Just as I was struggling to get a complete picture of all the TARP turds floating around, the NYTimes puts a comprehensive chart of the commitments from the FED and Treasury. The committed number is mind-numbing: $8T. This is way beyond the FED balance sheet which was .8T, a tenth. The difference is of course a monetary run-off. Spent is 1.5T. Click on the picture if you want a clear picture, the best macro picture I have seen so far (the only one). Commentary below.
Government as insurer, committed 3T spent .1T
This is the smaller spent number so far and the biggest committed. That is normal. This is essentially a default protection and the top number is therefore nominal. It is CDS given to investors in bank debt and money market debt. I was reading commentary that was surprised the spreads didn't fall lower on the guarantee of the US govts. Free lunch? Lots of arbitrage going on here. Only 70B has been eaten up in money markets.
Government as investor, commited 3T, spent .65T
Biggest spend investing in securities of the bank. This is pure capital injection. Includes TARP and commercial paper programs. This is the most direct observation of the subprime virus. CDO's had toxic tranches and even the senior ones turned out to be mostly worthless when Subprime started defaulting. 40% of mortgages issued in both 05 and 06 were subprime. This number is therefore not finished. A observer in the FT commented that effectively the government was taking "super senior" positions in the banks. The example of Citigroup, were the first 29B losses are absorbed by the lower tranches is essentially the equivalent of a CDO structure. Essentially transferring the horrendous liabilities to the government this is the most effective way to say "the virus buck stops here". With some mark to suspension of disbelief this investment may actually pay off in ... 50 years... The US govt is essentially the biggest hedge fund subprime security investor in the world, except it can't face redemptions... that is the point! L3 asset buyer of last resort.
Government as lender, committed 1.7T spend .6T
These are the various liquidity program, they are loans instead of equity/purchase of assets (as in above). In theory they rest above the capital structure above. All the lending programs fall in this category. Eventually the loans are repaid but when??? originate to repo was the scam going on in that fat category, sell whatever, post it as collateral, it is the new securitization.
I want to remain optimistic and here is why. The shadow banking beast started blinking (spreads coming down) on the news that 3T was committed. We are now at 7T. I do believe it is more liquidity than the beast warrants. The theory is to try to drown that one in liquidity. Critics warn of inflation risk, which I am not entirely sold on. More importantly the gambit here is that the government will not need to ACTUALLY SPEND that money, that the COMMIT is sufficient. It was also the theory for AIG but it failed, will it work at the systemic level? .
Stagnation of prices and economy would be a good outcome (StagStable scenario). If it doesn't work, then we got both risk of inflation if all that pent up liquidity unleashes at once (stagflation scenario) and deflation if it isn't enough to stem the deflationary tide (stagdeflation scenario: japan).
Here is where I am at.