Older CBO estimates were much grimmer. The projection for the loss in an analysis completed in August was $66 billion. The March figure was $109 billion.

The reason for the improvement is that the companies in which TARP funds were invested performed well. The government program usually got equity and debt in the firms it aided and often received convertible securities as well.

The first large return on the fund’s investment came as the banking industry rose like Lazarus. Banks more than offset the damage done by mortgage-backed derivatives with strong investment banking and trading revenue.  Companies such as Goldman Sachs Group (NYSE: GS) paid the government back quickly. Banks which appeared to be permanently crippled when TARP was created in October 2008, such as Bank of America (NYSE: BAC), have had improved fortunes. The TARP fund returns on these investments was impressive.

The bank industry recovery was followed by a successful restructuring of AIG (NYSE: AIG), which was able to sell a number of divisions and take its AIA unit in Asia public. And then GM’s public offering was done at a price which allowed the government to recoup most of its investment in America’s No.1 car company.

A great deal of the improvement in the TARP fund’s return is “on paper.” It has not sold all of its investment in GM. Several medium-sized financial firms have not returned their money and the rebuilding of AIG is not done.

The forecast for estimates of TARP losses gets smaller with each report, and given the assets still owned by the fund and the rate at which many of them have appreciated, it is  possible that the TARP fund could end up with a profit.

TARP, once viewed as a desperate way to save the financial world and one on which the government believed it would lose hundreds of billions of dollars, may be the best investment the US has made in the private sector since the crash began in the fall of 2008.

Douglas A. McIntyre

Reuters:   Work on the BP plc (NYSE: B) oil spill will be delayed because of Hurricane Alex.

Reuters:   China’s economic growth slowed.

Reuters:   Oil prices fell for the fourth day.

Reuters:   The euro hit record lows against the Swiss franc.Reuters:   Microsoft Corporation killed its Kin phone.

Reuters:   Amazon.com (NASDAQ: AMZN) launched a less expensive Kindle.

Reuters:   Google Inc.’s (NASDAQ :GOOG) operating license in China is under review.

Reuters:   Amazon will buy online store Woot.

WSJ:   China’s banks are trying to find a source of earnings beyond lending in the People’s Republic.

WSJ:   GlaxoSmithKline (NYSE: GSK) has set up a number of small biotech units.

WSJ:   Democrats on a panel set up by Obama said spending cuts would have to outweigh taxes to drop the deficit.

WSJ:   Toyota (NYSE: TM) found engine problems in 270,000 cars

WSJ:   Wellpoint cut back rate increases.

WSJ:   Federal authorities began a crackdown on film piracy.

WSJ:   Robert Benmosche, CEO of American International Group, threatened to resign again.

WSJ:   Yahoo! Inc. (NASDAQ:YHOO) said it would buy back $3 billion in shares.

WSJ:   Moody’s may downgrade Spain’s Aaa rating.

WSJ:   The financial reform bill would cut FDIC charges for some small banks.

WSJ:   JAL will ask for more funds to operate in bankruptcy.

WSJ:   GM is expanding the launch of its Chevrolet Volt battery-powered car.

WSJ:   The WTO condemned subsidies offered to Airbus by European nations.

WSJ:   Warner Music (NYSE: WMG) and MTV will team up to market songs.

WSJ:   The SEC said that pension funds may not seek political contributions from politicians that oversee them

NYT:   Documents show Goldman Sachs Group put pressure on American International Group to make insurance payments.

NYT:   The TARP could be phased out early.

NYT:   During Q2 the DJIA was down 10% and the S&P 500 by 12%.

FT:   Manufacturing growth slowed in Asia.

FT:   The EU agreed to harsh guidelines for banker bonuses.

FT:   BP plc is trying to raise more money.

Bloomberg: Boeing (NSYE: BA) may get a lift for its Air Force tanker bid from the WTO censure of Airbus.

Bloomberg:   Apple Inc. (NASDAQ: AAPL) was sued by consumers over iPhone reception charges.

Bloomberg:   Google’s Chinese plans may push more advertisers to Baidu (NASDAQ: BIDU)

Douglas A. McIntyre

The tax, which would impact the largest banks in America and many hedge funds, would go to pay for part of the cost of financial reform. It could also be used as a buffer against future bank failures which were paid for by the TARP–taxpayer money–in the recent financial crisis.The new plan to cover past expenses of the bailout will probably be covered now by ending the TARP and putting money from the fund into the hole that the $19 billion would have filled. The FDIC may also increase what it collects from banks to help create the pool of capital.

The primary objection to the fund, voiced by Massachusetts Senator Scott Brown, is that the fees charged to banks would impair their ability to make loans to small businesses and individuals. Banks would hoard money to cover the cost of their payments to the government.

