Subsidy Rate Falls in new CBO Report on TARP

In a report released today, the Congressional Budget Office (CBO) lowered it's estimate for the total subsidy rate for the Troubled Asset Relief Program (TARP). The new report, which assess TARP transactions through June 17 lowers the subsidy rate, a measure of the amount of total outlays that Treasury does not expect to recoup, to 36 percent from 45 percent in it's March baseline. 

The reduction reflects improved market conditions and quicker than expected TARP repayments, including a repurchase of almost $70 billion in warrants by 10 major institutions earlier this month. 

New aid to homeowners has a 100 percent subsidy rate, as that program does not require repayment to Treasury.

While the overall prospects are encouraging, the auto industry shows little promise of repaying it's "loans." With the exception of the foreclosure plan, the auto industry assistance, with a subsidy rate of 73 percent is the worst expected return of any part of TARP. The estimates follow closely previous, disaggregated auto industry assistance subsidy rates posted on this blog in January.

New Citi Plan could reduce risk

Citicorp announced plans to increase salaries today. The plan raised the ire of TARP oversight chairwoman Elizabeth Warren.
Yet Warren, who testified to House Financial Services today in defense of the administration’s proposed Consumer Financial Protection Agency, is misdirecting her anger.

As CNN reported today, the Citi plan is not to make its employees richer. Instead the plan swaps bonuses for salary. While it may be strange to most, almost two thirds of compensation for financial industry workers is not in their salary but rather in bonuses. Remember the “golden parachutes?” None of that money was salary.

So the plan is about redirecting the type of payment. Bonuses have been blamed for making traders more likely to take excessive risk and focus on short-term profit. Shifting to salary should reduce those incentives. The plan makes financial analyists more like other workers, and they think less about how their actions contribute to the profit margin in next quarter's report. While theory suggests that employers care most about total compensation, the Citi move indicates that the type of compensation really does impact incentives and should be considered in business decisions.

The Uninsured are Young Men

The chart above is from new data released today by the US Census Bureau. The chart shows the percentage of people by age and gender who are insured. Amidst disccusion of universal coverage through a possible health care mandate, the chart above reminds us that Americans do a very good job of obtaining health care coverage. Almost 85 percent of Americans have coverage.

Those least likey to have health care coverage are the young. Yet even among men aged 20 to 24, the group least likely to be covered, 69 percent have coverage. A successful mandate could increase coverage in this group by no more than 30 percent. While some young people may want health insurance and cannot presently afford it. Young people do face significnatly higher unemployment rates (the rate for men 20-24 was about 10 percent in 2008 and reached over 16 percent in the first quarter of 2009). Given that employers typically sponsor health plans, low labor force particiaption may be a barrier for some. Yet many likely see themselves as healthy and are willing to take a risk by not having health insurance.

Thos who support mandates are most likely to point to the right side of this chart and point out that mandates have worked for older Americans. The coverage rate jumps from the high eighties to almost one hundred percent at age 65, the Medicare claiming age. Yet a Meicare-like option, where younger workers help support fees for older workers though payroll taxes, cannot be replicated upon younger workers—there is no one younger to subsidize them.

As the US demands less, can the world demand more?

A report today by the IMF, concludes with an advisory that the US should not be counted upon to continue as the “global ‘buyer of last resort.’”

This claim is by no means new. Yet coming from a multi-national development institution that has long relied upon the United States to provide a bulk of its funding it takes on new urgency. In particular President Obama pledged a new $100 billion US contribution to the IMF earlier this year. (I commented on the implications of this injection for IMF voting in a previous post.)

Yet it’s unclear which, if any, country is ready to take upon the role the US played in driving global demand. The ideal candidate would be a large growing economy. Yet the biggest players have serious problems. China is known for its high personal savings rate. Plus, as CFR’s Brad Setser pointed out over the weekend much of the current growth in Chinese demand has been focused on domestic production, a trend that is likely to continue as long as the yuan is pegged to a basket of currencies in an attempt to encourage cheap exports.

India’s consumer economy may be more robust but like China it’s found domestic producers for a great many products. Indians may be beginning to drive but don’t expect to see many of them in Fords; they have Tata and other regional players.

