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TARP bailout investments next decade's financial implosion?
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The government invested about $200 billion in TARP funds through the end of last month, and the investments have apparently returned about 16% on an annualized basis.
In a post on the Wall Street Journal's Deal Journal, Heidi Moore looks at the numbers, which compare favorably to the returns of the less friendly--and more reptilian--private investment consortiums like private equity and hedge funds. Appropriately balancing her conclusion on a prominent "if," Moore writes:
If the [investment] keeps going the way it is, Secretary Hank Paulson will have leave a profitable legacy. More importantly, the government –which has already saved the banking industry and the auto industry — will prove itself to be the new “smart money” in the system.
However, that "if" entails costs that bring into question how smart the "smart money" really is.
The biggest cost behind the "if" is the initial charge to the economy from the events that lead to the TARP fund's creation. This is a cost I can't hang a number on, but the failure of numerous large institutions cost billions of dollars in shareholder equity alone. Tens of billions? Hundreds? Actually, you might need to bump it up an order of magnitude.
And now we see reports that last year's stock market losses left pension plans underfunded by $400 billion, reversing a $70 billion surplus at the end of 2007.
Beyond that, the cost in human suffering can't be quantified. Lost jobs, sizzled pension funds, shattered dreams. And watching banking executives collect huge bonuses after running their companies into the ground--priceless!
Clearly we are at a watershed for the stewardship of the nation's capital. And clearly there is a shift of socialistic hue taking place in some sectors, to the considerable relief of many who are justifiably appalled at the fiscal incompetence of many financial institutions and hedge funds. So now we will give the government a chance to demonstrate its capacity for incompetence. After all, what could possibly go wrong?
My view is that the TARP funds should not be viewed from the perspective of absolute return analysis. What is the cost of capital for this money? If its generation is dependent on massive losses to the economy elsewhere, the investments could ultimately be spectacularly bad ones, no matter how good the returns look in the short term.
It could be like robbing Peter to pay Paul--with an IOU.
Update: As of Feb. 5, there is compelling reason to believe the TARP investments have lost 30% since last year. Annualize that!
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