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

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Federal Spending Episode 14
Live Webcast on Dec. 12, 2012

The implementation of the Troubled Asset Relief Program (TARP) turned a lot of heads, not so much because the government was offering financial assistance, but because it did so at such an enormous scale. While opponents criticized the bailout for its enduring burden on taxpayers, supporters pointed to its necessity in order to keep the failing economy afloat. Now in its third year, many are left wondering: how successful has the program been and what unforeseen consequences emerged because of it?

Join host Eric Kavanagh for this episode of Federal Spending to hear former TARP regulator Amy Poster review the program’s successes and shortcomings. She will also discuss the looming “fiscal cliff” and what its implications could mean for the economy. She will be joined by Bloor Group Analyst and former operations manager Jessica Marie, who will shed light on TARP’s impact on small and mid-sized banks. Robin Bloor, Chief Analyst at The Bloor Group, will offer some perspective on the Federal Reserve's Quantitative Easing programs, and what impact they may have had on inflating the overall value of the stock market.

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Svilen Milev www.efffective.com
Scott Liddell www.scottliddell.net

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

  1. Federal SpendingTime to Face the Music:TARP Update and the Fiscal Cliff
  2. Host:Eric Kavanagh
  3. Amy Poster Jessica Marie Robin Bloor Strategic Advisor, Iron Analyst, Chief Analyst, Harbor Capital The Bloor Group The Bloor GroupGuests
  4. The Crisis
  5. T roubled A sset R elief P rogramThe Solution
  6. Now What?Derek J by Phil Watt
  7. 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
  8. Amy serves as a strategAmy is currently strategic adviser, non-investment activities for Iron Harbor Capital Management, a global macro strategy assetmanger 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. Treasurys Public PrivateInvestment Program (PPIP). Amy was also the central subject matter expert for financial markets at SIGTARP, leading criticalaudits 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 globalcredit 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 hasbeen 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 Directorsof High Water Women, and a sustaining angel and member of the Professional Leverage Committee of 100 Women in HedgeFunds.
  9. TARP US TAXPAYER PRICE TAG TARP TOTALS as of September 30, 2012 ($B) 700.0   475.0   467.0   417.3   327.5   84.2   44.4  Original TARP Amended TARP- TARP Obligated- Total Expenditures TARP Unspent Total Repayments Owed to Taxpayers Dodd/Frank 13 Programs BalanceSource: 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 $44.4B unspent TARP funds remain in housing. §  The majority of TARP programs expire between 2017-2020
  10.   The Forgotten Main Street TARP Disbursements by Category as of September 30, 2012   Community/ Small  Business     0%   Housing  Programs   2%   Auto  Support   SSFI  (AIG/CiH)   Programs   16%   19%   CPP/PPIP/TIP/Term   Asset  Back  Programs   63%   Source: SIGTARP Quarterly Report October 2012§  Four main component programs: ²  Housing Support Program: Making Home Affordable (MHA), FHA Short Refinance and FHA Hardest Hit Fund ²  Financial Institution Support: Treasury directly investing in banks, bank holding companies, and systematical significant failing institutions (SSFI) ²  Asset Support Program: Provide funding to purchasers of assets (TALF, PPIP programs) to open credit markets and foster market liquidity ²  Auto Industry Support Program: Stabilize US auto industry and provide market stability (ASSP and AWCP programs)§  TARP skewed to Wall Street bailout (63% + 16%=79%), Main Street 2% for housing and <1% for small businesses
  11. TARP OWED TO US TAXPAYERS Realized TARP Losses and Write-offsTARP BALANCES ($B) as of September 30, 2012 Write-offs $22.1BBalance - Unpaid TARP 84.2 due to   Bankruptcy   19%Realized Losses and Write-offs 22.1TARP Owed to Taxpayers 62.1 Realized LossesSource:  SIGTARP  Quarterly  Report  October    2012   Write-offs due to Bankruptcy Realized Losses 81% §  $22.1B of TARP funds will not be recovered §  Largest recorded losses on sale of AIG and GM common stock due to unfavorable equity market conditions and volatility §  Many smaller to mid-size CPP participants continue to experience difficulties and high losses resulting in inadequate capital and liquidity. Treasury has opted to accept lower valuation or conversion to more junior form of equity to avert total loss on its investment
  12. TARP  REALIZED  LOSSES  AND  WRITE-­‐  OFFS   Realized Losses/Write-offs ($B) % to Total NotesAuto - Chrysler 1.3 6.0% Of $1.8B Tarp investment, collected .5B from sale of equity and stock of UAW Retiree Trust and collateralAuto - GM 4.3 19.0% Sale of common stock at a lossSSFI - AIG 4.6 21.0% Sale of common stock at a loss. Weighted average sale of $30.97 vs. Treasury cost of $43.93CPP – 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- offCPP - CIT 2.3 10.0% Bankruptcy, no recovery of $2.3CPP .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  
  13. TARP- Prospects 2013 and Beyond§  Office of Management and Budget (OMB) and US Treasury estimate TARP’s cost at $65B. Largest losses would be to housing support programs, AIG, and automotive support programs§  Housing support programs will continue to languish Unspent   %  to   Expenditures         Category Balance   To   ($B)   ($B)   Total   Making  Home    4.0   29.9   12.0%   Affordable   FHA  Short        .1      8.1   1.0%   Refinance   FHA  Hardest  Hit   1.5      7.5   17.0%   Fund    §  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
  14. 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
  15.   TARP   The  Impact  on  Community  Banks  Federal  Spending  Webcast:    December  12,  2012      
  16. Agenda     Community  Banks  Defined  Strengths  and  Challenges   MARKETING STRATEGY The  Impact  of  TARP   APPLICATION GUI  
  17. 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.        
  18. 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.    
  19. 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.    
  20. FDIC  Failed  Bank  List    
  21. 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.    
  22. 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.    
  23. 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.            
  24.   Thank  you.          
  25. TARP and the Money Supply The Bloor Group
  26. US Monetary Base – Long Term Chart courtesy of ShadowStats.com The Bloor Group
  27. M1, M2 & M3 – The Long TermM1 = Includes bank reservesM2 = Money in circulationM3 = M2 + large and long-term deposits Charts courtesy of ShadowStats.com The Bloor Group
  28. TARP & The Monetary Base Chart courtesy of ShadowStats.com The Bloor Group
  29. TARP, Q1, Q2 and M3 Chart courtesy of ShadowStats.com The Bloor Group
  30. 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
  31. GDP vs. GFD Chart courtesy of USGovernmentSpending.com The Bloor Group
  32. ROUND TABLE
  33. THANK YOUThis episode will be archived at: http://www.insideanalysis.com/webcasts/fedspend/Image credit slide 4: http://www.efffective.com

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