Friday, May 15, 2009

The Truth Begins to Surface About TARP and Shovel-Readiness

Naked Capitalism posts tonight a missive about a TARP beneficiary in TARP Beneficiary Says "Sham" Bailouts Help Speculators. Here are excerpts, first from Yves Smith, the blogger and then from the speculator:

So far, the beneficiaries of the handouts equity injections have complained only about the Obama Adminstration's occasional efforts to act like a substantial shareholder and exercise some influence over the companies' affairs. We are the first to acknowledge that these too often have involved matters of appearance (executive pay) as opposed to substance (risk taking on the taxpayer dime for the benefit of shareholders and employees).

But now we have a salvo from an unexpected source: an investor who used TARP funds to buy a bank, and thinks taxpayers are getting ripped off. Mark Patterson, of MatlinPatterson Advisers, used TARP matching funds to buy a Michigan bank. This by no means was a large transaction, but the point is that someone that one would expect to praise the process (after all, he benefitted from its largesse) is a pointed critic. . . (Ed.: Now the speculator/beneficiary in an article in the Telegraph (UK)):

“The taxpayers ought to know that we are in effect receiving a subsidy. They put in 40pc of the money but get little of the equity upside,” said Mark Patterson, chairman of MatlinPatterson Advisers...

Mr Patterson said the US Treasury is out of its depth and seems to be trying to put off drastic action by pretending that the banking system is still viable.“It’s a sham. The banks are insolvent. The US government is trying to sedate the public because they are down to the last $100bn (£66bn) of the $700bn TARP funds. They think they’re doing this for the greater good of society,” he said, speaking at the Qatar Global Investment Forum.

Mr Patterson said it would be better for the US to bite the bullet as Britain has done, accepting that crippled lenders must be nationalised. “At least the British are not hiding the bail-out,” he said.

MatlinPatterson said private equity and hedge funds were deluding themselves in hoping to go back to business as usual after the trauma of the last 18 months.

“This is not a normal recession and there will be no V-shaped recovery. The crisis has destroyed leveraged companies. We’re going to see a catastrophic increase in the number of LBO’s (leveraged buyouts) going into default because they’re knee-deep in debt and no solution exists since they can’t refinance,” he said.

“Alpha hedge funds have been making their money by gambling with excessive leverage, so the knife that cuts off leverage is going to cut off their heads as well,” he said...

“The US government has thrown 29pc of GDP at this crisis compared to 8pc in the early 1930s. The Fed’s balance sheet has risen from $900bn to $2.7 trillion to bail out the system. America has to do it because the only way out is to debase the currency, but that is going to lead to some very high inflation three years down the road,” he said.

DoctoRx here now. The only thing in the above I would disagree with is the final statement that "the only way out is to debase the currency". Nouriel Roubini advocates, as I do, that debtors and lenders get together and cancel out as much of the debts as can be done. Barack Obama should be jumping on that theme. Avoiding debt deflation simplifies many, many matters and allows a balanced economy that should be "allowed" to grow at whatever pace is natural for it. Debasing the currency is a strictly political choice. It is not inevitable.

Below almost in its entirety is another piece from Naked Capitalism, reprinted here in its entirety as it has disappeared from the main NC page. Along with the above, which demonstrates problems with TARP (not to mention the even more abusive PPIP!), here is a discussion of practical problems with "stimulus":

Thursday, May 14, 2009

Not So Shovel-Ready Projects?

(Yves): Reader Harry H tells us that, at least in Vermont, shovel-ready projects aren't as ready to go as the very nature of the term would suggest. The Wall Street Journal described some reasons for delay back in March:

It turns out, though, that shovel-readiness is in the eye of the beholder. Soon after his visit, Mr. Biden found out that his model stimulus project wouldn't see a shovel for almost four more months, possibly longer, knowing how such timetables slip....

States are quickly assembling their construction wish lists. But it takes time to advertise for contractors, collect bids, check the numbers, pick a winner and get work underway. A typical paving project -- easy roadwork -- takes close to three months from the time the money is approved to the arrival of work boots on the ground, according to the American Association of State Highway & Transportation Officials. "It is not an instant process," says a spokesman.

(Yves again): However, an additional complicating (factor) appears to be the vagaries of the bidding process. (A Naked Capitalism reader) Harry H describes the local situation:

I was talking with a construction firm that was supposed to oversee a large ($9 million) civil project in VT.The bids on the project came in and there were 2 that were below $7 million. The $9 million was the engineers estimate. Take 20% off that, and that is roughly the cost of the work for the contractor, or $7.2 million. So the bids came it below what the costs for the project were likely to be.

This situation is very bad. The municipality does not want to let the work out if the contractor is going to go broke during the project, even with bonding it is a royal mess to have a contractor go bust in the middle, and to get someone else to go in and finish it is even harder. At the same time, getting rid of low bidders on government projects is very difficult. Lots of lawyers and obscure bidding laws, but it is possible to not let the job to the lowest bidder. It depends on law mostly, but smaller municipalities will usually throw out the entire bidding process, and start over in a few months. This is a simplification of the process, obviously. Lots of law behind the scenes that I only have seen in practice.

I have heard this is happening a lot, all of the "shovel ready" projects are not going anywhere because of bidding problems. This particular project was in a small town in VT, dig up main st and replace all of the water, sewer and gas line, and then re-do the entire road and drainage, as well as sidewalks. Very good work for a stimulus, lots of labor, as compared to say a new road.

(Back to Yves): The construction season is relatively short in the Northeast. If it doesn't get started soon, it will have to wait till next year. . .

DoctoRx here. The best-laid plans . . . gang aft agley.

The above demonstrates why this blog refers to ARRA of 2009 (i.e. the Obama "stimulus" plan) with quote marks around the word "stimulus". Supposedly only 5% of the ARRA funds have yet been disbursed. Along with waste and corruption, the rest of these funds are going to kick in when the economy is having a cyclical rebound without massive Federal debt. Oh, I forgot: a crisis is a terrible thing to waste.

But so is taxpayer money.

Copyright (C) Long Lake LLC 2009

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