost at $65B. Largest losses would be to housing support programs, AIG, and automotive support programs §  Housing support programs will continue to languish

§  Current Remaining Treasury Investments: ²  AIG - 16% stake ²  GM - 32% stake ²  Ally Financial - 74% stake ²  CPP - Preferred stock in 290 banks ²  Community Development Capital Initiative (CDCI) - preferred stock in 80 banks/credit unions

Category Expenditures        ($B)  

Unspent  Balance  ($B)  

%  to  To  

Total  

Making  Home  Affordable    4.0   29.9   12.0%  

FHA  Short  Refinance        .1      8.1   1.0%  

FHA  Hardest  Hit  

Fund     1.5      7.5   17.0%  

Fiscal Cliff: Where Do We Go From Here?

§  Fiscal Cliff - End of Bush tax cuts, extensions and renegotiation of payroll tax. $1.2 trillion in automatic government spending cuts (Medicare, Medicaid, Social Security) §  A bipartisan agreement is inevitable; what is uncertain is the timing §  Some after-effects if the fiscal cliff is not averted:

² Market volatility ² Stock market sell-off ² US ratings downgrade ² Recession for first half of 2013

 TARP  

The  Impact  on  Community  Banks  Federal  Spending  Webcast:    December  12,  2012  

     

   

Community  Banks  Defined  

Strengths  and  Challenges  

MARKETING STRATEGY

APPLICATION GUI

Agenda    

The  Impact  of  TARP  

   

What  is  a  Community  Bank?    

Independent  Community  Bankers  of  America:    -­‐  Its  members  range  from  insHtuHons  with  $3  million  in  assets  to            those  with  as  much  as  $17  billion  in  assets.  

 The  Federal  Reserve  Bank:  

 -­‐  Defines  a  community  bank  as  one  with  assets  up  to  $10  billion.    The  Office  of  the  Comptroller  of  the  Currency  (OCC):  

 -­‐  Has  a  lower  threshold  of  up  to  $1  billion  in  assets.    The  Federal  Deposit  Insurance  CorporaNon  (FDIC):  

 -­‐  Also  use  the  $1  billion  threshold  as  an  indicator.      

   

Strengths  and  Challenges    

Community  Banks  Play  an  Important  Role  in  the  Economy:    

 -­‐    Both  the  borrower  and  the  lender  maintain  a  stake  in  the  long-­‐term              outcome  of  a  transacHon.  

 -­‐    Place  greater  emphasis  on  long-­‐term  client  relaHonships,  incorporaHng          informaHon  as  part  of  their  customer’s  profile,  that  is  not  easily  

           quanHfiable  (such  as  number  of  years  known  by  the  bankers).    -­‐    Community  bank  lending  is  especially  important  to  small  businesses          that  have  few,  or  hard-­‐to-­‐value  assets  as  collateral  and  a  lack  of  audited          financial  statements.  

   

Strengths  and  Challenges    Limited  Access  to  Capital:  

   -­‐    Small  and  mid  sized  banks  need  capital  to  pay  off  Capital  Purchase                            

                                       Program  (CPP)  investments,  and  raising  that  capital  has  been  a                                                          challenge,  parHcularly  with  weakened  loan  por`olios.  

 -­‐    Hit  hard  by  the  commercial  real  estate  collapse.    -­‐    According  to  investment  firms,  it  will  take  $23  billion  in  fresh  capital          for  community  banks  to  repay  TARP  and  Small  Business  Lending  Funds        

                                     (SBLF);  to  absorb  credit  losses  and  boost  loan  loss  reserves;  and  to  meet                                                    higher  regulatory  capital  raHos.        

 -­‐    Higher  esHmates  of  capital  needs  (roughly  $90  billion)  came  from            StoneCastle  Partners.  

   

FDIC  Failed  Bank  List  

   

TARP’s  Impact    

A  Mixed  Story:    US  Department  of  Treasury:    “There  are  s>ll  343  banks  remaining  in  TARP’s  Capital  Repurchase  Program.  Most  of  them  are  smaller,  community  lenders.”    An  Important  Challenge:            

TARP  does  not  allow  banks  to  recoup  losses  already  incurred  on  troubled  assets,  but  experts  presume  that  once  trading  of  these  assets  resumes,  their  prices  will  stabilize  and  ulHmately  increase  in  value,  resulHng  in  gains  to  both  parHcipaHng  banks  and  the  Treasury  itself.  The  concept  of  future  gains  from  troubled  assets  comes  from  the  hypothesis  in  the  financial  industry  that  these  assets  are  oversold,  as  only  a  small  percentage  of  all  mortgages  are  in  default,  while  the  relaHve  fall  in  prices  represents  losses  from  a  much  higher  default  rate.  

   

TARP’s  Impact    

         

Although  poliHcs  played  a  role  in  TARP  funds  distribuHon,  TARP  investments  sHll  managed  to  significantly  boost  bank  loan  supply  during  the  crisis.  Further,  limited  evidence  based  on  the  two  years  aeer  the  iniHaHon  of  TARP  suggests  that  TARP  banks’  loan  quality  has  not  significantly  deteriorated  aeer  TARP  investments.        Without  the  $442  billion  of  new  loans  sHmulated  by  TARP  injecHons  the  economic  condiHons  in  late  2008-­‐2009  could  have  been  even  worse.  One  major  policy  implicaHon  of  these  results  is  that  capital  support  for  banks,  in  addiHon  to  liquidity  support,  is  very  important  in  alleviaHng  credit  crunch  during  banking  crises.  Japanese  experience  in  the  1990s  suggests  that  bank  recapitalizaHon  programs  need  to  be  large  enough  to  revive  bank  lending.  

   

TARP’s  Impact    

         

PosiNve  Signs  for  Community  Banks    -­‐     RaHos  of  nonperforming  assets  remain  high,  but  asset  quality  is            stabilizing,  and  bank  provisions  for  loan  losses  are  decreasing.    -­‐    Business  models  are  changing.    -­‐    Liquidity  is  more  of  an  immediate  goal.          

   

Thank  you.    

     

The Bloor Group

TARP and the Money Supply

The Bloor Group

US Monetary Base – Long Term

Chart courtesy of ShadowStats.com

The Bloor Group

M1, M2 & M3 – The Long Term

Charts courtesy of ShadowStats.com

M1 = Includes bank reserves M2 = Money in circulation M3 = M2 + large and long-term deposits

The Bloor Group

TARP & The Monetary Base

Chart courtesy of ShadowStats.com

The Bloor Group

TARP, Q1, Q2 and M3

Chart courtesy of ShadowStats.com

The Bloor Group

In My Opinion….

•  TARP was to recapitalize the banks which had been operating at very “high risk” levels of leverage

•  Even so, many large banks were absorbed by other less vulnerable banks

•  The “printing” of money continued long after 2008 under the title of “quantitative easing”

•  The monetary base has expanded very fast in these past four years

•  But most of the money has not made its way into the economy

The Bloor Group

GDP vs. GFD

Chart courtesy of USGovernmentSpending.com

ROUND TABLE

THANK YOU This episode will be archived at: http://www.insideanalysis.com/webcasts/fedspend/ Image credit slide 4: http://www.efffective.com