2/18/09

Shocking bank factoid of the day

Fascinating op-ed in NYT today that points out something I had not been aware of - the TARP money went to bank holding companies, not the bank subsidiaries themselves, which seems like an enormous benefit to shareholders and incumbent management but not at all a way to assure capital adequacy in the actual banks. Highlights:
While TARP has been generous with bank holding companies, these companies have not been so generous with their banks. Four large holding companies — JP Morgan, Citigroup, Bank of America and Wells Fargo — initially received a total of $90 billion in TARP money in the fall, but by the end of 2008 they had contributed less than $15 billion in equity capital to their subsidiary banks....[This] means that when it comes time to recapitalize banks there is a bigger hole to fill, and when banks fail there is less capital available to meet the government’s obligations to insured depositors and other creditors. Keeping money at the holding company may benefit its shareholders, but it is costly for taxpayers.
If there's a credible rebuttal I'd like to hear it. Otherwise this looks like (yet) another source of justifiable outrage in the way the bank bailout has been structured to date.

1 Comments:

Blogger Kev said...

I am probably betraying my ignorance here, but could some of this have to do with notion that the troubled assets - the CDOs, SIVs, CDSs, IOUs, SUVs, IEDs, etc. - are held at the higher levels and not within the individual banks?

I recall WSJ reporting that AIG's problem was predominantly at the parent level; the various subsidiary companies were prevented by their respective state regulators from funneling their reserves upward to cover the losses at the top. When AIG corporate was being nationalized, the state companies were still solvent. (I am not complaining about that practice, by the way ... the actions of the state regulators protected traditional AIG policy-holders.)

With AIG, the subsidiaries were doing fine writing traditional policies but the parent company was writing the credit default swaps et al that put it at such risk - especially once Lehman went under.

Could it be that the subsidiary banks in this case have more stable portfolios than the parent companies? Could some of this funding be required at the corporate level to Spackle over the gaping holes in the ivory towers?

February 18, 2009 at 5:39 PM  

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