Jeremy Warner: Unpopular Tarp gets Obama treatment
Tuesday 03 February 2009
Like everything else devised by the Bush administration, the $700bn Troubled Asset Relief Programme (Tarp) for bailing out the US banking system is being rethought.
Congressmen had to be warned that the financial system would collapse, and to be promised all kinds of pork-barrel projects, before they were persuaded to vote it through.
Yet it was never entirely clear what they were signing up for, and anything that bails out greedy Wall Street bankers was always likely to be deeply unpopular. Most of the money so far paid out seems to have found its way straight into bankers’ back pockets in the form of hefty bonuses.
The original concept was to use the Tarp for buying up toxic assets from the banks, or a classic “bad bank”
approach. The flaws in this approach fast became apparent. Which assets should be bought, what prices should be paid, and was $700bn ever likely to be enough to clear the banking system of its toxic debts?
The money was therefore switched to recapitalising the banks instead.
This self-evidently hasn’t done the trick either. So is it back to the original “bad-bank” approach? Whatever the President’s new Treasury scheme comes up with, they want the package to be seen as comprehensive and properly thought out this time around.
The measures are therefore likely to contain a whole range of different initiatives, including bad bank and an asset-protection scheme provisions.
This will once again allow Gordon Brown, the British Prime Minister, to claim he has led the world in sorting out the banking crisis, since the new approach will broadly mirror what the UK Treasury has already announced in the UK.
The beauty of the asset protection, or insurance, approach is that a premium can be charged for the privilege and it doesn’t actually cost the taxpayer anything in terms of upfront payments. The government is only on the hook if the quality of the loans continues to deteriorate.
Yet it is not really Gordon Brown’s idea. Asset protection has already been used by the US Treasury to underwrite a number of individual banks, including Citigroup and Bank of America. What does seem clear from everything Barack Obama has said over the last week is that, whatever form the new arrangements take, they will be linked to root-andbranch checks on bankers’ pay.
No formal arrangements have yet been put in place in Britain for limiting pay. Both the Treasury and the FSA have deliberately shrunk from direct intervention in a snakepit they know would be practically impossible to control in any kind of equitable or meaningful way. But that’s not going to stop them trying on the other side of the pond.
Second thoughts on BP chairman Will Paul Skinner ever make it to the chairman’s suite at BP?
Hewas all lined up and ready to go, and in preparation had even resigned his present berth at Rio Tinto, which he is due to vacate in April.
In the last week, however, certain major shareholders in BP have questioned the appropriateness of the appointment, forcing Peter Sutherland, the present incumbent, to indicate that he may have to stay on longer while an alternative is sought.
What’s caused shareholders to cut up rough? Mr Skinner stands accused of two major strategic errors while at Rio Tinto. The first was to pay $40bn in cash at the top of the market for Alcan. With the credit crunch now biting hard, this has left Rio seriously overgeared. Many of the Alcan assets Rio had been planning to sell to pay down debt are now essentially unsaleable, or will fetch such low prices they will require massive writedowns.
Even Rio’s “good” assets wouldn’t fetch much in these markets and, in any case, their sale would so neuter the remaining company that Rio would lose much of its raison d’être.
Rio’s pledge to raise $10bn through asset sales this year is already looking undeliverable. Instead, the company has been forced to admit it may have to raise money through a rights issue, something which until last week had essentially been ruled out, or tap its major Chinese investor, Chinalco, for money either by issuing convertible bonds, or by selling stakes in core mining acreage, or possibly all three.
Rio’s mistake in buying at the top of the market is by no means unique.
Believing a super-cycle of ever growing demand was in progress, most big mining finance houses engaged in exactly the same process. The competition for Alcan was hot, and for a little while, as aluminium prices soared, the $40bn paid looked a steal.
Yet as often occurs in such cases, the “winners’ curse” eventually struck.
Rio won the auction, but lost the war when, abruptly, the cycle came to a gut-wrenching end.
Perhaps worse, Rio stands accused of buying Alcan for essentially the wrong reasons, not as a strategically important consolidation, but merely as a bulking-up exercise to deter BHP Billiton, which by that stage had already privately approached Rio looking for a nil-premium merger.
And that was Mr Skinner’s second mistake. Eventually BHP bid anyway, but was soundly rejected by Rio. Had Mr Skinner and his board agreed the deal, it would have been much more difficult for BHP to withdraw, as it later did, citing the size of Rio’s debts in a falling commodities market.
Such key errors of judgement, critics claim, make Mr Skinner ill suited for the BP job. Well, maybe, but my guess is he will eventually get the post.
As a former Shell man, and by all accounts an exceptionally wise counsel on all the other boards he serves on, he would seem ideally suited to the position. BP is keen to have him, and unless instructed otherwise by its big shareholders, will almost certainly move ahead with the appointment.
In any case, it seems worth waiting to see the outcome of the Chinalco negotiations before casting final judgement. Perhaps Mr Skinner can salvage something from the wreckage with a strategic partnership with the Chinese that will serve Rio’s longterm interests well. We’ll see.
A good time to be starting a bank Good bank, bad bank, new bank.
It might seem perverse to say it, with the banking system on its knees, but there has scarcely been a better time to start a bank. Terry Smith, chairman of Tullett Prebon, reckons he could easily find investors to back such a concept, notwithstanding the losses they have sustained on existing banks, and when you think about it, he may be right.
The great thing about a new bank is that it comes unencumbered by the legacy of bad and toxic debt that has so poleaxed confidence in existing banks. If itwere set up according to strict guidelines on how deposits would be invested, it could quite quickly begin borrowing and lending in the normal way. Sadly, existing banks are excluded from this process because of lack of trust in the shape of their balance sheets.
It is not cheap to start a bank. The barriers to entry in terms of capital requirements and regulatory demands are formidable. A large bank may also require access to an extensive branch network, which is why the big supermarket groups have been active in entering the field.
Yet public trust in existing brands, always tenuous, has pretty much evaporated as a result of the credit crunch. Almost any Tom, Dick or Harry would seem preferable to the reckless way the incumbents have behaved with our money.
If Terry Smith doesn’t succeed, there’s always the new “people’s bank”. The Post Office is already proving a prime beneficiary of depositors’ loss of confidence in the mainstream banking system.
Time for some “managed protectionism”
The world is in the midst of a serious recession, but despite rising resentment as the ranks of the unemployed swell, it doesn’t have to turn into a protectionist rout. This would be the way of ruin.
Recession would fast turn into depression, and there’s no knowing where that would end.
Yet in these extraordinary times, some degree of protectionism is almost inevitable. Such is the seriousness of the economic correction that it may prove virtually impossible to hold entirely true to the free-trade ideal. Already, it is beginning visibly to crack. I’m not talking here about the imposition of 1930s-style import controls and tariffs. Any such notion must indeed be resisted at all costs.
But it is perhaps forgivable for nations to want to support through the storm their strategic industries, which in normal times would be perfectly viable, with subsidy, loan guarantees and other forms of government assistance. Already, the European Commission is sinking under the weight of applications for dispensation from the usual rules on state support.
At the present rate of progress, many industries and companies will die while awaiting decisions.
Let’s call it “managed protectionism”, but there is a clear need for the European Union to spell out what single-market rules and regulations might be suspended to deal with these exceptional circumstances.
There also needs to be a road map for their reintroduction when things improve. Any such suspension is plainly not ideal, yet if countries are going to do it anyway, it is surely better that it takes place according to agreed guidelines than unilaterally.
That way disaster lies
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