Fallout: The Financial Crisis

Unwinding TARP’s payback plan

Marketplace Staff Sep 22, 2009
Fallout: The Financial Crisis

Unwinding TARP’s payback plan

Marketplace Staff Sep 22, 2009


Tess Vigeland: In the year since the financial collapse, a whole lot of money has been handed out to institutions to prevent them from falling apart and taking down the world economy with them. The Federal Reserve, the Treasury, the White House — they all bailed out banks, insurance dealers and car companies in a variety of ways.

So this week we’re looking at how and when the government might get paid back. First up: the $700 billion Troubled Asset Relief Program, TARP. Banks like JPMorgan Chase and Morgan Stanley have returned the funds. Bank of America says it’ll pay back TARP money soon. Tony Sanders is a professor of finance at George Mason University. And I asked him to catch us up on where things stand.

TONY SANDERS: Some of the larger banks are actually paying off the TARP money. Simply because most of them really would like to pull out, they’re actually posting some gains or at least have cut their losses. But some of the smaller banks just don’t have the capitalization going forward right now to repay the TARP or the federal government at this point.

Vigeland: And of course car companies got a chunk of it as well. Are we expecting anything back from them?

SANDERS: Car companies did get a significant chunk, and the answer is no. I would not look for any money to be coming back from the car companies to repay taxpayers.

Vigeland: So we’ll take a write down on that one.

SANDERS: In reality, it’s just a bad business model. We shouldn’t have done it. But I think in terms of the banks, as the market turns around, I think that the banks are going to show some really good signs of repaying the money.

Vigeland: Is it fair to say that the financial system is still dependent upon TARP funds?

SANDERS: For the short run, I would say the answer is yes. And when you look at it, housing prices have stabilized across the country for the most part. I wouldn’t say, they’re not going to fall further. Arizona, Nevada, California and Florida are all going to be susceptible to further declines. Because that’s where the foreclosures are still going to be coming. Fast and furious at least for the next six months to a year.

The bigger banks are starting to stabilize. The smaller banks, on the other hand, who had a lot bigger exposure to commercial real estate and commercial loans, they’re not going to stabilize for a while.

Vigeland: One of the companies that got a pretty big chunk of TARP funding was AIG. Is that company anywhere close to being able to pay that back?

SANDERS: How do we know? The problem with AIG is that’s a company that was sort of, I wouldn’t call it a shadow bank, but it was clearly an institution that was not monitored very carefully. As soon as the market stabilizes, and starts to come back — which it’s showing signs of — AIG will stabilize. But if the market continues to deteriorate, we’re on the hook for lots of money with AIG.

Vigeland: So the short answer there is no, they’re nowhere close to being able to pay it back.

SANDERS: I don’t think so.

Vigeland: Is it possible at this point to estimate how long it might take for the government to unwind it’s involvement in the banking system?

SANDERS: Well, to unwind that size of a portfolio, which is essentially what TARP is, portfolio preferred stock, it’s going to take years to get out of this, and that’s if the market stabilizes now and starts to grow. It’s going to be three or four years before they can actually realistically repay that.

If the market lies flat or keep on its downward trend, we could see this being almost like a perpetuity. It just won’t be repaid. That’s why there’s such a big emphasis on getting this economy turned back around on its feet, and getting the banks back doing what banks do well, which is lending money. We need banks in the economy. And the more this hangs out there and doesn’t do anything, and the more the banks are stifled with having to repay the TARP money, the less lending they’re going to be doing. So it’s in everyone’s best interest to turn this thing around.

Vigeland: Tony Sanders is a professor of finance at George Mason University in Washington D.C. Thank you so much for your help today.

SANDERS: Thank you very much.

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