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.