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Banks Whining Over TARP Repayment Terms

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I have zero sympathy for the kvetching over the banks’ complaints over the supposedly onerous terms for repayment of TARP funds.

Let’s review some of the claims:

1. “It was forced on us.” Um, the only time that was arguably true was when Hank Paulson got nine banks together and made a great show of making them take TARP funds, in essence to disguise the fact that some desperately needed the money (Citi in particular) while other just badly needed it. And were smaller banks forced? Please.

2. “This terms are really unfair!” Despite Paulson’s show of coercion was in fact a great deal. Lest we all forget, the TARP funds were at terms more favorable than the best of the bunch, Goldman, had just extracted from Warren Buffet. Similarly, the smaller banks were delighted to take the money. From the New York Times in December:

Most of the banks that received the money are far smaller than behemoths like Citigroup or Bank of America. A review of investor presentations and conference calls by executives of some two dozen banks around the country found that few cited lending as a priority. An overwhelming majority saw the bailout program as a no-strings-attached windfall that could be used to pay down debt, acquire other businesses or invest for the future.

Nothing beats revisionist history.

So what is really causing the consternation? It is that the banks suddenly want to give the money back now to escape the executive comp provisions. But the TARP funds had warrants attached, and Uncle Sam wants to exercise the warrants as part of any repayment.

Think of it as a fund exit fee. You get into a fund that otherwise looks phenomenal but has an exit fee. Suddenly you have an emergency and you need the dough, and instead of amortizing that exit fee over the, say, minimum 5 years you expected to be in the fund, you are amortizing it over two months. What looked like no big deal suddenly is a big deal.

But what is particularly ugly is the banks trying to welsh on the terms with rubbish arguments like the ones above. If you have been on the receiving end of a conversation with a particularly unpleasant bank customer service rep regarding some gotcha fees, I’m sure you relish the spectacle of the banks hoist on their own petard.

Funny how contracts are sacred until they are the ones you want to get out of.

From the New York Times:

As the Obama administration completes its examinations of the nation’s largest banks, industry executives are bracing for fights with the government over repayment of bailout money and forced sales of bad mortgages.

President Obama emerged from a meeting with his senior economic advisers on Friday to say “what you’re starting to see is glimmers of hope across the economy.” But there were also signs of growing tensions between the White House and the nation’s banks over the next phase of the financial rescue.

Some of the healthier banks want to pay back their bailout loans to avoid executive pay and other restrictions that come with the money. But the banks are balking at the hefty premium they agreed to pay when they took the money.

Jamie Dimon, the chief executive of JPMorgan Chase, and two other executives of large banks raised the issue with Mr. Obama and the Treasury secretary, Timothy F. Geithner, at a meeting two weeks ago.

“This is a source of considerable consternation,” said Camden R. Fine, who attended the White House meeting as president of the Independent Community Bankers, a trade group of 5,000 mostly smaller institutions, many of which are complaining about the repayment requirements…..

Both large and small banks have pressed the Obama administration to make it less costly for them to exit the bailout program by waiving the right to exercise stock warrants the banks had to grant the government in exchange for the loans. At a meeting last month, the chiefs of three of the largest banks separately asked Mr. Obama to direct the Treasury not to exercise the warrants, Mr. Fine said.

Douglas Leech, the founder and chief executive of Centra Bank, a small West Virginia bank that participated in the capital assistance program but returned the money after the government imposed new conditions, said he complained strongly about the Treasury Department’s decision to demand repayment of the warrants. That effectively raised the interest rate he paid on a $15 million loan to an annual rate of about 60 percent, he said.

“What they did is wrong and fundamentally un-American,” he said. “Even though the government told us to take this money to increase our lending, the extra charge meant we had less money to lend. It was the equivalent of a penalty for early withdrawal.”

Exactly, The sort you impose on consumers with no inhibition. This was in the TARP rules, sorry you didn’t read your customer agreement closely enough.

