Ira Artman’s Sterling Slivers: Bait and Switch - TARP, the RTC, and Supervisory Goodwill

January 15th, 2009 · No Comments

                                           Please sir, may I have some more?

The Chairman of the Bank of America must regret his more than passing resemblance to Mark Lester, who played Oliver in the 1968 movie.

As reported in today’s New York Times, the bank recipient of more than $25 billion of TARP gruel:

  • …Is seeking billions more to shore up its balance sheet as it struggles with mounting losses [from a recent acquisition] …
  • “Private investors are no longer willing to pour in new money to the banks… The government is the only option if there isn’t time to earn the capital back…” [a banking analyst said].

              J. Creswell, The New York Times – Bank of America May Get More Bailout Money, 15 Jan 2009.

In trying to figure out how we got here, it dawned on me that the:

  1. Banking system has unwittingly (I think) made itself the victim of the greatest “bait and switch” scam in financial history; and
  2. This scam occurred right in front of our eyes when TARP changed from an asset purchase plan to a capital investment program.

We are fighting this economic war with the TARP that we got, which was not the TARP that we thought we had.

The TARP program that was passed by Congress, and signed by the President, was marketed to both the public and our representatives as an asset purchase program with the expectation that it would be acquiring mortgage related assets.

Press coverage suggested that TARP is most similar to the RTC – Resolution Trust Corporation – which was a government owned entity formed in the late 1980’s to liquidate assets acquired from insolvent S&L’s:

  • … Former officials [of the RTC] are helping their clients get a piece of the bailout money or the chance to buy, at fire-sale prices, some of the bank assets taken over by the federal government…

             E. Lipton & D. Kirkpatrick, The New York Times - Veterans of ’90s Bailout Hope for Profit in New One, 29 Dec 2008.

While this might be true if TARP were only investing in mortgage assets - it is not. TARP is ALSO providing banks with the capital they must have to operate or acquire other institutions in the absence of any private investor interest (as reported by Creswell, see above.)

As a result, the “TARP that we got” does NOT resemble the S&L era’s RTC. Rather, it is a reincarnation of “Supervisory Goodwill.”

“Supervisory Goodwill” such as that provided to Ben Franklin Savings in the 1980’s so it could acquire Equitable Savings, was a federally sanctioned accounting fiction that permitted solvent thrifts to acquire failed S&L’s at the government’s request.

The Supervisory Goodwill filled out the acquirer’s balance sheet so that the acquirer would NOT be immediately declared insolvent. In 1989, however, Congress retroactively disallowed Supervisory Goodwill. This forced the failure of most of the otherwise solvent acquiring institutions.

In our 21st century reincarnation of a Dickensian (i.e. exhibiting poor social or economic conditions) financial disaster, the “TARP that we got” has created dozens of banks institutions that are just as dependent upon TARP as the S&L’s were dependent upon Supervisory Goodwill.

Take the TARP capital or the Supervisory Goodwill away, and all fail.

I’m afraid to watch. I’ve seen this movie.
- - - - - - - - - - - 
I used to work with numbers for a living, but now I feel like I’m sitting in the dark, watching the flickering financial system as I  search  for a new job or at least my next idea. Till next time.


J. Creswell, The New York Times – Bank of America May Get More Bailout Money, 15 Jan 2009

E. Lipton & D. Kirkpatrick, The New York Times - Veterans of ’90s Bailout Hope for Profit in New One, 29 Dec 2008.

Romulus Films/Columbia Pictures -  Oliver!, Romulus Films, 1968.

Tags: Commentary · Ira Artman · Mortgage Market

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