HSBC on the TARP

September 26th, 2008 8:07 pm | by John Jansen |

This is the summary page of a report by economists at HSBC on the TARP program:
*** A Leaky TARP ***
*** The US Financial Crisis and the Troubled Assets Relief Program ***
Please open the attachment to view the full document:

26 September 2008

* Even if TARP unclogs the system a bit…

* …it will not jump-start bank lending

* So policy makers will need to do more

We take a look at the top 20 US banks by assets and make a rough stab at
how much of their assets will be eligible for the USD700bn Troubled Assets
Relief Program (TARP), assuming it ultimately passes Congress in one form
or another. Although many of the assets should have only limited
impairment over the long run, we suggest that approximately USD3trn in
assets could feasibly meet the conditions required to be eligible to be
sold to the government, assuming Treasury Secretary Henry Paulson gets
wide leeway in deciding what assets to purchase. The bottom 80% of US
banks and the pure-play investment banks may have an additional USD1.5trn
of eligible assets, for a total of roughly USD4.5trn. The USD700bn TARP,
while helpful, would represent only 15% of this. We have our doubts about
whether that would be enough to unclog the financial system.

But even if TARP did have better-than-expected results, it will not
jump-start lending, as house prices appear likely to keep falling for some
time, TARP will not completely rebuild trust between banks, risk reduction
at money market funds still pose systemic problems despite recent
government investor insurance, and mark-to-market rules will still
increase capital needs even if TARP acts to reduce some strains. In other
words, the forces of deleveraging are overwhelming, and so the credit
will remain over the next few quarters.

As a result, the economy would be virtually stalled over the next year, we
forecast that the unemployment rate will rise to at least 7% in 2009, and
therefore core inflation is likely to fall next year. On a “cash-deficit”
basis, the budget deficit is likely to soar to USD1.2trn for 2009, we

As a result of this growth backdrop, more macroeconomic policy action is
still likely to be needed to stabilize demand in the form of more fiscal
stimulus, fed funds interest rate cuts to 1% with the risk that it goes
all the way down to 0%, and ongoing enhancements to liquidity injections
and other unconventional options. It’s not over yet.

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  1. 11 Responses to “HSBC on the TARP”

  2. By b on Sep 26, 2008 | Reply

    How A Clinton-Era Rule Rewrite Made Subprime Crisis Inevitable

    Terry Jones
    Wed Sep 24, 7:19 PM ET

    One of the most frequently asked questions about the subprime market meltdown and housing crisis is: How did the government get so deeply involved in the housing market?

    The answer is: President Clinton wanted it that way.

    Fannie Mae and Freddie Mac, even into the early 1990s, weren’t the juggernauts they’d later be.

    While President Carter in 1977 signed the Community Reinvestment Act, which pushed Fannie and Freddie to aggressively lend to minority communities, it was Clinton who supercharged the process. After entering office in 1993, he extensively rewrote Fannie’s and Freddie’s rules.

    In so doing, he turned the two quasi-private, mortgage-funding firms into a semi-nationalized monopoly that dispensed cash to markets, made loans to large Democratic voting blocs and handed favors, jobs and money to political allies. This potent mix led inevitably to corruption and the Fannie-Freddie collapse.

    Despite warnings of trouble at Fannie and Freddie, in 1994 Clinton unveiled his National Homeownership Strategy, which broadened the CRA in ways Congress never intended.

    Addressing the National Association of Realtors that year, Clinton bluntly told the group that “more Americans should own their own homes.” He meant it.

    Clinton saw homeownership as a way to open the door for blacks and other minorities to enter the middle class.

    Though well-intended, the problem was that Congress was about to change hands, from the Democrats to the Republicans. Rather than submit legislation that the GOP-led Congress was almost sure to reject, Clinton ordered Robert Rubin’s Treasury Department to rewrite the rules in 1995.

    The rewrite, as City Journal noted back in 2000, “made getting a satisfactory CRA rating harder.” Banks were given strict new numerical quotas and measures for the level of “diversity” in their loan portfolios. Getting a good CRA rating was key for a bank that wanted to expand or merge with another.

    Loans started being made on the basis of race, and often little else.

    “Bank examiners would use federal home-loan data, broken down by neighborhood, income group and race, to rate banks on performance,” wrote Howard Husock, a scholar at the Manhattan Institute.

    But those rules weren’t enough.