When it comes to reliance on US demand, paraphrasing Churchill may be most helpful. It’s the worst system around, except that we have no other to try.

Fearing the R-word

Among elected officials, there is rarely a desire to be the first to use the "R-word": Recession. While the word does not evoke the same fear of breadlines and shantytowns that Americans have been trained to associate with a Depression, the term still reminds people of slim times and cutting-back.

Friday the University of Michigan and Reuters released their headline confidence index: the Index of Consumer Sentiment. The measure tracks how people feel about the economy at any given time. The index sat at a

bout 80 points just before the current recession began in December of 2007. Since then it feel to a low of  55.3, a level unseen since 1980.

Confidence is beginning to recover, reaching 69 points in the preliminary June estimate. This good humor comes even as unemployment continues to rise and economists tell us that Americans have "lost their spirit."

Yet more interesting than the immediate swing in confidence is the increased variation when we do enter recessions. Beginning in the 1980s, peoples confidence became markedly different during recessions (as timed by the NBER) then during the rest of the business cycle.

The chart below gives the average level of consumer confidence by decade. It then provides decade-long averages for both recessionary and non-recessionary periods. Starting in the 1980s the gap in confidence between recessions and the rest of the business cycle becomes stark. While the current recession has been deep, the 1990's and even early 200s saw mild recessions associated with large deterioration in confidence. Consumers look more manic than they once did.

Source: Author's calculations, University of Michigan/Reuters Index of Consumer Sentiment, National Bureau of Economic Research Business Cycle Dating

Banks Stress Competitiveness in TARP Repayment

Treasury has announced that it will allow 10 institutions to payback $68 billion in funds obtained via TARP’s Capital Purchase Program (CPP). The move comes as the Administration mounts pressure to limit executive compensation. Last week, Kenneth Feinberg, the man who handled compensation for 9/11 victims' families was reported to be taking a position as a compensation czar. The Wall Street Journal reported the new position as "Special Master for Compensation."

In testimony today, Secretary Geithner said that TARP has been successful but is only one piece of the solution. While calling for a “delicate balance between intervention and allowing market participants latitude to operate,” Geithner did call for a new regulatory structure.

So it's not surprising that the Treasury release did not name the banks that are paying back the funds yet Bloomberg had no problem naming them. In fact, an excited release from JP Morgan Chase touts the firm’s “fortress balance sheet." Firms want everyone to know that they are getting out of TARP. Ironically, when the CPP launched Treasury quickly gave funds to lots of institutions, some who may not have needed it, to obscure the unhealthiest institutions. By the end of 2008, 214 institutions had funds and at present 601 disbursements have been made.

These institutions want both potential employees and investors to know that they are steady enough to get rid of the TARP funds but more importantly they want to signal that they can get out before Congress or the Administration imposes new rules and regulations.

Academics probe Twitter habits

A new study out of the Harvard Business School, takes a look at Twitter the newest, yet to make money, social networking craze. While the study finds some interesting gendered impacts (men are more likely to follow other men), I'm struck by the graphic below of how concentrated Twitter production is.

The study finds that 90 percent of tweets come from the top 10 percent of users. They compare this to 30 percent of content production by the same share of other social networks.

One possible explanation is that Twitter allows few types of content. Other networks like Myspace or Facebook allow posting of music, photos (which twitter does allow), or surveys. 

Twitter is also at a different stage of development than more mature networks.

New Markets are Urban Markets

This post should have gone up several days ago, fortunately the finding is evergreen.

Last week Treasury announced it's New Markets tax credit. The program provides $1.5 billion this year for community development and is funded through ARRA.

While the headline was the amount of money going out, the point that few noticed is how much of this community development is headed to urban areas.

Source: CDFI releases, author's calculations

The figure gives the share of the total disbursements. The data comes from individual allocations, which state the share of their funds going to each type of location. The clear tendency is to spend in urban areas. In fact of the 32 organizations that received funds only three intend to use more than 40 percent of their funds in urban areas. Of course this is only one part of ARRA.