Money given by the government to help the government money taken to support reforms have similar effects. Money passed to banks by the TARP was supposed to increase their appetite for making loans. That did not happen. Taking money from the banks is likely to depress lending further, although it is hard to imagine that lending practices could get much worse.

Brown may be right, but for the wrong reasons. There may be no circumstances, at least as the economy still sputters, that banks will make loans at all.

Douglas A. McIntyre

Via MarketWatch:           The sweeping Dodd-Frank bank reform bill was amended Tuesday by a joint House-Senate conference committee to change the way the bill is funded, in order to address the objections of several key Republican senators.

Under the proposal by Connecticut Sen. Chris Dodd, the projected $19 billion cost of re-regulating the financial system and paying for the possible liquidation of a large bank would be paid with unspent funds in the Troubled Asset Relief Program and by an extra premium charged to large banks by the Federal Deposit Insurance Corp.

The amended bill will now go House and Senate for their approval. Democratic congressional leaders hope the bill can be passed this week.

The Congressional Oversight Panel’s May oversight report, “The Small Business Credit Crunch and the Impact of the TARP,” finds that, although the Troubled Asset Relief Program (TARP) has launched several initiatives aimed at restoring credit availability, it is not clear that they have had any significant impact on small business lending.

From 2008 to 2009, lending to small businesses fell 9%. Overall lending portfolios only dropped 4.1% according to the report.

The panel attacked Treasury’s plan to offer $30 billion to small and midsized banks to encourage lending. The capital would carry a below average interest rate. COP says that the program will take a long time to approve and may be an administrative mess.

Banks can’t be given incentives to make small business loans. The government will have to force their hands. No financial firm is going to extend credit to companies on which it believe it will make a loss. The FDIC examiners are too close at hand

Douglas A. McIntyre

Douglas A. McIntyre

What the approaches fail to contemplate is that a liquidation by its nature may require government funds and that those funds may never be returned to taxpayers.

Another possible program that may address bank failures is a fund, paid for by the banks themselves, to cover the costs of winding down institutions. The fund would be as large as $50 billion and might have other uses including paying back past losses from the TARP program. But, the pool of capital will take several years to fund, if it is derived from a levy paid for by the largest banks. That means that its effectiveness may not exist short-term

The current debate about how another credit crisis might play out does not acknowledge that some amount of taxpayer money is always necessary in these events. That was true in the S&L crisis and also the Asian credit crisis in 1997. Aside from the US capital in the IMF, which had to loan money to Asian sovereign nations, the Fed paid for a bailout of some financial institutions like Long-Term Capital Management which were likely affected by the economic crisis there. That bailout totaled $3.6 billion. The federal government provided as much as $125 billion in aid during the S&L debacle.

One of the results of most US credit crises is that the taxpayers get much of their money back, eventually. That was certainly true with the TARP fund. Even though that money  has been recouped, Americans were at risk for paying huge sums, which would cause either higher taxes short-term or in the futures as bailout ripples cause future deficits.

The Senate cannot create a failsafe system to handle another bank crisis which takes down firms like Wachovia and CountryWide. The need for capital in a similar situation would almost certainly be beyond $50 million, and the mechanism that would be created to collect that capital is set up so that it will not be appropriately funded anytime soon.

Douglas A. McIntyre

The report has three important highlights. The first is that GM has pension obligations to 702,387 people and Chrysler to 254,644 people. The second is that GM’s pension contributions were $13.6 billion underwater at the end of 2009 and Chrysler’s were short by $13.4 billion. The third is that the GAO forecasts that GM will have to put $12.3 billion into its pension plans to have them fully funded by 2015 and Chrysler will have to add $1.3 billion.

What the report says little about is that the two car companies may not have the money to put into the funds.

GM expects to make money in the second half of the year and may even have an IPO before 2011 to pay back part of its $50 billion of obligation to taxpayers. Chrysler management says the company will break even this year. The conditions of the economy will determine whether either firm’s forecasts are right. The state of unemployment and consumer access to credit may undermine their abilities to hit the lofty goals.

The two American car companies also face an unprecedented wave of discounts and rebates driven mostly by Toyota’s (TM) efforts to keep its current customers and bring in new ones. These efforts brought Toyota’s domestic market share back above 16% in March after it had fallen close to 12% in February. The cause of February’s low number was, of course, the after-shock of the Japanese firm’s recall of 8.8 million cars worldwide for brake and accelerator problems.

Whatever Toyota’s reasons for aggressive pricing, Detroit’s three companies are matching the discounts model-by-model to keep their own market shares from slipping. GM, Chrysler, and Ford (F) can ill-afford the damage to their revenues. Toyota, however, can easily afford to continue discounts.

The chance that GM and Chrysler may not be able to fully fund their pensions in the next five years means that the federal government will have to consider aid to these funds. The prospect may be unpopular with taxpayers, but labor often votes for Democrats and the Presidential election is not as far off as it seems.

