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Tuesday, March 24, 2009


goldman sachs to return TARP infusion

in the new york times.

Goldman Sachs is planning to give back its TARP money soon. Very soon, actually — ideally within the next month, according to people involved in the process. That’s a much quicker timetable than the end-of-year goal previously set out by Lloyd C. Blankfein, Goldman Sachs’s chief executive. As taxpayers, we should be thrilled that Goldman is going to quickly pay back the $10 billion it was given last October, right?

Well, not so fast.

Goldman’s sudden urgency to return the money stems, in part, from the uproar over A.I.G.’s bonuses last week, and the criticism of Goldman over revelations that the firm had been the largest recipient of government money as a counterparty of bets placed with A.I.G. It’s also paying a hefty 5 percent interest payment to taxpayers for that money.

“It’s just impossible to run our business in this environment,” said one senior Goldman executive who insisted on not being quoted by name for fear of crossing the Treasury Department.

Of course, another factor in Goldman’s decision to return the money is that it can: the firm is known to be sitting on a balance sheet with about $100 billion of available cash, so a mere $10 billion should be no problem.

why is a bank holding $100bn in cash? because it doesn't have a good prospect for investing it for profit.

it is becoming increasingly apparent that some banks, while appreciating the liquidity facilities made available to them as bank holding companies, have no use for TARP funds or other forms of excess reserves.

It could create even more chaos in the financial system if some banks gave back the TARP money, only to howl soon after that they still needed it after all. “We see another $1.5 to $2 trillion of as yet unrecognized losses from U.S. assets still to hit global financial sector balance sheets and challenge its institutions,” said Daniel Alpert, a managing director of Westwood Capital.

“The near daily announcements over the past two weeks, by money-center banks and finance companies, that they are making money this year on an operating income basis, have become borderline irresponsible, relative to continued deterioration in value of the assets on their balance sheets and the continuing impact of a worsening recession,” he added.

loan loss reserves very likely do need bolstering in general, which is why the ratio of loss reserves to total loans is climbing as steeply as ever. but $10bn in TARP capital will make no difference to a bank sitting on $100bn in that respect.

moreover, if banks in general are shown regulatory forbearance on how the derivative portion of their portfolios are marked, chances are that even the more damaged banks will earn their way back to solvency in due course (though it will be several years). the government has shown no inclination to force the issue and nationalize.

but what i find interesting is that banks like GS, BAC, JPM, WFC and others who have claimed to want to return TARP capital cannot find a good use for the money. if loan and investment opportunities were rampant, i have little doubt that obstacles like bonus restrictions would be easily overcome with a bit of creative regulatory arbitrage.

it's not that the bonus payment issue is null. this is capital, after all, which they are paying a 5% coupon for. goldman raised some billions from warren buffett in the heat of the 2008 crash for which they are continuing to pay on the order of 17%. so the restrictions -- and the probability of more restrictions to come -- matter.

but the issue of rejected capital bears watching for other reasons. excess reserves are moving in lockstep with monetary base -- since the beginning of fed balance sheet expansion in september, monetary base less excess reserves has risen by about $70bn, meaning that of $800bn in monetary base expansion 91% has gone straight to excess reserves. i would expect more of the same out of quantitative easing. the liquidity crisis that sparked massive new borrowings from the fed by depository institutions has eased significantly -- down nearly 70% from the mid-october peak, with participation in the fed's alphabet soup declining. ominously, total loans and leases at commercial banks is declining steadily -- and now has been since topping in late march 2008 (with a one-time jump thanks to the reorganization of some large investment banks as bank holding companies in the midst of the crash). fixed private investment is declining rapidly. personal saving and likely net private saving -- GDP less consumption (including durables), government sending and net foreign investment -- are jumping. shockingly, household credit market debt outstanding recorded its first contracting quarter since the second world war, and is flat YoY through 3q2008. more volatile commercial and industrial loans have also turned down.

this is all in line with the onset of a balance sheet recession -- plentiful reserves, improving bank liquidity, lack of advantageous use for bank capital, contracting commercial and household loans.

UPDATE: calculated risk highlights the strong negative mortgage equity extraction -- households are paying down loans.

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