Tuesday, December 15, 2009

Tarp repayments

The question that I get asked repeatedly is: "If the banks are paying back the TARP money they must be doing great, right?" Well, not entirely.

The banks are repaying the TARP money through the issuance of new stock. They can issue this new stock because their stock prices have doubled or tripled since March. Why have their stock prices rebounded so sharply? In large part due to the Fed's purchase of mortgage backed securities, the loose lending by the FHA, the first time home buyer tax credit, mortgage modifications, accounting changes that allowed the banks to mask losses and trading gains realized by using capital from the Fed to fund trading operations.

Many of these programs may end next year and many mortgages appear to be teetering on the edge. I think the banks realize that next year could be another difficult year and if their stock prices get whacked they won't be able to raise the funds to repay TARP next year so they are rushing to get out now. For example, Citigroup has to issue 5 billion shares to raise $20 billion at it's current prices that represents about 20% of it's outstanding shares. If the stock falls back to $2, they have to issue 10 billion shares or suffer 40% dilution to repay TARP.

Can you imagine the controversy in Washington next year if the banks spiral out of control again are "Even BIGGER than too big to fail" as the NY Times put it today and come back to the taxpayer with their hat in hand in an election year?

A couple of news outlets keep running this story that sales of fresh Christmas seem to be ticking up this year. Perhaps there is a small uptick in the early portion of the season, but small samples sizes make this data hard to believe. Also, all of the data keep citing the units of trees sold, but given the increased market share of Walmart, Home Depot, and Lowes selling $19.99 6' trees, I'd guess that the total value of trees sold will likely be flat to down this year.


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