IL&FS Crisis: Adopting Mini TARP Would Aid Investors, Harm Cronies

Does India need a mini-TARP to trap the IL&FS contagion?

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Cameraperson: Abhishek Ranjan


Cash. Every entrepreneur knows it’s like oxygen. Without it, even the most valuable asset rapidly becomes junk. Which is why in 2014 when the Modi government took over I had advocated a TARP-like rescue plan for our economy, then to solve the twin balance sheet problem and now to arrest the IL&FS contagion.

Let’s begin with a bit of history. Lehman filed for bankruptcy on 15 September 2008. Markets plunged, threatening the global economy with a disorderly collapse.

But to Uncle Sam’s credit, it swiftly got into emergency mode. In less than three weeks, on 3 October 2008 President George Bush signed the Emergency Economic Stabilization Act aka Troubled Asset Reconstruction Program or TARP.


How TARP Saved the US Economy

The US Treasury resolved to buy $700 billion of distressed assets or pump cash directly into bankrupt balance sheets. $245 billion was given to banks; $70 billion to the insurance giant, AIG; $80 billion was used to rescue auto companies like GM and Chrysler; the rest was given to a clutch of endangered entities.

It’s a tribute to TARP’s effectiveness that only $410 billion was ultimately used; $290 billion was never drawn down.

Cash given under TARP was neither a grant, nor a subsidy, but an investment which the companies had to pay back with an appropriate return.

Yet, the Congressional Budget Office initially estimated that $ 356 billion (out of the $ 700 billion) would be irretrievable, to be written off. But the lawmakers were happy to burn this cash to save their economy. They understood that the promise of immediate dollars would obviate a systemic meltdown (how I wish the Modi team had the same understanding of market psychology!).


Finally, as opposed to the feared loss of $356 billion, TARP ended with a zero loss, perhaps even a marginal gain for the US Treasury! Today, merely a decade later, the American economy is in the pink of health, with the markets at a record high, annualised growth nicking 4 percent, and unemployment falling below 5 percent. Frankly, in my book, that’s how successful TARP was.

A Mini TARP for IL&FS?

Now, I assert that a mini TARP for IL&FS will help ordinary investors & harm crony capitalists. Let me make a few assumptions, which are very close approximations of the real situation:

  • Total capital employed by IL&FS = Rs 1,50,000 crore
  • Value of underlying/monetisable assets = Rs 1,00,000 crore
  • Amount of immediate cash (or TARP-like bailout needed to stop defaults) = Rs 30,000 crore
  • Total market cap that NBFCs have lost since the first IL&FS default = Rs 4,00,000 crore

As per the current situation, without a TARP-like intervention by the Modi government, IL&FS’s equity/debt holders have lost Rs 50,000 crore (ie, total capital of Rs 1,50,000 crore minus salvageable assets of Rs 1,00,000 crore). But “innocent”/ordinary investors in NBFCs have lost Rs 4,00,000 crore, ie the market cap wipeout.


Mini TARP Bad For Crony Capitalists

Imagine if the government had created a mini TARP for IL&FS by infusing Rs 30,000 crore under a superior rights’ instrument, the defaults would have immediately stopped. IL&FS’s equity/debt holders would now have lost Rs 80,000 crore, that’s Rs 30,000 crore MORE than the Rs 50,000 crore they are losing in the current non-TARP situation.

And finally, even if we make the rather generous assumption that only half the market cap losses of NBFCs were on account of IL&FS’s defaults – remember, these defaults would NOT have occurred had the Modi government created a mini TARP for IL&FS – we see an immediate gain of Rs 2,00,000 crore for ordinary investors!


So there you are. By not going for a TARP-like bailout, Prime Minister Modi has given an extra gain of Rs 30,000 crore to crony capitalists who allowed IL&FS to crash, while levying an extra tax of Rs 2,00,000 crore on ordinary/innocent investors, like you and me.

The above is very simple arithmetic, but a team of IAS babus (bureaucrats) will never understand it, because they are deeply suspicious of market forces.

Yeh kya kar diya Pradhan Mantri Modiji? (What has your government done, Prime Minister Modi?)

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