July 29 2009|11.52 AM UTC

Stan Reybern

$700+ Billion Later, How Are We Doing?

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Despite scathing criticism, the $700 billion Troubled Asset Relief Program (TARP) is part of today’s reality. Therefore, it is now important to determine just what we, the taxpayers, have gotten for our money. We need to know how the bailed-out companies and institutions are performing now that the funds have been dispersed. It wasn’t an easy job, but we trudged through the murky swamps of vague press releases and media spin to get the unvarnished facts about post-bailout performance. Here is how various bailed-out entities are doing today.

The Still Struggling

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CIT

Many of the companies that received bailout money were unethical, poorly managed, or both. It comes as no surprise, then, that many of these firms are continuing to struggle after helping themselves to the public treasury. Foremost among these is CIT Group, the leading small business lender that took $2.6 billion in bailout funds last December. CIT’s financial picture has only worsened in the nearly seven months since, with USA Today reporting the firm’s stock had dropped 75% on July 16 following reports that the company would likely not be receiving more government money. Bankruptcy seems a likely near-future fate for the once-mighty lender, whose bonds were recently rated as “junk” by Moody’s, S&P and Fitch.

Citigroup

Citigroup has also seen better days, a recent spike in share prices notwithstanding. According to TheStreet.com, Citi’s stock has fluctuated in the $3 per share neighborhood all year, …”hampered by the arbitrage trade for much of this year where institutional investors and hedge funds have taken long positions on Citi’s preferred stock, while shorting the common stock.” Analysts have warned not to see the aforementioned recent spike as evidence of an enduring turnaround for the troubled bank, who is only months removed from nearly being forced out of its naming rights deal with the New York Mets by federal regulators.

BB&T Bank

BB&T Bank (whose chairman called the bailout a “ripoff” despite being forced to accept money from it by his board of directors) has not emerged from the post-bailout turmoil in very good shape. As WFAE.org reported on July 17, BB&T, “…fell below analyst expectations, reporting $121 million in net income, or 20 cents a share, for the second quarter of 2009.” WFAE goes on to note that, “…losses on home loans and the cost of paying back $3 billion in federal bailout money” were cited as reasons for the company’s struggling performance.

US Bancorp

It appears that Minneapolis-based US Bancorp has fallen on black days as well. The recipient of over $6.5 billion in bailout funds saw its earnings plunge 50% due to the company’s deteriorating credit quality, according to a July 22 Wall Street Journal report. The WSJ elaborates on the causes of US Bancorp’s troubled state:

“Losses from uncollected loans rose 18% from the first quarter, less than in previous quarters, and net charge-offs rose to 2.03% of average net loans outstanding from 0.98% a year earlier and 1.72% in the first quarter.”

General Motors

Of course, no discussion of failing post-bailout companies would be complete without General Motors. After taking more than $30 billion in TARP funds, the highly unionized automotive bellwether succumbed to bankruptcy, laying off over 20,000 employees. According to CNN Money, the events precipitating GM’s decline include “decades of market share losses” (GM now earns less than 20% of US vehicle sales) and crushing debt that “rose to an unaffordable $54 billion” prior to the bailout. CNN goes on to note that GM has emerged from bankruptcy as an entirely new entity, the old company having been removed from the Dow Jones industrial average in June.

The Seemingly Revived

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Goldman Sachs

Other companies have seemingly turned it around following receipt of bailout funds. First to mind along these lines is Goldman Sachs, which has come roaring back to prosperity after getting $10 billion in TARP funds. John W. Schoen of MSNBC opines that the investment bank obtained its unprecedented second quarter profit of $2.7 billion by picking up investment banking business from former competitors, such as the now-defunct entities Bear Stearns. Goldman Sachs has apparently also repaid all of the money borrowed from TARP.

JP Morgan Chase

JP Morgan Chase joined Goldman in posting strong second quarter profits, clocked by USA Today at, “…$2.7 billion, a 36% increase from a year earlier, with record revenue of $27.7 billion. ” USA Today attributes much of the company’s post-TARP success to the leadership of CEO Jamie Dimon, described as a “tough manager” who has been praised by President Barack Obama for, “… doing a pretty good job.”

Morgan Stanley

Less than a year after going on corporate life support with $10 billion in TARP dole, Morgan Stanley is ready to expand. The WSJ reported on July 29 that the company, “…has been hiring analysts in technology and health care, and plans to expand in financial services after reducing stock research costs. While the company has yet to turn a profit since accepting bailout money, the decision to add staff indicates that certain sectors of the firm’s business are on an upswing.

Wells Fargo

Time will tell if the momentum is permanent, but Wells Fargo posted a record second quarter profit of $2.58 billion, according to the San Francisco Chronicle. Revenue also spiked +28% to $22.5 billion, largely on the strength of Wells Fargo’s acquisition of Wachovia. While some analysts remain skeptical of the company’s long-term prospects, they have surprised many analysts with their 2Q success following the receipt of $25 billion in bailout money.

Northern Trust

Finally, Chicago-based Northern Trust has shored up its operations after receiving $1.5 billion from the TARP program, reportedly posting a net profit of $226 million (up 5%) according to Forbes. In remarking on the company’s apparent turnaround, Forbes states that, “…assets under management increased, revenue improved in some areas and investments reversed earlier negative trends.” It remains to be seen whether Northern Trust’s growth will continue, but current trends have pleased investors of the beleaguered firm thus far.

The overwhelming majority of bailout recipients still appear to be struggling. It will be several years (at the very least) before the banking/finance sector begins to recover as a whole. What the recovery of these few companies illustrates, however, is that shrewd aquisition, sound strategy, and tough leadership can take even debt-ridden, bailout-assisted companies into profitability sooner than expected.

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{ 1 comment… read it below or add one }

Angela Lovell July 30, 2009 at 6:25 am

I guess the band aid is only that. And it’s going to peel and fall off sooner or later.

There are of course always those that can succeed in the turmoil of economic uncertainty by taking advantage of others more weak and, in the case of the analysis above, creating a smaller community of investment options.

Whether that just perpetuates and itensifies the climate that caused the economic meltdown in the first place is open for debate, but I would venture that this unprecedented global bail-out is simply setting the
stage for the next one, which will be harsher and more catastophic than the last one.

Business as usual.

Sincerely hope I am wrong.

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