The Washington Post has made a startling discovery: Banks want federal financial assistance without strings attached.
Earlier this week, Goldman Sachs announced that it would soon repay its "bailout" (or "TARP") loan and abandon the controversial program. But even though Goldman has pledged quickly to repay $10 billion it owes the federal government, the company has not promised rapid repayment of $28 billion in government-secured loans it received from private investors.
When financial markets froze last year, the government enacted TARP in order to provide direct financial assistance to banks. But in a separate program administered by FDIC, the government acts as the guarantor of loans made to banks by cautious investors. If the banks default on the loans, the government must pay the outstanding balance.
In addition, the Federal Reserve sponsors a discount lending program, which provides banks loans at a below market interest rate. The Federal Reserve does not disclose the list of beneficiaries.
After Goldman announced that it was pulling out of TARP, New York Times financial reporter Floyd Norris observed that the company was not forgoing governmental assistance altogether. Instead, Goldman elected to retain the benefit of $28 billion dollars in federally guaranteed loans -- not to mention nearly $12.9 billion in payments it received from AIG, which were undoubtedly funded by TARP assistance the embattled insurer received.
Companies Are Leaving TARP Because They Want "No Strings Attached" Federal Financial Aid
Today's Washington Post explains why companies are trying to repay TARP loans, while retaining the benefits of other government aid programs. The answer lies in the details of the various programs. TARP now has tougher conditions, including restraints on executive compensation. The FDIC loan guaranty program does not carry such restraints. Remarkably, banks want "free" money. [Note: "Remarkably" = sarcasm.]
The Washington Post reports that J.P. Morgan Chase has joined the list of banks that want to leave TARP. Jamie Dimon, the company's CEO, says that TARP is a "scarlet letter," and he renounces the idea of accepting additional funds from the government.
But while JPMC will rush to repay its $2.1 billion TARP loan, the company has no immediate plan to repay $40 billion in federally guaranteed loans it received from investors through the FDIC program. In fact, during the first week of April 2009, JPMC borrowed an additional $2.3 billion (which exceeds the amount of the company's TARP loan) through the FDIC program.
Irony: Is the Government Giving Banks the Money They Need to Get Out of TARP and Escape Restraints on Government Aid?
It appears that banks are taking advantage of governmental financial programs, such as the FDIC guaranty, in order to abandon TARP and its restrictions. Although the government has "toughened" requirements for TARP recipients, it provides less restrictive financial assistance to many of the same companies through other aid programs.
If the government provides banks with access to "unregulated" (or "less regulated") loans, the profits they make from lending this money could allow them to accelerate repayment of their TARP loans and evade the programs' tougher restrictions. At a minimum, government aid could free up other assets, which the banks could then apply to TARP payments. So, the government could actually fund banks' efforts to escape executive compensation limits that attach to TARP assistance. And if these firms subsequently participate in Tim Geithner's "toxic assets" purchase plan, they will receive additional governmental assistance that does not come with the conditions that TARP imposes, but which contains very generous risk formulas that allocate potential losses primarily to the government and potential gains primarily to private investors.
Unregulated Funds Can Generate Bank Profits
Furthermore, because banks that participate in the FDIC or Federal Reserve loan programs receive below market interest rates, they can make higher profits by using these cheaper money sources to finance their own loans to individuals and companies at higher interest rates. Accordingly, it is plausible that government aid has contributed to the sudden "profits" several banks have recently reported. As some commentators have argued, recent bank profits could in fact represent a government-sponsored windfall, rather than a real turnaround in financial markets.
Unequal "Welfare" Policies
Although the financial crisis warrants governmental intervention, it seems unconscionable to give many of the very companies that were largely responsible for causing the financial crisis easy access to governmental financial assistance. Furthermore, if the public supports extraordinary restraints on the receipt of governmental assistance for the poorest and most vulnerable persons in society, the public should demand similar concessions from bankers who want federal financial support. With some states callously considering whether to test recipients of unemployment assistance for drug use, it appears that the federal government is financing efforts by banks to escape politically popular restraints on the use of federal financial aid.