New COP Report - Guarantees Created Significant Moral Hazard

On Friday you were probably bowled over by the unemployment rate. So astounded, we missed this major report release by COP, the Congressional Oversight Panel on TARP.

The Report, Guarantees and Contingent Payments in TARP and Related Programs is another damning condemnation on corporate socialism to the point of moral hazard. Yet, at the same time, the report says taxpayers will likely profit from the huge TARP gamble. Well, well, if the government is turning the world into a glorified casino with U.S. taxpayer money, all the while guaranteeing the bonuses profits of large banks, at least it looks like we won't take the loss.

The Panel found that the programs' income will likely exceed their direct expenditures, and that guarantees played a major role in calming financial markets. These same programs, however, exposed American taxpayers to trillions of dollars in guarantees and created significant moral hazard that distorts the marketplace.


Firstly to the money! So far the program has received $17.4 billion in fees. The OMB has projected profits to be $752 million past the original TARP lending. That said, the OMB is under the Obama administration and... what was that jobs estimate again on Stimulus? hmmmm.....

The report lists these risks of Treasury Funds still for the taxpayer (see report for magic decoder ring on programs):

  • The TGPMMF has ended with no loss, but $3.6 billion was used from the ESF to purchase assets from the USGF outside of the TGPMMF.
  • The DGP currently guarantees a principal amount of $307 billion (plus interest), which will diminish as June 2012 approaches, with $2 million in expected losses to date.
  • The AGP guarantee for Citigroup is still in place, and initial actuarial estimates point towards a possible $34.6 billion loss under the moderate stress test scenario and $43.9
    billion loss under the severe stress test scenario, which, after the 39.5 billion “deductible,” would result in no loss for the government entities under the moderate scenario and a loss of $3.96 billion to Treasury under the severe scenario. The AGP guarantee for Bank of America ended with no loss.

Note the Panel is asking about Citigroup.

Treasury is contractually obligated to continue guaranteeing Citigroup assets until 2013 (for non-residential assets in the guaranteed pool) or 2018 (for residential assets in the guaranteed pool).

While Treasury, the Federal Reserve, and the FDIC provided extensive details of the mechanics with respect to additional assistance to Citigroup and Bank of America, the rationale underlying the guarantees remains somewhat unclear.

To date the three agencies have not disclosed why these programs were selected; why Citigroup and Bank of America were the only institutions selected for asset guarantee protection; what alternatives were available; and why those alternatives were not chosen.

Most interesting is under a moderate Stress Test scenario, Citigroup can lose $34.6 billion. Bear in mind the unemployment rate is much larger than in the original stress tests.

The recommendations are:

  • First, the Panel recommends that Treasury disclose the rationale behind the creation of guarantee programs, including a discussion of any alternatives, why those were not selected, a cost-benefit analysis of all options, and why Citigroup and Bank of America were the only institutions selected for asset guarantee protection.
  • Second, the Panel recommends that Treasury fully and publicly disclose its legal justification for creating the TGPMMF through the use of the Exchange Stabilization Fund. Treasury should also provide reports of the total number of money market funds participating in the program, or the total dollar value guaranteed, for each month that the program was in existence.
  • The Panel also recommends that the MOUs with Citigroup and Bank of America, and the MOU with any other institution relevant to this report on the AGP and other TARP-related guarantees, be provided to the Panel to inform its oversight functions, to be used subject to applicable legal protections.
  • Finally, the Panel recommends that Treasury provide regular disclosures relating to the guarantee of Citigroup assets under the AGP, including the final composition of the asset pool (as reflected on Schedule A to the Master Agreement) and total asset pool losses to date, as well as projected losses of the pool, and how these estimates have been calculated.

Ok, so the U.S. Treasury has crossed a line with corporate socialism for which there may be no return. Citigroup appears to still be a black hole. Yet, so far, U.S. taxpayer money isn't actually going down the drain, although the government put it on the Roulette wheel and spun.

Awesome! Aren't you glad Elizabeth Warren is even there? One statement I appreciate is this:

With so many stabilization initiatives in use at any time, it is impossible to attribute specific results to a particular initiative.

No joke. Did the U.S. government just baffle global finance with a complicated web of financial program confusion, bet the farm, crossed their fingers and hoped it all worked?

The report has numerous tables, so I suggest at least scanning it.

Don't miss Senator Bernie Sander's Too Big To Fail - Too Big To Exist, bill. The legislation plain gives powers to break up systemically risky institutions. (duh!) Believe it or not, Senator Sanders bill is gaining support, of course what 98% of the American people want doesn't usually mean a thing in D.C.



note, the profits are just guarantees

not the total TARP program. According to the last SIGTARP report, we know $50 billion is assuredly lost from the Home Buy assistance and the report stated the auto loans are probably lost as well.