Too Big to Fail is a Red Herring

TARP Revisited: Banks “Too Large to Fail”- A Red Herring

by Elliott Morss, Morss Global Finance


Remember the Troubled Asset Relief Program (TARP)? Initiated in 2008 to bail out the US financial system, it is still around. In this, my fifth review of the program, I note that most of the money lent out has been paid back. And with the capital, interest, dividends, and warrants paid back, at least the bank-bailout part of TARP will do more than break even.

However, a number of problems remain. Of the 753 banks that originally borrowed from TARP, 319 have not yet paid the Treasury back. Why not? Remember that all banks are now paying 9% for TARP money. Banks in good shape can borrow at much lower rates. Draw your own conclusions. But it gets worse: 242 banks have missed scheduled dividend/interest payments to TARP. And there are 43 banks that have missed 10 or more scheduled payments.

I start with an overall status report on TARP. I follow with a more detailed review of the banks that still owe TARP money. I conclude with why the “too big to fail” concern is a red herring.

TARP in Sum

There are plenty of reports on TARP. The US Treasury has to make monthly reports to Congress. The Office of Management and Budget (OMB) must make semi-annual reports, and the Congressional Budget Office (CBO) must make an assessment of each OMB report within 45 days of its issuance. Table 1 is the most recent summary from the Treasury.

There will be no further disbursements from the bank support part of TARP. As Table 1 suggests Treasury estimates that overall, the bank support program will make almost $15 billion. However, that part of the program going to smaller banks is projected to lose nearly $3 billion.

The Congressional Budget Office estimates that $431 billion of the $700 billion initially authorized for the TARP will ultimately be disbursed, including $14 billion in additional projected disbursements (mortgage programs – $11 billion and the Public-Private Investment Program (PPIP) – $3 billion). The CBO’s estimated final cost for TARP is lower than Treasury’s – $24 billion.

Source: US Treasury (Click table to enlarge)

Of course, running a program as large and as complex as TARP is costly. By the end of July, direct hires had cost $99 million and contracts with financial and legal firms have been $713 million.


At one point, the US government had committed $180+ billion to bailing out AIG. Why such concern for an insurance company? The concern had nothing to do with saving the insurance industry or AIG in particular. Rather, AIG had foolishly insured large amounts of risky “financial paper” that equally foolish banks had generated. If AIG had failed, the banking crisis would have been much worse. The US Treasury estimates AIG support will end up costing $3 billion, OMB estimates $22 billion, and the CBO estimates $11 billion.

But note: at the time banks were trying to collect on their losses from AIG, its staff was telling Treasury Secretary Paulsen that they could probably negotiate payments down to 60 cents on the dollar. Why? Because AIG was effectively bankrupt. Paulson said no: pay them the full amounts. Why? One can only speculate. But that decision meant AIG paid banks $43.6 billion on insurance claims, including $12.9 billion to Goldman Sachs. That would have been $26.2 billion at the 60% payout rate for a savings of $17.4 billion.

Automotive Industry

TARP paid out almost $80 billion to GM, Chrysler, and their financing entities. CBO estimates the total cost will be $20 billion while Treasury estimates $25 billion. The government retains about 33 percent of GM’s equity. The Treasury has no remaining investment in Chrysler, having sold all of its shares on July 21, 2011, for $560 million. TARP provided $19 billion to GM’s financing arm – GMAC (General Motors Acceptance Corporation) now Ally Bank. It now owns 74% of Ally’s equity.

TARP Banks

  1. a. By State

Data on banks that still owe TARP money are presented in Table 2. They are ranked by the total owed as a percent of the state’s total deposits. Puerto Rico leads all states by far. Beyond that, all regions are represented except the Northeast and the West.

Sources: US Treasury and FDIC

  1. a. Banks with Largest Outstanding TARP Balances

As mentioned earlier, 319 banks still own TARP money. And of that number, 303 have not even started to repay their debts. The ten banks with the largest debts to Treasury are given in Table 3. The banks in bold have also missed interest payments on their debts.

Source: TARP, Oct. 17, 2012 report.

  1. a. Banks That Have Missed Interest/Dividend Payments

Every bank that has borrowed from TARP has an agreed-upon schedule for interest or dividend payments. 242 banks have missed scheduled payments. The 15 banks with the largest outstanding balances of missed payments are presented in Table 4, along with the banks that have missed 11 or more scheduled payments.

Source: US Treasury (Click table to enlarge)

  1. a. Conclusions

It is notable that this list includes large and small banks. Small banks gambled with depositors’ money as did large. Probably a good idea to avoid these banks, both as a depositor and investor.

Why Banks “Too Big To Fail” Is a Red Herring

There has been considerable talk and writing about down-sizing the largest banks. But this TARP review indicates it is not only the largest banks that gamble with depositors’ money. Many small banks do as well. The primary objective of bank reform should be to protect depositors’ money. Let’s focus on this objective. In order to protect deposits, no bank, large or small, should be allowed to engage in risky business dealings. What should this mean? As I have written earlier, limit Federal (FDIC) bank insurance to those that:

  • Manage their own loans and
  • Earn less than 10% of their income from trading.

Bankers’ incentives change when, instead of managing their own loans and being dependent on repayments for survival, they sell them off for a commission. Trading is too dangerous for depository institutions, and no amount of bank regulation can deal with this.

6 replies on “Too Big to Fail is a Red Herring”

  1. That’s a terrific idea, to limit FDIC insurance to banks that manage their own loans and earn less than 10% of their income from trading. However, I don’t see why we shouldn’t focus on TBTF as well. TBTF allows megabanks to have concentrated lobbying power and the potential for multibillion-dollar bailouts. These banks also likely suffer from the effects of diseconomies of scale, with so many departments doing so many different activities under one roof.

    TBTF and safeguarding against gambling with derivatives don’t need to be exclusive from each other.

  2. Is my information correct? … I have heard that a great deal of tarp repayments are nothing more than government endorsed commercial paper. Thus those who receive the bailouts are enabled to obtain low interest loans in the open market because the paper is kissed by the federal govt. Govt then marks the loan paid in full while we taxpayers are still liable for the funds obtained in this way.

  3. 1) FDIC is for the account holders, NOT the bank registering the account!

    2) regarding TARP, why on EARTH does an issuer of fiat currency need any of it’s currency back? Answer: it doesn’t, quite obviously.

    The ONLY rational purpose for TARP is to serve some public purpose, such as preserve public health, preserve national capabilities, or increase general welfare of the people (i.e, the REAL metrics that constitute the budget of a fiat currency issue).

    Did TARP serve to buffer the real economy from the fraud executed in the fiat finance industry? No? It only served to help the finance industry bugger the real economy?

    Will you re-do your TARP grading using REAL, not fiat metrics? Thanks in advance.

  4. Some industries are doomed to fail. It is only health to let the weak die and let the strong continue to grow. Look at what has happened to Japan. Because the Japanese government is supporting its corporations, Japan is still in recession after 20 years. Let the economic cycle takes its own natural route. It will be painful in the short term but in the long run, it only means a stronger economy with companies that can compete.

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