More TARP money will have to be thrown at banks to avoid a systematic financial breakdown, economic experts said on "Squawk Box" Thursday.
Bank of America, whose once estimated $50 billion acquisition of Merrill Lynch has now dropped to a $19 billion deal, is among the banks that will need more money. Yet, even with the injection of more capital to acquire Merrill Lynch, Bank of America may still be in perilous territory because of the pending litigation it faces regarding the bond holders’ settlements.
“Bank of America is trying to stick past due holders from Countrywide with the cost of the settlement and they’ve said no because you’d end up hair cutting the bond holders 30, 40 percent,” Christopher Whalen, Senior Vice President and managing Director of Institutional Risk Analytics, said.
If the bond holders succeed in filing a class action lawsuit that says there’s a conflict between the sponsor and the trustee in a securitization then the deal with Merrill Lynch
could fall apart, said Whalen.
“What I’m saying is with Countrywide’s unliquidated claims, the litigation, the settlement with the attorney’s general, this could all unwind,” said Whalen.
But even if Bank of America swallows its dire deal, it and other banks are still in desperate need of more money than the remaining $350 billion left in the TARP fund.
“The fact that Bank of America is going back now to the treasury and saying 'we need more money,' the fact that Citigroup is in trouble, the fact that many regional banks are insolvent, the fact that hundreds of community banks are insolvent means we need much more,” said Nouriel Roubini, chairman of RGEMonitor.com. “If the credit losses are going to be as large as the estimate, $350 billion is not going to be enough.”
In fact, it may take multiple TARP funds to increase lending and to save the banks, Edmund Phelps, Nobel Prize winner and economic professor at Columbia University, said.
“We’ve got to do a huge amount of TARP, TARP two and maybe TARP three, so we can get bank lending going again, so that we can get financing and business investment and business innovation,” Phelps said.
In addition to pumping banks full of more TARP money, there needs to be more visibility, Michael Spence, Philip H. Knight Professor of Economics at Stanford University and Nobel Laurreate, said.
“We need a more aggressive program of buying assets, particularly a more aggressive program of getting some of these toxic assets off the balance sheets. I think the whole financial sector isn’t going to stabilize until there’s greater visibility, Spence said. “Getting the transparency back is an important part of getting private capital flowing back into the financial system and that’s important to get the credit coming through normal channels again.”