With three major banks repaying TARP money to the Government the past several days, a chapter is coming to a close. With Bank Of America, Citigroup and now Wells Fargo repaying TARP, the Government has gotten back nearly all the money it injected into the banks. Even General Motor’s CEO Ed Whitacre Jr announced yesterday that the company plans to repay TARP by June 2010.
Flashback to slightly over a year ago September 2008, shortly after the collapse of Lehman Brothers, many major banks looked to be on the verge of collapse. Merrill Lynch had to be rescued by Bank Of America which also had to be rescued this time by the Government to prevent its collapse. Morgan Stanley and Goldman Sachs the two remaining investment banking giants both appeared to be near collapse. Wachovia and Washington Mututal were both brought to the verge of bankruptcy brought about by a run on the banks. A mutual fund broke the buck and there was a several hundred billion dollar run on many mutual funds. Even, General Electric was rumored to be insolvent due to its lending by Ge capital, and its reliance on commercial paper for short term lending, for which the market had dried up.
Few people would have thought a year ago that all the major banks especially Bank Of America and Citigroup would be healthy enough to stand on their own. In the begriming of this year Bank Of America and Citigroup appeared on the verge of collapse even after receiving $45 billion from the Government, and there was talk of nationalizing all the major banks. There were wild rumors that the large banks were insolvent and even the “good” banks like JP Morgan and Wells Fargo were said to be in major trouble. There was talk of a great depression that may have even be worse than the great depression.
Former treasury secretary Henry Paulson sprang into action. He asked congress for $700 billion to buy toxic assets from the banks. Ultimately the banks were given capital injections instead of the Government buying their toxic assets. Many experts speculated that this would not even be enough, and trillions of dollars would be needed to buy up the toxic assets. There was talk of a depression even after TARP.
Only one year later, the situation is dramatically different. There is no talk of nationalization and Citigroup and Bank Of America have higher Tier One Common equity ratios than most other large banks. Wells Fargo, Goldman Sachs and others are back to high profitability. While Citigroup and Bac are still losing money, they are losing far less than they were during the peak of the crisis. In addition John Paulson expects Bank Of America to have a $27 billion net income in 2011, which is a far higher amount than the bank earned in 2006 near the peak of the bubble.
TARP is not a perfect program and we are not completely out of the woods yet. In addition there is growing anger on the populist far left and far right who would rather see the financial system collapse than banks receive any government aid. This movement is gaining popularity in Washington and threatens to harm the economic recovery. Fannie Mae, Freddie Mac and AIG are still under severe stress and it is doubtful whether they will be able to repay TARP soon, if ever at all. Paulson was not a great secretary of Treasury. He took little action to stem the crisis until 2008, and let the subprime bubble build until then. Additionally he made a catastrophic mistake to let Lehman Brothers declare bankruptcy which nearly brought a total collapse of the worldwide financial system. However, he stepped up to the plate and saved the financial system by begging congress to pass TARP. As a result of his actions he saved the financial industry and only a year later, the US banking system as a whole is healthy enough to pay back its government aid. Overall, as a result of recent events I believe that TARP can be declared a major success.
disclosure: long jpm, gs, ge, wfc