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July 14, 2010

Did We Need TARP? A Lesson in Government Accounting

 “With the bailout going on two years old, the government is pulling out the propaganda machine to defend it’s involvement in the free market.  The government has no problem publicizing how it profited from the banks, but what you won’t hear is discussion about Chrysler, AIG, Fannie Mae, and Freddie Mac.”
Recently, the government reported that it has made (in profit) more than $20 billion from the TARP program.  The majority of this profit came from the big banks that turned to the federal government (and in some cases were forced) for capital during the financial crisis.  The government often uses the profitably of TARP to politicize that the bailout was profitable, however, let’s examine the facts beyond what the government is telling us.
The obvious question that strikes me is that if the federal government was able to extract $20 billion from the banking system in profits, how could the banks have needed the money?  The banks were not lending in the short period of time between taking TARP and paying it back, so how were the banks able to generate such a profit in a short period of time?
Interestingly enough, in the spring of 2009, the Financial Accounting Standards Board (FASB) changed the rules on how illiquid assets were reported.  Previously, they were reported as mark to market or the value for which they would sell for that day.  As the crisis deepened, the valuation of these assets plummeted which pushed most of the banking system into insolvency. 
The new rules allowed for auditors to use common sense methods to value these assets.  For example, an asset could now be valued based on the cash flow or returns it creates as opposed to its market value.  The auditor still has to document the method behind the valuation (to keep people from pulling numbers out of thin air).  All of the major business media outlets covered the changes in valuation rules (Reuters, Bloomberg, MarketWatch).
Within a couple of months of the valuation changes, ten banks were given the okay to pay back the TARP money.  Furthermore, Wells Fargo alone made billions in profits from the change in valuation methods.  After the changes to valuation methods, Wells Fargo was readily able to pay back the TARP funds.  Furthermore, the Wells Fargo chairman was less than enthused about the usefulness of the TARP program.  All of this information begs the question, did we need TARP?
By the way, if you’ve ever wondered where mark-to-market accounting came from, thank your Congressman.  Sarbanes-Oxley mandated mark-to market accounting for publicly traded companies.  Mark to market is simply another consequence of “good intentions” from the federal government.
For those in the government who are prepared to call the taxpayer bailout a victory, the facts also need to be examined further.  The $20 billion profit does not include the $180 billion investment in AIG and the $400 billion plus committed to Fannie and Freddie.  I bet there are CEOs out there who wish they can report profits on only the operations that are doing well and sweep the others under the rug.  Unfortunately for them, only the federal government is authorized to do that.

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