I think President Obama will soon need to ask Congress for more TARP funding, and that such a request will displace his legislative agenda for a while. Let’s do the math.
When President Obama took office, $387 B of the $700 B of available TARP funds had already been publicly committed. Here’s the breakdown.
|Banks — Capital purchase program||$250|
|Bank of Amrerica||$27.5|
|….GMAC(including $1B from UST –> GM –> GMAC)||$6|
|Term Asset-backed Lending Facility (TALF)for new securities for consumer credit||$20|
This meant that the Obama team had $313 B left to commit before reaching the $700 B limit.
Since January 20th, President Obama has made the following new commitments:
$50 B from TARP into housing subsidies — Note that this is just the TARP commitment. There’s other spending on housing, but it’s not from TARP.
$30 B more from TARP for AIG
$5 B from TARP for auto parts suppliers
$15 B from TARP to buy securities derived from small business loans guaranteed by the Small Business Administration
$80 B to further expand the TALF to consumer credit and mortgages
$75 B — $100 B for the new “Public Private Investment Plan” announced Monday, to purchase toxic loans and mortgage-backed securities from banks. They call these “legacy loans” and “legacy securities.”
That’s a total of $255 B — $280 B in new commitments.
Add that range to the $387 B we had committed, and you come up with a range of $642 B — $667 B already committed.
That leaves them $33 B — $58 B before they hit $700 B.
There’s some uncertainty around the $80 B figure to further expand TALF, because the Administration has been ambiguous about how big the new TALF would be in total. I’ll bet they’re scrambling this week trying to figure out what they actually meant.
They can create some wiggle room for themselves if they say that the $15 B for small businesses and the $5 B for auto parts suppliers are a subset of the $100 B (in total) for “consumer credit.” This uncertainty and ambiguity should not obscure the critical point: they’re almost out of money.
They have $33 B — $58 B before they hit the $700 B barrier. Let’s assume they do some hand-waving: “What we meant was …,” and redefine some of those previous commitments as overlapping and therefore non-additive. It appears to me that their best case scenario is they could have $100 B of room. My best guess is that they have less than $40 B of room.
Let’s look at what other needs they will face:
- The banking regulators are doing rigorous stress tests on the 19 biggest banks. Some of those banks are going to need more capital.
- The auto loans we (the Bush Administration) issued expire March 31st. If they continue those loans, then that $25 B remains committed. It looks like they will extend the loans, using at least a few billion more from the TARP. Let’s be optimistic and call it $5 B — $10 B. (If they instead provide debtor-in-possession financing, their initial outlay is probably more like $20 B.) I’ve written a separate series of posts on the Administration’s auto loan options.
- They need “dry powder” for unexpected bad scenarios, which seem to crop up every few weeks. You always have to worry about AIG needing more money, and unpleasant surprises could come from any direction.
- I assumed only $75 B for the direct costs of the Geithner plan. If they want to go to the top end of their range, that’s another $25 B.
- The ambiguity on the size of the TALF is an additional $50 B — $100 B question for TARP.
- I think the Geithner plan risks being too small to have the desired effect. Much of the informed commentary seems to agree with this judgment. If it is successful, they will want and need to put more funds into it. (I think this is their strategy.)
I would bet heavily against them being able to stay within the $700 B this year. It’s easy to imagine them approaching the limit within a few months. The auto deadline looms, and there will be pressures when the stress tests complete.
- The Obama Administration should produce an accounting of TARP commitments similar to what I’ve done above. It doesn’t have to be complex — a two-column table will do nicely.
- This accounting should show how the various consumer credit and TALF commitments overlap, if at all. It should also provide clarity to the markets about the sizes of various components of the TALF.
- The Administration should explain how much room they have left within the $700 B provided by Congress, what possible demands they anticipate, and what their game plan is for allocating the remaining resources. Secretary Geithner should be given tremendous flexibility to change this game plan as circumstances warrant, but should provide initial clarity.
- Congress should take the Obama Administration’s previous warnings seriously, and incorporate the possibility of a new TARP request into next week’s budget discussions. It makes no sense to build a budget and ignore that $250 B elephant over there in the corner.
I think the President will need more TARP funds soon. If he does, he’s going to have to go to Congress to get them. If this happens, it will overwhelm his legislative agenda.
In part two of this series I’ll show you that the Obama Administration has warned the Congress that this may be coming.
In part three (coming soon), I’ll give my views and recommendations.