TARP Was Good

Yesterday, congress kept criticising Hank Paulson for the Troubled Asset Relief Program (TARP). Though it is fair of them to complain that the plan changed from buying toxic assets when Congress voted for it. However, events changes and the switch to buying preference shares was the only solution that could be rolled out fast enough.

Firstly, they argued that the preference shares were just cheap loans to Paulson’s friends. Pointing out that Buffet was able to get better terms for similar loans a few months earlier. However, the government should not be a loan shark, charging high rates of interest to people who cannot borrow elsewhere. Some institutions were on the brink of failure, and without time to do due diligence it makes sense to offer help to everyone. That is why warrants were included in the plan, more on that later.

The next critisim is that they were mislead into the approving the plan by an exagerated doomsday scenario. Simultaniously arguing that the economy is in such a bad state now, the plan achieved nothing. TARP’s aim was not to solve the world’s problems, it was an ambulance to get the paitent to the hospital. Essentially a bridge loan, until the markets had calmed down and banks started trusting each other again. The banking system did not collapse and are starting to repay the preference shares. So the plan so far, has worked.

If you compare the TARP preference shares to the bank bailout in the UK were interest rates were higher. UK banks could not afford the interest and were forced to convert the loans to equity to preserve cash. So instead of taxpayers getting their loans back, UK taxpayers are stuck with common shares that have lost over £10 billion in value. US taxpayers are starting to get their money back, and have made billion dollar profits on the warrants. The more profit the banks make the more profit taxpayers make on the warrants.

Yet the most bizarre claim was the congresswoman complaining that the terms of the warrant allow the bank to choose when it buys them back (once it has repaid the preference shares). Arguing the government should dictate when the bank must buy them back. Suggesting she does not understand what a warrant is.

The government can sell the warrants to third parties or exercise the warrants any time it likes, so there is no need to force the bank to buy them back. A bank buying back the warrants is similar to a company buying back its stock. It will cost the bank money, but will not affect its profit. The only advantage to the buy back clause is if congress imposes extra regulation, such as salary caps, on TARP warrant recipients. If a bank cannot choose to buy back the warrant to avoid the regulation it gives an unfair advantage to those that avoided TARP.