Jim Rogers calls most big U.S. banks "bankrupt"

The mechanics of the ‘direct cash infusion’ scheme must have involved taking the worthless MBS off the failing bank balance sheet and substituting cash, but how then get equity? Must have been a condition of TARP to cancel the CDS contract. Participating banks had no choice, either TARP or bankruptcy. They could also opt to fight for CDS performance in court but they knew CDS was a scam.

Except the direct cash infusion didn't take anything off the bank's balance sheet, it just bought preferred stock and warrants for common. No CDS contracts were canceled as a condition for taking TARP money. Many of the participating banks weren't facing bankruptcy and didn't need TARP money. As evidence, some are using TARP money to fund acquisitions.

Your comment applies to banks such as JP Morgan Chase. My comment was to banks such as CitiBank.

It is obvious that Paulsen is choosing which banks to win and which to lose.

Citi was in the ‘too big to fail’ category. Citi was facing bankruptcy and needed TARP. Cash from the new TARP funded preferred stock did not replace the cashflow that Citi once had when its MBS portfolio was performing. It likely invested this cash in treasuries or other fixed income securities to replace the lost cashflow.

If the CDS contracts in such situations were not cancelled in such situations as Citi, then it makes no sense what TARP is doing. It would not surprise me as many respected financial leaders have stated Paulsen does not know what he is doing except for choosing winners and losers. Then again Paulsen may know exactly what he is doing but is a good liar.

I am inclined to believe Paulsen is thrashing around without a handle on the effects of his actions. He needed to be led to taking ‘equity stakes’ rather than his initial idea to make a market for troubled (worthless) assets.

To me his language revealed that he is truly not the man for the job. In regards to switching his strategy of using TARP for bailing out banks to bailing our credit markets he stated recently to Congress that “Facts had changed and required adjustment”. Any good analyst would respond that “Facts never change, impressions change”. So Paulsen had the wrong ‘impressions’ meaning he never had the facts to begin with and may still not have them. So his is either a liar or a bit buffoonish.

Paulsen’s people state they prevented the banking industry from collapsing. That is true but they did not prevent the economy from collapsing. The banks are not loosening up much in their lending divisions even though there is a large queue of qualified borrowers. This liquidity freeze is stalling the economy.

As I said it is likely banks such as Citi are using the TARP funded cash for preferred stock to purchase treasuries and not to replace their lost cashflow from failed MBS holdings. So in an indirect way the TARP money is being cycled from the FED money creation through banks back to Treasury to keep Government funded. In the meantime the economy suffers which is why Pelosi and others are pushing the trillion dollar stimulus package.

It’s too bad we did not get transparency on the mechanics of this bailout. Lack of transparency was the culprit at the start of this crisis. And lack of transparency was what investment banks and Wall St firms wanted in order to avoid regulation.

I agree, of the first nine banks, Citi was probably the only one at real risk of failure. Several of the other first nine were reported to have had their arms twisted to participate, no one knows for sure, but speculation is that Treasury wanted to avoid a stigma that participating in TARP was an indication of failure.

If CDS contracts were canceled as part of the deal, it hasn't been reported anywhere. For most banks, canceling CDS contracts wouldn't make sense. They're more likely to be the buyers of coverage, not sellers. The banks' concern would be whether or not the counter parties are solvent.

I think TARP has been a flawed program from the start.

Your point about Citi is correct and points out one of the key flaws in TARP. The banks most likely to apply are the ones that need help. But they need the new capital to beef up their balance sheets so most of that money doesn't flow to the credit markets. For the plan to do what Paulson wants, strong banks need to participate. But if Treasury puts too many strings on the money, there's no incentive for them to play.

The banks that most need TARP can't do what Treasury wants them to do and the banks that can make it work won't play if Treasury tries to make them do what Treasury wants.

"The mechanics of the ‘direct cash infusion’ scheme must have involved taking the worthless MBS off the failing bank balance sheet and substituting cash, but how then get equity? Must have been a condition of TARP to cancel the CDS contract. Participating banks had no choice, either TARP or bankruptcy. They could also opt to fight for CDS performance in court but they knew CDS was a scam."

I suppose AIG had the significant chunk of outstanding MBS/CDS final "insured" obligations. That's what $150B if TARP went for and Paulson got a chunk of AIG in return. Didn't that stuff go on the market for 90%+/-, thus establishing some sort of base and market. Then they got out of future entanglements in that aspect of the business?

yitbos

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