Wednesday, October 1, 2008

What's TARP worth?

If TARP2 goes through (90% probable?) the US Fed and Treasury may (or may not) come clean on immediate gains to the public finances. There are very direct gains for the public purse and the banks, and generally in the markets. When the bailout was first mooted markets jumped 8%. What happens when TARP passes - maybe a 5-10% jump today (despite recession news)and more after Friday? The staggering of the decision may work well by frustrating the stock markets from rising too sharply too quickly, but there is also a risk that TARP loses some of its confidence-boosting effect.
I totally disagree with the privatising and socialising of gain and loss type 1-dimensional arguments. To repeat an earlier calculation, I expect the following minimum gains from TARP's $700bn and expect not all of the fund will be deployed this year.
Private sector, $650bn gain approx:
q $400bn gain to banks' troubled asset fair values
q $200bn capitalisation gain via banks' share prices
q $40bn avoided in 1% insurance hike on FDIC's $4tn deposits
Public sector, $530bn gain approx:
q $100bn avoided in 2% deposit insurance on insured mortgages
q $100bn 10% gain to AIG's $1tn assets (Federally owned)
q $ 85bn recovery of loan to AIG
q $160bn to bal. sheet of FM&FM $1.6tn assets/ $1.5tn liabilities
q $100bn 15% profit on RMBS etc. bought in by TARP
to which can be added other gains in tax, lower cost of borrowing etc.

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