October 3 is the first anniversary of TARP - the Troubled Asset Relief Program. You recall that the original intent of the bill was to purchase troubled assets from financial institutions to restore confidence in the credit markets. I had written when the act was proposed that it was doomed to fail. What was the price for the assets purchased? If purchased at market value, then it would do the institutions little good because it would still leave their balance sheets impaired. If purchased at a premium then the Feds would be stuck with an instantly underwater asset. In any event, it escaped me how all of this was to restore confidence. Of course, even the government soon realized the folly of its ways and quickly modified the implementation of the act - much to the chagrin of some legislators - to inject capital instead into failing institutions. I was actually ok with this if the capital was in the form of preferred stock. I favored the use of cumulative preferred where dividends were "guaranteed". If not paid then there would be an arrearage where the missed preferred stock dividends would all be paid prior to any payments to common stockholders. Of course, preferred stockholders do not have a vote or a direct say which seemed appropriate for the federal government. However, I was not surprised when the Feds decided to purchase common stock instead which gave this government entre into the decision making process at the largest financial institutions in the country. The president insists that he does not want to run the banks, he does not want to run the automobile industry and he does not want to run the insurance industry. Really? Then why is he? Have you heard a definitive exit strategy from the president? Neither have I.
Harold A. Black is professor emeritus in the Department of Finance, University of Tennessee, Knoxville having retired after 24 years of service. He has served on the faculties of American University, Howard University, the University of North Carolina - Chapel Hill and the University of Florida. His government service includes the Office of the Comptroller of the Currency and as a Board Member of the National Credit Union Administration. He also has served on the boards of directors Home Savings of America and its parent company, H. F. Ahmanson & Co., Irwindale, California prior to its merger with Washington Mutual Savings Bank, on the board of New Century Financial Corporation, Irvine, California, then the nation’s largest real estate investment trust and as director and later chairman of the Nashville Branch of the Federal Reserve Bank of Atlanta. He writes an occasional article for the Knoxville News-Sentinel at http://www.knoxnews.com/staff/dr-harold-black/. His web page is haroldablackphd.com