It is difficult for me to speculate where our ship of state will eventually land and how the TARP issue(s) will be resolved, so let’s consider Yankee Doodle Dandy’s perspective.

Neo-Federalism, hubris, and trapped — or more appropriately TARPed — were words that came to mind as Yankee Doodle Dandy celebrated our nation’s 233^rd birthday.  As he reflected on one of our Founding Fathers (Alexander Hamilton) and the state of our financial system given the last 18 months of dystopia (liquidity and credit crisis), Yankee Doodle began drawing several parallels from that statesman whose image adorns our ten-dollar bill  to the present.

The first parallel — or Hamilton haunting if you will — is the general tenor of the current administration to wield more influence over financial intermediaries to prevent future systemic risk to our economy. 

This new and more rigid form of “Federalism” (a strong central government advocated by Hamilton) has begun to take shape in the specter of new laws and regulations to curb perceived abuses in the credit, investment and financial markets, and is likely to result in a single, more powerful regulatory/resolution authority.  The initial thinking is to extend such power to the Federal Reserve.

“And whom would you have representing us in government?
Not the rich, not the wise, not the learned?
Would you go to some ditch by the highway and pick up the thieves,
the poor, and the lame to lead us?
Yes, we need an aristocracy to be running our government
— an aristocracy of intelligence, integrity and experience.”

                                              … Alexander Hamilton

 

 

Is this who he had in mind?

The second parallel drawn was how expedient our last and current Treasury Secretaries have acted and are acting.

Their actions were and are so Hamilton-esque (playing things fast and loose in an emerging and evolving political and economic environment).  For example, Henry M. Paulson calling the CEOs of our nation’s nine largest banks (Jamie Dimon – JPMorgan Chase, Robert Kelly – Bank of New York/Mellon, John Thain – Merrill Lynch, Ronald Logue – State Street, John Mack – Morgan Stanley, Lloyd Blankenfein – Goldman Sachs, Ken Lewis – Bank of America, Vikram Pandit – Citigroup, and Richard Kovacevich – Wells Fargo) to his office on October 13, 2008, and forcing them to accept a direct $125 billion capital infusion (Troubled Asset Relief Program) under the terms that the Treasury Department dictated (See PBS “Frontline” episodes Inside the Meltdown and Breaking the Bank for more specific information).  In essence, this move to restore confidence in our financial system, to get the banks lending again, and to protect the economy had a more profound effect.  It heralded a new way for the Treasury to do business.  Now, the department purchased equity stakes (ownership) in a wide variety of banks and in effect, became partners with those financial entities (See “The Capital Purchase Plan: Do You Dare?”, The Raddon Report, November 12, 2008).  Thus, on that fateful October day, the largest banks in the U.S. were, to some degree, nationalized.  Then-Secretary Paulson’s bold move did not have the immediate effect that he desired and Yankee Doodle cannot speculate how history will treat him.  Moreover, he recently testified in front of the House Committee on Oversight and Government Reform with respect to the Treasury Department’s involvement and role in engineering Bank of America’s acquisition of Merrill Lynch.

In a second example, Timothy F. Geithner administering the repayment of TARP funds and the redemption of stock purchase warrants. 

Earlier this year, as conditions seemed to brighten, many banks began to grouse that they wanted to return TARP money to free themselves from such a stigma.  However, the Treasury was not ready for them to do so because the department and the administration wanted to avoid the excesses of those (AIG) that had accepted government funds in the recent past.  It needed a mandate from Congress, which it received with the passage of the American Recovery and Reinvestment Act of 2009.  The law allowed the appropriate regulatory agency to dictate to those institutions that took TARP funds (649 banks) who would/could run them, how executives would/could be compensated and the amount of dividend payments they could make, as well as restrict stock buybacks.  As a result, the head of a number of U.S. banks now resided within the confines of the Oval Office, the Executive branch of our government.

