The infamous TARP package received a favorable vote from the House of Representatives on Friday, October 3rd. The crisis was so serious, according to TARP advocates, that the President signed the bill into law Saturday, so that it could become effective immediately. Everyone assumed, at the time, that Treasury Secretary Paulson would proceed to buy "toxic assets" from the banks in the now forgotten "reverse auctions." After all, that is what Treasury Secretary Paulson said he would do as he pushed the single largest spending bill in history through a pliant Congress.
Within 48 hours of the TARP becoming law, Treasury Secretary announced a shift in course. Instead of the "reverse auctions," now deemed impractical (though the week before Paulson had labeled them the only hope to save the financial system), Paulson called in the nine leading financial institutions and insisted that they take Treasury cash whether they liked it or not. In all, nine institutions took in $ 250 billion in cash and the Treasury received a preferred security interest in each bank. Those banks who refused, notably Goldman Sachs, Wells Fargo, and JP Morgan, were to told to take it or else. So, they took it.
Over the next eight days more than $ 400 billion of bank equity disappeared in an avalanche of selling of the financial stocks (and other stocks as well). Within eight weeks, Citigroup alone had shed over $ 50 billion in market capitalization.
Now, we hear the banks need a mere $ 75 billion of additional capital to weather a significant worsening in the economy and more than half of that amount is needed by a single bank, Bank of America, leaving $ 40 billion needed for the entire remaining banking industry. Really?
$ 40 billion is a ridiculously small number. Bank of America acquired Merrill Lynch for more than that number. Lehman lost more than that number in market value in its final year of existence. If that is all the banking system needs after a significant deterioration in the quality of their assets as the recession has unfolded, then why all the hoopla last October?
This is truly incredible. If all the banking system needs, at this point in the recession is $ 75 billion, then this will rank as one of the mildest banking crises in history. Who are Geithner and Obama kidding? $ 75 billion? All of this anguish and panic for that?
And don't even suggest that the cash infusion did any good. The cash infusion of TARP shattered confidence in the American banking system, because it suggested that it was needed and needed immediately (now, I guess, it wasn't really needed after all). The TARP cash infusion led directly to the worst one week financial panic in world stock market history. All for a need for $ 75 billion in extra capital in case we have a real recession (instead of one conjured up and produced by politicians with an axe to grind and media pundits looking for something to say)?
$ 400 to $ 500 billion....why that would be a real need for additional equity. $ 75 billion indeed? As Rahm Emanuel has been quoted so frequently as saying, "never let a good crisis go to waste!"
