US Taxpayer – The Universal Savior

In the post-Depression economics, Tim Geithner – US Treasury Secretary, has initiated a plan to inject $2.5 trillion of Public-Private Investment Fund (PPIF) into US banks to get rid of the toxic assets. On one side, nationalizing top-tier banks may be politically acceptable in places like Norway, Sweden, Chile, Iceland, Ireland and even Japan and the UK, but it is still inconceivable in New York and Washington. On the other side, American taxpayers are saturated with huge Wall Street bailouts and overpaid bankers. Consequently, taxpayers would never approve another open-ended injection of public capital into banks. Since the enactment of the Troubled Assets Relief Program (TARP) in October 2008, more than 360 US banks have received at least $353 billion of funds from the Treasury. This includes:
• $145 billion of capital injections to Citigroup, Bank of America, JP Morgan and Wells Fargo
• $10 billion each for Goldman Sachs and Morgan Stanley
• A grand total of $84 billion to the rest of the US banks
• $40 billion in capital injections and $113 billion in credit in AIG
By February 2009, banks and insurance companies have already absorbed at least $817 billion of government capital injections, $251 billion of toxic asset purchases, $2.6 trillion of government loans and $5.9 trillion of government debt guarantees. If we added the guarantees for Fannie Mae and Freddie Mac, the loan guarantees double to $10.9 trillion.
How much all these toxic assets on the banks’ balance sheets actually are worth? There is no active exchange for most bank assets, especially those that are hardest to value in this environment, like mortgage-backed securities. Banks are permitted to value the assets on their books at “fair-market value” – in essence, whatever their accountants tell them they are likely to be worth. Nowadays, the difference between the fair value and the market value could be up to half or more of book value. The banks have enough incentives to hold on to the loans, rather than sell them at market value. As soon as they start selling down one troubled asset, they will be required to “mark-to-market” all similar ones. The resulting writedowns might lead to bank insolvency. Since major banks still hold all these lousy loans at book value, it means that they do not have much room on their balance sheets for new loans, such that the credit crunch continues.
It is clear for everybody that US taxpayers are going to pay this TARP bill where total losses will easily eclipse all the other recent banking crises combined – including $2 trillion to $4 trillion of further bank write-offs beyond the $1 trillion of losses already recognized. In addition to the PPIF there was the idea to establish a “Global Recovery Fund” permitting sovereign wealth funds like those in Norway, UAE, Europe, Latin and Asian countries that have a stake in restoring the world’s financial sector. Along these lines, the IMF and the World Bank’s IFC are willing to participate in helping banks around the world by partially purchasing some non-performing loan portfolios. European banks have their problems comparable to the troubled assets that US financial institutions accumulated during the housing bubble. On top of that, these banks have at least $1.4 trillion in exposure to Central and Eastern Europe loans that have a very high default rate. At the end of the day, US taxpayer is bearing the bulk of the financial burden as far as IMF and WB are concerned.
Bottom line, engaging into a long-term swap of troubled assets for government bonds, while cleaning-up the banks’ balance sheets it might completely shift the risk of potential losses from the toxic assets to taxpayers. What is wrong with our politicians?

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