The new law also allowed TARP recipients, upon regulatory approval, to repay the funds that they were advanced without waiting.  This proved to be problematic to our 75th Secretary of the United States Department of the Treasury because approval mechanisms were not in place to deal with the banks that wanted to approach 1500 Pennsylvania Avenue.  Accordingly, Secretary Geithner (former ninth president and chief executive officer of the Federal Reserve Bank of New York), in conjunction with the Federal Reserve, devised a “stress test” (a “forward-looking” exercise designed to estimate bank losses in 2009 and 2010 under two economic scenarios) to buy some time (See “If I’m Ken Lewis,” The Raddon Report, May 15, 2009).  The delaying strategy worked for awhile.  However, roughly two months later, 10 big banks (JPMorgan Chase & Co., American Express Co., Goldman Sachs Group Inc., U.S. Bancorp, Capital One Financial Corp., Bank of New York Mellon Corp., State Street Corp., BB&T Corp., Morgan Stanley, and Northern Trust Corp.) came a-knocking on Secretary Geithner’s door to get the Treasury’s imprimatur to repay $68 billion.  In another delaying tactic as perceived by Yankee Doodle, the Federal Reserve required that those 10 firms demonstrate they could issue debt without relying on a federal facility and raise additional capital from outside investors prior to repaying funds.  Such a requirement was quite surprising for Yankee Doodle in the case of JPMorgan Chase, which had been deemed to have passed the Fed’s earlier stress test.  

At the same time, Secretary Geithner also was dealing with those institutions that wanted to expunge the stock purchase warrants that they sold to the Treasury in exchange for funds they received.  The warrants allow the government/Treasury to buy common stock in the banks at a later date (i.e., within 10 years). The essential idea behind the warrants was to provide more of a return to taxpayers for their investment in the banking industry.  If the banks did not want to buy those warrants back, they must allow the Treasury to sell them to private investors, which would dilute shareholder value.  At issue was and is the value — or setting the value — of those warrants in a suppressed market.  The fuss, the “to do,” the hubbub, the brouhaha began when several institutions approached the Treasury to buy back their warrants they had sold.  Unevenly handed, Treasury charged a perceived “onerous exit fee” to one financial institution (Centra Financial Holdings, Inc.) for its buy back of the warrant(s) it sold, while offering a perceived “deep discount” to another financial institution (Old National Bancorp) for its buy back of the warrant(s) it sold.   Thus, Secretary Geithner came under the scrutiny of a Senate panel and the banking industry because of an apparent lack of “transparency.”  In true Hamilton style, Treasury delayed further warrant redemption until in it could develop a Warrant Repurchase and Disposition Process, which the department released just before this year’s celebration of our nation’s birthday (June 26, 2009).  Despite such an action by the Treasury, Yankee Doodle felt that this warrant issue will remain a contentious question for some time to come.

After drawing these parallels to the past, Yankee Doodle remained/remains in a conundrum with respect to the state of our financial system and TARP.  Per the results of the stress tests, the Treasury and regulators have offered assurances that financial market stability is going forward.  Further, financial institutions were and are once again raising capital in the private sector.  If the original goal for TARP was to promote stability by providing a necessary capital prop to financial institutions and it was no longer perceived needed, why was not an exit strategy being proposed/explored?  After all, exit strategies have been called for in other arenas of our government’s purview. 

Subsequently, Yankee Doodle learned that one exit strategy (rightly or wrongly conceived) has been suggested to date. 

Representative Jeb Hensarling (a Texas Republican) has introduced a bill (TARP Repayment and Termination Act of 2009) to provided for such an exit.  In essence, the Congressman’s bill sets a firm end date (December 31, 2009) for TARP, codifies the conditions that banks can repay funds, outlines when the Secretary of the Treasury must liquidate any remaining warrants, and mandates that the TARP spending authority will be reduced dollar for dollar as banks repay funds.  Yankee Doodle particularly embraced the last provision (dollar-for-dollar reduction of the TARP spending authority) of Congressman Hensarling’s bill.  This is due to fact that currently funds repaid to TARP are returned to the general pool to be used by the administration and the Treasury to promote other economic, social and political agendas. A good example is the use of TARP funds for General Motors Corporation, GMAC LLC, Chrysler LLC, Chrysler Holding LLC, Chrysler Financial Services Americas LLC, and New CarCo Acquisition LLC.  Once again, another Hamilton ghost/parallel (government becoming directly involved in large-scale industry) began to haunt Yankee Doodle.

It is difficult for Yankee Doodle to speculate where our ship of state will eventually land and how the TARP issue(s) will be resolved.  However, he could take some solace in the remarks made to him by one “stress test” banker in response to his verbal carping with respect to the Treasury and regulators as outlined above: “Do not be too critical, we are in uncharted waters.”

On a lighter note, Yankee Doodle’s nom de plume was inspired by George M. Cohan.

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