April 24, 2009
Authored by: Robert Klingler
The Wall Street Journal Economics Blog has an excellent post by Jon Faust, the director of the Center for Financial Economics at Johns Hopkins University, criticizing Elizabeth Warren’s claim that the Treasury is only getting 66 cents in value for every TARP dollar spent.
Overall, the 66 cent myth is based on the assumption that markets were functioning normally, that the Treasury would pursue a panic sale, and that banks required no compensation due to risk of Congressional meddling.
These arguments are not revelations. Before Warren’s panel commissioned the market-value report, the Panel asked Treasury to perform this valuation. According to testimony, Treasury replied that the market valuation was not relevant. Indeed, Treasury agreed that the assets would be below par if valued at prevailing market prices but argued that the investments would be “at or near par” on a more reasonable basis.
Finally, Treasury reminded the panel that part of the value to the taxpayer was to come in “ensuring the stability of the financial system,” a factor that plays no role in market valuations.
Rather than evaluating these arguments, Warren complained that Treasury didn’t explain itself sufficiently well. Perhaps Treasury could have been clearer, but the basic ideas sketched above are not subtle. If Warren’s panel had insufficient expertise to understand these arguments, the investment bank it hired could easily have explained them.
In addition to these criticisms, as we’ve previously noted, Warren’s analysis uses a one-size-fits-all investment analysis, despite criticizing the Treasury for doing the same thing. The 66 cent figure is based on the value received by the Treasury under the TARP Capital Purchase Program exclusively for its investment in the first eight recipients of TARP Capital Purchase Program funds. While these entities have received the bulk of the TARP Capital Purchase Program funds, there have been over 500 additional recipients of these funds, many of which look virtually nothing like the original eight recipients, and about half of which have received TARP Capital Purchase funds under the private term sheet, resulting in a different investment vehicle.