Oh, but I forgot. Some animals are more equal than others.

The article pointed to a second area of friction between banks and regulators, one we had warned of earlier. With mortgages in particular (unlike some of the complex MBS), coming up with valuations of pools is not horribly arcane and investors can make reasonable estimates of value. Given how far over any real economic value (whether mark to market or hold to maturity) the prices at which some banks are carrying mortgages on their books are, we didn’t see how the government, even with all its smoke and mirrors, could entice investors to overpay for impaired assets. Even with non-recourse financing of anything less than 100%, it doesn’t make sense to pay 90 cents for something you expect to be worth 60 to 70 cents.

Again from the Times:

This month, the nation’s largest banks began announcing their latest quarterly earnings. Some, like Wells Fargo, have released results early to trumpet their profitable first quarter — and possibly to give them leverage in coming negotiations with their regulator.

The immediate concern for the administration is how to get the weaker banks to relieve their books of deteriorating mortgages and mortgage-backed securities.

Industry analysts estimate that United States banks alone have more than $1 trillion of such mortgages on their books but have recognized only a small share of the likely losses.

Economists at Goldman Sachs estimated recently that banks were valuing their mortgages at about 91 cents on the dollar, far more than investors are willing to pay for them.

Even though the Treasury Department plans to subsidize the purchases of toxic assets by giving buyers low-cost loans to cover most of their upfront cost, a growing number of analysts warn that many if not most banks will remain reluctant to sell.

“The gap is still very wide,” said Frank Pallotta, a former mortgage trader at Morgan Stanley, now a consultant to institutional investors. “If every bank was forced to sell at the market-clearing price, you’d have only five banks left in the market.”

A final observation: the Times headline, clearly reflecting industry views, points to something seriously amiss: “Showdown Seen Between Banks and Regulators.”

Regulators hold the power of life or death over their charges. They can yank their license and put them out of business. The idea that there could be a “showdown” says the two parties have equal bargaining power. Here we have an industry with its big players and quite a few small fry on life support, and the bystanders benefitting hugely from rock bottom short interest rates, and they act as if they can make demands?

Unfortunately, with the government looking as if it is owned by the banksters, the answer is probably yes.

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26 comments

  1. artichoke

    Do we have reason to believe the banks can get their “sacred” contracts altered in their favor? Is that something Geithner can do by himself without Congressional approval? If so we may be in trouble again …

  2. Anonymous

    I read something recently which I will post below that explains to me why the banks have the world by the neck…so to speak.

    “Today five US banks according to data in the just-released Federal Office of Comptroller of the Currency’s Quarterly Report on Bank Trading and Derivatives Activity, hold 96 per cent of all US bank derivatives positions in terms of nominal values, and an eye-popping 81 per cent of the total net credit risk exposure in event of default.

    The five are, in declining order of importance: JPMorgan Chase which holds a staggering $88 trillion in derivatives (€66 trillion!). Morgan Chase is followed by Bank of America with $38 trillion in derivatives, and Citibank with $32 trillion. Number four in the derivatives sweepstakes is Goldman Sachs with a ‘mere’ $30 trillion in derivatives. Number five, the merged Wells Fargo-Wachovia Bank, drops dramatically in size to $5 trillion. Number six, Britain’s HSBC Bank USA has $3.7 trillion. (“Geithner’s ‘Dirty Little Secret’: The Entire Global Financial System is at Risk”, F. William Engdahl, Global Research)

    That is $196.7 Trillion Samoleans or whatever marbles are worth when this glass bead game is over.

    psychohistorian

  3. Richard Kline

    To my perspective, the banks dictated a ‘put’ to the populace via the mouth of Hank Paulson. Yes, yes, yes; they had to agree to a few ‘silly sections’ in the crap document they flashed before the elected schlepresentatives of the nation, but that was just, y’know, for good visuals. I mean ever’body that counts knew and knows that the real deal was for the Guvmint to buy up all the crap assets at face+bonus. Let’s get on with it, right? Am I right? The bitching from the diseased lords of wealth, here, is that they have to sit in schoolchairs for the half of an hour and lie their way through some silly exam before the payoff and roadkill are swapped. _Of course_ they’re sour: they made a deal with Hank and Larry, and those schlubs aren’t getting the ball in the goal. I mean, c’mon fer crissakes, are these the kind of lackies they paid good money for?

