McCaskill-Grassley Bill – Wanted: Managing Director for TARP I, LP

On November 19, 2008 U.S. Senators Claire McCaskill (D-MO) and Chuck Grassley (R-IA) introduced the McCaskill-Grassley Bill to provide additional oversight of the Troubled Asset Relief Program (“TARP”). The bill is designed to increase the power and better define the role of the Special Inspector General (“IG”). The TARP was originally established to purchase troubled assets (bad mortgages) from the flailing financial institutions. The TARP has shifted the programs focus to the Capital Purchase Program (“CPP”), effectively functioning as a private equity fund focused on PIPE (private investments in public equities) investments in out-of-favor industries, which in fact would be every industry in the United States.

With two main focuses, US tax payers may have to take the good with the bad. The bill will “expand the authority of the IG to cover any and all action conducted as part of the Troubled Asset Relief Program.” Currently TARP I, LP is doweling out its LP’s (tax payers) money with only a few investment considerations in mind: (1) limited executive compensation, (2) clawback provisions in place, and (3) no golden parachutes. Missing from the investment committee’s analysis are (1) Tier 1 Capital ratio, (2) asset growth rate, (3) deposit market share, and (4) return on tangible equity, too name a few. As previously mentioned, on November 1 of this year the CBO listed the first $135B in TARP related investments as having a net present value of -$17B; thankfully these investments are not carried at fair market value. Using the KBW Regional Bank Index as a proxy (which lost 25% form October 21 to November) the reported $-17B of TARP expenditures (negative investments) would stand at -$42B.

Additional oversight is necessary for the $700B TARP plan which equates to early 5% of US GDP. Here in lies the bad; the bill will also “give the IG temporary hiring power.” With a government’s P&L that looks strikingly similar to that of General Motors, the US Government is taking on G&A – a hiring binge that will inflate a bloated government. Oversight is important, but at what cost? Keynesians may find the additional government expenditures a demand side stimulus; a few Wall Street types can take their talent to the TARP. The demand side and supply side debate wages on, but both demand siders and supply siders would agree a better alternative would be to fund projects with long-term future benefit, namely infrastructure.

Post-Close work with a portfolio can help drive returns to LPs, but making good investments should be step one. Coupling some prudent oversight with more appropriate investment criterion (capital infusions in otherwise solvent banks) could provide tax payers with return on investment not simply a hope for return of investment.