“With the bailout
going on two years old, the government is pulling out the propaganda machine to
defend it’s involvement in the free market.
The government has no problem publicizing how it profited from the
banks, but what you won’t hear is discussion about Chrysler, AIG, Fannie Mae,
and Freddie Mac.”
Recently, the government reported that it has made (in
profit) more than $20 billion from the TARP program. The majority of this profit came from the big
banks that turned to the federal government (and in some cases were forced) for
capital during the financial crisis. The
government often uses the profitably of TARP to politicize that the bailout was
profitable, however, let’s examine the facts beyond what the government is
telling us.
The obvious question that strikes me is that if the federal
government was able to extract $20 billion from the banking system in profits,
how could the banks have needed the money?
The banks were not lending in the short period of time between taking
TARP and paying it back, so how were the banks able to generate such a profit
in a short period of time?
Interestingly enough, in the spring of 2009, the Financial
Accounting Standards Board (FASB) changed the rules on how illiquid assets were
reported. Previously, they were reported
as mark to market or the value for which they would sell for that day. As the crisis deepened, the valuation of
these assets plummeted which pushed most of the banking system into
insolvency.
The new rules allowed for auditors to use common sense
methods to value these assets. For
example, an asset could now be valued based on the cash flow or returns it
creates as opposed to its market value. The
auditor still has to document the method behind the valuation (to keep people
from pulling numbers out of thin air).
All of the major business media outlets covered the changes in valuation
rules (Reuters,
Bloomberg,
MarketWatch).
Within
a couple of months of the valuation changes, ten banks were given the okay to
pay back the TARP money. Furthermore,
Wells
Fargo alone made billions in profits from the change in valuation methods. After the changes to valuation methods, Wells
Fargo was readily able to pay back the TARP funds. Furthermore, the Wells
Fargo chairman was less than enthused about the usefulness of the TARP program. All of this information begs the question,
did we need TARP?
By the way, if you’ve ever wondered where mark-to-market
accounting came from, thank your Congressman.
Sarbanes-Oxley mandated mark-to market accounting for publicly traded
companies. Mark to market is simply
another consequence of “good intentions” from the federal government.
For those in the government who are prepared to call the
taxpayer bailout a victory, the facts also need to be examined further. The $20 billion profit does not include the
$180 billion investment in AIG and the $400 billion plus committed to Fannie
and Freddie. I bet there are CEOs out
there who wish they can report profits on only the operations that are doing
well and sweep the others under the rug.
Unfortunately for them, only the federal government is authorized to do
that.