The bailout of Detroit may not yet be over.

Douglas A. McIntyre

The major banks in Ireland face a 32 billion euro shortfall as the “bad bank” begins to buy their distressed assets. The National Asset Management Agency, aka “the bad bank” announced it would buy 16 billion euros worth of loans for which it will pay only 8.5. billion euros. As the FT commented, “The Irish government, which has already nationalised one bank, Anglo Irish, is now widely expected to end up as the majority owner of every big bank in the country, bar Bank of Ireland.”  The sale of the bad part of their balance sheets to the NAMA leaves them low on capital and fundamentally unable to function without a money infusion. The government is the only source.

Ireland has not stopped its national restructuring with the banks. It also means to cut the pay of public workers and other expenses to get it below the EU mandated ratio of deficit to GDP. The Greeks should be so disciplined.

The American government decided more than a year ago that its investments into banks would be temporary and done largely though the TARP. Although many small institutions which received TARP money will never pay the government back, the largest banks like Citigroup (C), JP Morgan (JPM), Goldman Sachs (GS), and Bank of America (BAC) have repaid their obligations back in full and the Treasury should make profits on these investments through the sales of warrants and common shares. The taxpayer will net  about $8 billion from a planned sale of the government’s stake in Citigroup.

It is too early to tell whether the Irish made the right decision. Many bank analysts believe that the large American banks still have too many commercial loans and too much  consumer debt on their balance sheets. These analysts say there will be another day of reckoning for US financial firms. That point of view has many doubters, but no one can forecast the economy and the results that a bad downturn in GDP might have on the loans that banks gave out two, three, and four years ago.

The taxpayers may yet get a larger share in American banks than they anticipated.

Douglas A. McIntyre

Bank analyst Dick Bove, normally a pessimist about the shares in large money center banks, recently said that he expects bank stocks to quadruple by 2012.  “The catalyst is the reduction in loan losses. That’s all that investors in banks care about,” he told BusinessWeek on March 24.

Citi’s total market cap is $122 billion now, which gives taxpayers a stake valued at $33 billion. The value of that stake would be $131 billion if Bove’s forecast proves true for Citi. The investment base that the government has in the firm, the value of its initial investment, would be a lower part of Citi’s shares if the stock was near $15. That would mean that the taxpayer’s return on the government investment would be leveraged even higher than a four fold increase in the value of the public shares.

The government’s argument for selling the shares now may be that future events could take Citi’s share lower. But the Fed and Treasury know more about the Citi  balance sheet than analysts or investors, so a sales now represents a vote of “no confidence” in the bank and the credit markets.

Treasury could wait two years until Citi’s earnings have rebounded completely. A sales which brings taxpayers $130 billion from Citi’s shares, less the government’s initial investment,  is a significant portion of the entire investment made by the TARP into American banks.

Douglas A. McIntyre

The problems with mortgage defaults and foreclosures will get worse. In the final quarter of 2009 mortgage defaults increases for the seventh consecutive quarter.  The percentage of current and performing mortgages fell to 86.4% as of December 31, a decline of 0.9% from the previous quarter.  This drop was due to the 21.1% increase in mortgages 90 or more days past due.

The rise in seriously delinquent mortgages was most significant among prime borrowers.  This group increased by 16.5% during Q4 2009.

The Adminstration has come up with a way that it believes will substantially alter the housing market by eliminating some part of the pool of loans that is likely to default in the future. The Washington Post reports that the proposal would mean ”banks and other lenders would have to reduce the payments to no more than 31 percent of a borrower’s income, which would typically be their unemployment insurance, for up to six months. In some cases, administration officials said, a lender could allow a borrower to make no payments at all.” Some unemployed homeowners could potentially go months without having to make a single payment on their home loans.The government may also encourage banks to bring down the balances on mortgages that are over 15% underwater.

The Post reports that lending institutions would be paid well for handling loan modifications. The amount would almost double what the government pays financial firms for the service now. The FHA would be asked to help underwater borrowers as well according to the Post. The balance of the details about how the program will work are not available, or, more probably, have not been worked out. The one thing that is clear about the White House plan is that it will be funded from the TARP facility, the same $700 billion program that saved the financial industry as the credit crisis grew.

The fight over the program will be bitter, but not nearly as bitter as the fight over who will have access to reduced mortgage payments, especially if the monthly obligation can go to zero.

This is the latest of a number of programs to prop up the value of American real estate which have been proposed by the Administration. The largest is the $75 billion lending facility set up to support home loan modifications. The theory behind this version of the series of bailout plans is that offering homeowners lower monthly mortgage payments will encourage them to continue to live in their current residences. This in turn will slow the number of foreclosures, stabilize neighborhoods in decline, and puts a floor under falling home prices.