No-one Dast Blame the TARP

Did the Troubled Asset Relief Program work? Stephen Grocer at the Wall Street Journal's Deal Journal blog notes that Bank of America and American International Group continue to sponge up bucks like your worst couch-surfing brother-in-law:

And yet, since the stress test results were announced early last month, the 19 firms that were put under the microscope have raised more than $55 billion in the stock markets, according to Dealogic. Even more impressive, BofA, which had the greatest equity hole to fill, had raised $33 billion through asset sales, equity issuance and other means. Now the nation's biggest banks are tripping over themselves to pay back those loans from the Treasury Department's Troubled Asset Relief Program.

This week alone, Morgan Stanley, J.P. Morgan Chase and American Express have hit the capital markets to sell stock. The moves are meant to meet the government's new requirement for TARP repayment, namely that they must prove they can raise capital through the public markets.

Grocer (and with a name like that he's gotta know markets) in turn refers to TheDeal.com's George White, who has this to say:

While the TARP ended up looking nothing like the emergency plan that then-Treasury Secretary Hank Paulson pitched to Congress only months ago—when panic reigned on Wall Street and LIBOR rates topped 4%—the much maligned bailout served its purpose of averting a wholesale meltdown of the U.S. banking system while confidence slowly returned.

We can't ever know what the banking sector would have looked like had House Republican's succeeded in killing the TARP, but chances are it would've included far more pain for financials and a case study for business schools in what happens when a bank "too-big-to-fail" actually fails.

The London Independent goes so far as to say that the great credit unwind is over:

It is, of course, hardly a consensus yet, but it is the best conclusion to draw from this number: $36bn (£22bn). That is the amount that investors have poured into the weakest of the American banks in the past month, helping to fill the holes which opened up in their balance sheets and crippled their lending activities. Stronger banks such as Goldman Sachs have raised billions more, giving them greater resources to lend into the US economy and abroad.

None of this is to say that recessions on either side of the Atlantic are about to end, that job insecurity and business caution are about to be replaced by a new bullishness, or that banks will suddenly be turning on the credit taps for sub-prime mortgage applicants or consumers who are already up to their card limits. But the first phase of crisis has given way to something more normal.

It's a stretch to call any of The Naughty 19 the "weakest of the American banks." Some 36 banks have managed to fail this year with only minimal government assistance. And I can't be the only crash-scene rubbernecker who would in fact like to see what happens "when a bank 'too-big-to-fail' actually fails." I also stand by my earlier statement that trying to use credit to solve a problem created by too-easy lending is like trying to drink yourself sober. Still, being a libertarian means never fearing the question or the answer, so I'll leave the question out there: Has the TARP succeeded in its purpose?

Here are some interesting comments from Federal Reserve Chairman Ben Bernanke's congressional testimony yesterday:

Among the markets where functioning has improved recently are those for short-term funding, including the interbank lending markets and the commercial paper market. Risk spreads in those markets appear to have moderated, and more lending is taking place at longer maturities. The better performance of short-term funding markets in part reflects the support afforded by Federal Reserve lending programs.

Note that Bernanke yesterday also supported the idea that it might be time to take the bottle away from the dipsomaniac, saying increasing prices for long-term Treasury bond yields "appear to reflect concerns about large federal deficits but also other causes, including greater optimism about the economic outlook, a reversal of flight-to-quality flows, and technical factors related to the hedging of mortgage holdings." (You can read Bernanke's written statement here; and watch video of the full session—including the questions where most of the deficit commentary occurs— here.)

Pimco CIO Mohamed El-Erian says Bernanke's two aims were to manage expectations for a recovery and warn the executive and legislative branches to stop throwing money away. BusinessInsider.com's "Inside Man" says No, no, Bernanke, you should make people think you're going to inflate the greenback by 5 percent or more. The Economist says German chancellor Angela Merkel was right: central banks need to get serious with their exit strategies. And morally upright Sen. David Vitter (R-LA) asks Bernanke and Treasury Secretary Tim Geithner for more clarity around the TARP repayment rules.