    The folks running these colossal financial parasites live in a different reality from the rest of us. Until and unless we drag them into ours, preferably by a rope ascending.

  4. Anonymous

    Richard Kline,

    If I may offer a slight correction. The folks running these colossal financial parasites, as you call them, work for the one percent of the population that controls the runners detailed above and the rest of us.

    Maybe some of the runners get into the elite, I don’t know. What I do know is that they are in front of a curtain that dare not speak its name.

    psychohistorian

  5. Russ

    I agree that the prospect of the fat banks getting the same treatment they gleefully mete out to individual customers is delightful.

    (I still have that horrible article Yves quotes above in my files, the one with the smaller banks bragging about how they were getting a pure windfall to be used for purely rent-seeking ends, and openly sneering at the notion that they had any obligation to lend. It gets even worse than the quote Yves gives.)

    Still, given how this admin seems dead set on a policy which is pro-bank at all costs, by now I’d be surprised if they actually did enforce this policy.

    By now I’m so used to heads-I-win, tails-you-lose lemon socialism that I automatically regard any theoretical break from that pattern, even a minor one, as a propaganda lie.

  6. B. Mull

    So let me get this right. Warren Buffet took a risk and invested in Goldman, and he’s gets the chance to earn a tidy return. The taxpayers take a huge risk investing in countless insolvent banks, and we get our contracts voided.

    And this so the banks can now switch to their preferred bailout method: the no-warrant non-recourse no-strings-attached PPIP.

  7. Francois

    “What they did is wrong and fundamentally un-American,” he said. “Even though the government told us to take this money to increase our lending, the extra charge meant we had less money to lend. It was the equivalent of a penalty for early withdrawal.”

    LOL!!

    My karma is overriding their dogma; I am reading Yves’s post while listening to Bob Dylan’s Like A Rolling Stone:

    “How does it feeeeeel?
    How does it feeeeeel?”

  8. Francois

    Richard Kline wrote:
    “The bitching from the diseased lords of wealth, here, is that they have to sit in schoolchairs for the half of an hour and lie their way through some silly exam before the payoff and roadkill are swapped.”

    Well! If it that much of an ordeal, how about the Administration step aside for a moment and let us show them how bad it would be if we had it our way? We could have the temptation to put some pitchfork tips on the school chairs…and mandate a prolongation of the period while at it.

  9. Anonymous

    I seem to recall those banksters leaving the meeting with Paulson with smiles you couldn’t wipe off their faces and a little skip to their steps.

  10. PghMIke

    Here’s another question — Wells Fargo made so much money by borrowing at 0% and loaning at 4.5% (long term), which isn’t surprising, of course. And they stated that their business is booming.

    I’m going to guess that the loan business is booming at any solvent bank.

    Now, if there are so many solvent and profitable banks loaning like crazy, why exactly do we have to bail out the larger, insolvent banks? Why not let them fail (in a controlled fashion, i.e. receivership). It looks like there are lots of other banks willing to step into the void.

  11. Eagle

    It’s getting hard to read this blog without getting the impression the goal of the author(s) is not getting a working banking system but punishing bankers. No wonder you attract so many nuts in your comments.

    In any case, the terms of the loan have obviously changed/tried to be changed with the introduction of executive compensation restrictions that were not part of the original loan.

  12. DownSouth

    Russ said…”By now I’m so used to heads-I-win, tails-you-lose lemon socialism that I automatically regard any theoretical break from that pattern, even a minor one, as a propaganda lie.”

