I'm diggin' up bones
I'm diggin' up bones
Exhuming things that's better left alone
- Randy Travis
Last Wednesday brought a wonderful data dump by the Fed as they complied with a congressional order to release the recipients of TARP funds. The website ProPublica provides a list of the recipients of these funds as well as the funds provided to Fannie and Freddie.
In summary, the government disbursed nearly $554 billion to 938 recipients and only $221 billion has been returned. To be fair, of the $333 billion still owed to taxpayers, $200 billion sits with Fannie, Freddie and AIG, leaving only $133 billion spread across the remaining dependants.
In addition, as bankers we know a dirty secret most casual observers do not: Many of these recipients were quite strongly encouraged to draw funds from the taxpayers at the time. The reason it seems was to disguise those institutions that really needed the funds.
In other words, the view was: Should Wall Streeters discover which of their herd were lagging behind, trading lines would be cut, loans would be called, and no amount of government infusion could save them. The resulting solution was to give money to everyone so the laggards could not be easily identified.
But take a closer look at this enormous list of participants. By this time, it is likely that those decoy recipients have returned funds — with a not inconsiderable vigorish attached. And yet the number of smaller institutions still on the dole is somewhat mindboggling.
If you click the link above and scroll about one-third of the way down to the $25mm mark, you will see that from $25mm below very few recipients have paid back their TARP money.
Primarily community banks, these institutions likely hold significant exposure to real estate loans in their local markets — both residential and commercial. In fact, it could be argued that the reason we haven't seen the commercial real estate bust many expected in 2010 resides on this page.
In addition, these banks are typically paying up for deposits in the broker market, whether they are money market deposits or CDs.
On the trading desk, we see offers of this paper from time to time where the primary pitch is FDIC insurance up to $250,000. But for our clients, who value liquidity over return, it seems folly to reach for a few extra basis points at the risk of having funds tied up in an FDIC liquidation, even if it may only be for a day or two.
When TARP was first unveiled, its goal was not necessarily to keep zombie institutions alive forever, whether they were large or not. But today, it seems to be doing just that. More to the point these smaller, obviously non-systemic risk institutions continue to be on the government dole.
So far in 2010, the FDIC has shut 149 banks* in a fairly consistent fashion throughout the year. Estimates of the eventual total range widely, but the fact is no one really knows where they will stop.
Taking all this together it seems evident, in my opinion, that investing in small community banks without significant due diligence and credit analysis may lead you on a path to the FDIC for repayment of some of your funds.
Instead, stay liquid, stay focused and stay principled in your investment strategies.
Nonfarm payrolls increased 39K for November, well below expectations for an increase of 150K. The disappointing number conveyed that the labor market continues to struggle as companies have limited their hiring. The unemployment rate rose to 9.8 percent, the highest level since December 2009.
Factory orders fell 0.9 percent in October, after increasing 3.0 percent the previous month. This was the first drop in four months, and may signal that companies are paring back investments in new equipment.
ISM manufacturing came in at 56.6 for November. Manufacturing in the U.S. has expanded for a 16th consecutive month. A reading above 50 signals growth. The manufacturing sector has been one of the few bright spots in the current economic recovery.
*As of November 30, 2010
The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or SVB Asset Management, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.
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