Everyone seems to hate the federal government's Troubled Asset Relief Program (TARP) except CNBC's Jim Cramer who thinks that TARP worked and "...was a necessary rescue of a critical industry that ended up working better than anyone could have imagined...". Tim Massad, US Treasury Secretary for Financial Stability, also thinks the program was a success (interview video above). The assessments of Cramer and Massad might prove accurate except for one problem institution, AIG (I'll get to this bad boy at the end of the post). My models suggest that there is still some probability AIG will fail and the government will loose the $40 billion invested in the company.
Cramer points to two banks as success stories. Fifth Third Bancorp (FITB) recently payed back $2.4 billion in TARP funds and SunTrust (STI) is about to make a secondary offering to raise funds to repay TARP. Cramer wants his viewers ready to buy the secondary offering. What does the Random Stock Walker think about these banks?
Neither bank is a random walk and both are strongly linked to the US economy. A boostrap forecast for First Third Bancorp is displayed above. In 2011, the trouble period has passed (the stock could have totally collapsed in 2009) and the stock is now on the way to recovery.
The same can be said for SunTrust. The stock is not a random walk and is well linked to the US economy. SITI could also have failed in 2009 but now is predicted to recover quite well in the future.
The recovery of AIG will not go as smoothly and it is not entirely past its trouble period. My model shows that there is some probability AIG will fail before 2015. AIG's collapse was more centrally related to the entire subprime mortgage crisis since it was one of the major insurers of structured debt securities backed by subprime loans. It will take a lot longer to unravel the mess created by AIG business practices and, not surprisingly, there is some probability the mess cannot be unravelled.
No comments:
Post a Comment