    I believe that’s an important point.

    In his book Bad Money Kevin Phillips includes a table entitled

    U.S. Financial Mercantilsm: Bailouts, Debt and the Socialization of Credit Risk, 1982-2007

    The welfare for the rich phenomenon is therefore not something that began with the Bush administration. It is something that began with the Reagan administration and has spread inexorably, like a cancer, throughout the body politic.

    As once can discern by looking at Phillip’s table, the bandaids have grown bigger and bigger, but at what point does the patient finally succumb? The Obama administration seems to be betting everything that the bigger bandaid theory will work one more time.

  13. DownSouth

    Eagle said…”In any case, the terms of the loan have obviously changed/tried to be changed with the introduction of executive compensation restrictions that were not part of the original loan.”

    That brings up another sticky problem. It has become clarion that the management of the big banks feel absolutely no obligation whatsoever to the larger society. But do they feel any obligation to their own stockholders?

    Here we have an example of bank management making decisions based strictly on its own narrow self-interest: returning the TARP money so that it can pay itself bigger bonuses. But how do the interests of the banks’ stockholders fare in this scenario?

  14. rd

    There is an easy solution. The government doesn’t exercise the warrants if the banks give all of their customers the same leeway on credit card, loan, and mortgage agreements for the next five years. Interest rate resets on credit cards are rescinded, we can get 100 basis points off of our interest rates on our mortgages and loans without having to get a new mortgage, and fees are generally slashed.

    That sounds fair to me as the sanctity of contracts would now be parallel through the system.

    I guess they should have read the fine print in their US Treasury credit card agreement.

  15. apachecadillac

    The bubble boys who became bank CEOs (and their minions) aren’t exactly blessed with political skills and their Beltway toadies substitute connections for a feel for the public mood. So, what do you expect?

    If they get what they want, it may be the worst possible outcome for them. They will be setting themselves up for a game of Oligarchs and Siloviki, and just look at how things are playing out in Russia currently.

  16. Anonymous

    Leverage is back into the system but not as much as it used be 2-3 years ago. As long as leverage is low things are not getting back the way they used to. Is the sky falling? No, but as an economy we will have fewer options going forward. Key assets such as houses will continue to deflate which is exactly the recipe we need to revert them to their historical averages.

  17. Eagle

    DownSouth: I agree, I am actually strongly in favor of increasing stockholders’ rights.

    One unfortunate consequence of everyone owning stocks seems to be the same problem that plagues representative democracy – special interests capture and most don’t care enough to voice their opinion. The best regulations will find an effective way for boards and management to be held accountable to their stockholders.

  18. Eagle

    Eagle: Also, just wanted to mention that situations like these are precisely why firms feel it necessary to waste money on lobbyists. Congress is continually changing it’s mind and getting just a minor exception inserted into a law pays back your lobbyist fees ten-fold.

    Naturally we’ll continue to look to the same politicians who got us into this mess to get us out, instead of instituting truly effective measures like term limits and a much larger House.

  19. dd

    Ownership was long ago subsumed by a financial sector able to leverage inter-mediation into virtual ownership.
    Shareholders are at best “owners” of an uncertain dividend revenue stream and an uncertain market value. Actual ownership was long ago diluted to the point of nonexistence and certainly has little impact on management decisions.
    Same is true for foreclosed real estate where fractional CDO “owners” have no ability to effectuate property rights except through financial sector inter-mediation.
    Same is true for long term corporate bondholders who discover bond pricing does not reflect value as the default risk pricing has been severed and given over to CDS.
    Derivatives also allow the financial sector mavens to leverage all manner of assets without all the hassle of ownership and leave the titled asset holders with all the losses..just ask Lehman stock and bond “owners.”
    The essence is the financial sector was allowed to undermine all notions of “ownership,” hollow out asset values for executive gain, and shift all insolvency risk to end-chain titled owners.
    The government has every interest in forestalling the outcome as it was an enthusiastic participant in the process.