    Clinton got the Department of Housing and Urban Development to double-team the issue. That would later prove disastrous.

    Clinton’s HUD secretary, Andrew Cuomo, “made a series of decisions between 1997 and 2001 that gave birth to the country’s current crisis,” the liberal Village Voice noted. Among those decisions were changes that let Fannie and Freddie get into subprime loan markets in a big way.

    Other rule changes gave Fannie and Freddie extraordinary leverage, allowing them to hold just 2.5% of capital to back their investments, vs. 10% for banks.

    Since they could borrow at lower rates than banks due to implicit government guarantees for their debt, the government-sponsored enterprises boomed.

    With incentives in place, banks poured billions of dollars of loans into poor communities, often “no doc” and “no income” loans that required no money down and no verification of income.

    By 2007, Fannie and Freddie owned or guaranteed nearly half of the $12 trillion U.S. mortgage market — a staggering exposure.

    Worse still was the cronyism.

    Fannie and Freddie became home to out-of-work politicians, mostly Clinton Democrats. An informal survey of their top officials shows a roughly 2-to-1 dominance of Democrats over Republicans.

    Then there were the campaign donations. From 1989 to 2008, some 384 politicians got their tip jars filled by Fannie and Freddie.

    Over that time, the two GSEs spent $200 million on lobbying and political activities. Their charitable foundations dropped millions more on think tanks and radical community groups.

    Did it work? Well, if measured by the goal of putting more poor people into homes, the answer would have to be yes.

    From 1995 to 2005, a Harvard study shows, minorities made up 49% of the 12.5 million new homeowners.

    The problem is that many of those loans have now gone bad, and minority homeownership rates are shrinking fast.

    Fannie and Freddie, with their massive loan portfolios stuffed with securitized mortgage-backed paper created from subprime loans, are a failed legacy of the Clinton era.

  3. By UrbanDigs on Sep 26, 2008 | Reply

    wow…should we burn our dollars for heat?

  4. By John Jansen on Sep 26, 2008 | Reply

    No. Buy tuna and toilet paper and head to Idaho. I had a cup of coffee there and know the economist. He can be very thought provoking.

  5. By Terminal on Sep 27, 2008 | Reply

    Thought provoking indeed.

    One thought provoked in me, after observing that the earlier rescued have more beneficial terms in the unfolding crisis because of limits on resources, is that any action taken in haste without a view to a long term solution is likely to be at best wasted, at worst counterproductive.

  6. By Terminal on Sep 27, 2008 | Reply

    In view of the news emerging that the chief Wall Street beneficiary of the AIG rescue was Goldman to the current estimate of $20B, the question arises whether Mr. Paulson will complete his term of office?

    Certainly the focus is elsewhere this weekend, but if and when it returns to this transaction, his stay in office, even for a few more months, may become problematic.

  7. By John Jansen on Sep 27, 2008 | Reply

    This has been a saturday away from the computer. How did Goldman reap a $20billion benefit from the AIG affair?

  8. By Terminal on Sep 27, 2008 | Reply

    See Article by Gretchen Morgenson in NYT with title “Behind Biggest Insurer’s Crisis, a Blind Eye to a Web of Risk” Date online Sept.27 .

    Sorry, I tried including a link, but it didn’t seem to take.

  9. By John Jansen on Sep 28, 2008 | Reply


  10. By Michael on Sep 28, 2008 | Reply

    This argumentation that blames Clinton for the current crisis is without a doubt a least constructive and the most useless contribution I have seen towards solving the current crisis.

    You Americans are decadent enough to think that you can still quarrel over political nuances (after all, what really is the difference between Democrats and Republicans…come on), rather than working together to avoid a severe credit deflation.

    I like the US very much, and I hope (and pray)that you guys are going to get your act together.

    – A speechless European observer

  11. By anon on Sep 29, 2008 | Reply

    Finding people to blame is part of the process.

    And its not just this article that blames Clinton. Even the Village Voice (far from a Republican friendly paper) blames Clinton and Andrew Cuomo. I get tired of hearing people blame free markets for this mess, when the government basically caused the problem.

  12. By tulipbulb on Sep 30, 2008 | Reply

    A few days ago under the heading LEAKY TARP HSBC’s estimate of the face value of toxic loans was placed at 3.0 to 4.5 trillion. Does anyone know the size of the total pool of which these loans are a part o what percentage of bank asses they represent?

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