  20. Anonymous

    I love the delusions of people who think that contracts are “sacred.” The extremes of this view are so hypocritical, it ceases to be funny. I’m a lawyer and have been helping one client get of out contracts for years, renegotiate when leverage changed, screw over counterparties, the whole nine yards. One day last month, a company building a resort in Latin America needed to get out of deal with him, and he honestly said that these guys were “despicable.” I don’t even know where to start.

  21. Yves Smith

    Eagle,

    The banking system is far too large and needs to be rationalized. It grew to an unprecedented size making bad loans. That activity should not come back.

    The coddling of bankers that caused the mess is part of the problem. The Swedes were far more ruthless in getting rid of diseased and overpaid management.

    I worked in the industry and have consulted to it extensively, so I have an idea of what it takes to run this businesses well. You do not need the absurd comp regime of recent years to attract sufficiently skilled talent.

  22. Francois

    @Eagle:
    “It’s getting hard to read this blog without getting the impression the goal of the author(s) is not getting a working banking system but punishing bankers. No wonder you attract so many nuts in your comments.”

    Nuts? lemme give you some nut:

    http://zerohedge.blogspot.com/2009/04/imminent-disinformation-schism.html

    Read this post, and you come back and tell us if some drastic remedies are not needed here.

    Believe it or not, some “nuts” weren’t born so, but became so because were in a situation that is enough to drive any sane person…nuts!

  23. Anonymous

    The TARP is fundamentally un-American. We should put the insolvent banks into receivership, wipe out shareholders, and cut the debt to recapitalize the banks. But capitalism in America is dead. We now only have lemon socialism.

  24. Fraud Guy

    If you have been on the receiving end of a conversation with a particularly unpleasant bank customer service rep regarding some gotcha fees, I’m sure you relish the spectacle of the banks hoist on their own petard.

    I pulled up the easy chair, grabbed some popcorn and the remote, and haven’t laughed so hard since I first saw Robin Williams “live at the Met”.

  25. Eagle

    Yves: Agreed, that activity shouldn’t come back. I, like anyone else commenting on this crisis in good faith, just want to return to a healthy economy. I’m not willing to cut off my nose to spite my face raising hell over a few million in bonuses or TARP loans to community banks, while billions in bailout money are wasted because it’s not politically palatable to follow a more effective course of action. Even if you believe nationalization is the way to go, it’s becoming clear that just giving money to banks would be far cheaper than the convoluted processes we’re now undertaking.

  26. cat

    “So let me get this right. Warren Buffet took a risk and invested in Goldman, and he’s gets the chance to earn a tidy return. The taxpayers take a huge risk investing in countless insolvent banks, and we get our contracts voided.”
    Maybe we voided our contracts after we started imposing new conditions months after they were signed? Plus, TARP is a loan. The we make nice interest on this money by borrowing at near-zero percent and lending money to these banks at 5% for first 5 years and 9% thereafter. If your mortgage lender called you (in spite of the fact you were making your monthly payments on time), and started telling you what kind of carpet you are allowed to have in your home, wouldn’t you try to break such contract too?

    Additionally, as I remember it Paulson FORCED first 9 banks to take TARP whether they wanted to or not. In fact, I distinctly remember some of healthier banks like Wells Fargo objecting. Many of these first 9 banks were NOT insolvent at all, the whole reason Paulson wanted these banks to take TARP was to avoid stigma associated with these funds.

    WHY ARE YOU RE-WRITING HISTORY?

    “And this so the banks can now switch to their preferred bailout method: the no-warrant non-recourse no-strings-attached PPIP.”
    Don’t worry, with government changing the rules several months after the fact, very few private investors will want to have anything to do with PPIP.

    See you all on the unemployment line which is where this class warfare is going to get us all. Myself included – I don’t work for banks, just would like to live in lawful society and not the one where the government behaves as if we are in the Soviet Union.

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