The Big Bank Bailout Payback Bamboozle

Wall Street players reimburse Treasury with money we lent them—and Geithner celebrates?

Last week was a milestone for US treasury secretary Tim Geithner. He
finally got to play the hero. The morning of June 9, Treasury notified
10 financial institutions, including JPMorgan Chase, Goldman Sachs,
Morgan Stanley, US Bancorp, and Capital One Financial, that they were
"eligible to complete the repayment process" for the capital they
received under the Troubled Assets Recovery Program (TARP). In other
words, they would be allowed to pay back $68.3 billion. Even though
they really owe $229.7 billion. That we know of. But Geithner didn't
mention that last bit. Instead, he professed that "these repayments are
an encouraging sign of financial repair," with the caveat that "we
still have work to do."

The "we" he refers to is himself and Wall Street, both of whom are
getting a good deal out of this fractional payback scheme. The
agreement frees the banks from restrictions on executive pay or, worse,
their general practices, but it still allows them to keep the cash
they've received through non-TARP venues like the FDIC Temporary
Liquidity Guarantee Program- or the massive sums the banks recovered
from AIG (thanks to its own federal bailout) to cover their losses on
credit derivatives. Not to mention any cash provided by the mother of
all cheap loan programs-the Federal Reserve.

Geithner, for his part, gets to convey the message that things are
looking up. "These repayments follow a period in which many banks have
successfully raised equity capital from private investors," stated the
press release. "Also, for the first time in many months, these banks
have issued long-term debt that is not guaranteed by the government."

Well, of course certain banks have raised some money on their own:
Firms have a tendency to look a whole lot better when they're backed by
government capital and have cheap federal loans sitting on their books.
Private investors notice that sort of thing. But more troubling than
the misplaced praise is the fine print that accompanied the
announcement: "These repayments," the department noted, "help to reduce
Treasury's borrowing and national debt. The repayments also increase
Treasury's cushion to respond to any future financial instability that
might otherwise jeopardize economic recovery."

This statement belies some accounting sleight of hand.

off, it conveniently ignores the fact that TARP accounts for a
fraction-about $700 billion-of the government's $13 trillion banking
stabilization scheme. At some point, investors are going to balk at
buying up federal debt (Treasury bonds), thereby forcing the government
to pay higher interest rates, which will wipe out much of the TARP
payback benefit. The second sentence is more ominous: It suggests that
if banks need that money back, it'll be waiting for them right there at
the Treasury Department.

On the day of his announcement, Geithner acknowledged to the Senate
Appropriations Committee that "while we see some initial signs of
economic improvement and the financial system is beginning to heal, our
country faces very substantial economic and financial challenges."
Indeed, the banking sector has not gotten substantially better lately.
According to a report compiled by the Investigative Reporting Workshop
and MSNBC, the number of delinquent or defaulting bank loans grew by 22
percent during the first quarter of 2009-six out of ten banks were, in
fact, even less prepared to absorb further losses than they had been
during the last, abysmal quarter of 2008.

While the treasury secretary conveyed to the senators some
understanding of the plight of the rest of us, this show was all about
Treasury and the banking sector. Geithner praised the government for
pulling off stress tests of the 19 largest financial institutions last
month. "The clarity and transparency provided by the tests," he said,
"has helped improve market confidence in the banks, making it possible
for them to collectively raise nearly $90 billion through private
equity offerings, bond issuances without government guarantees and
sales of business units."

But Tim's not playing it straight. The fact that most of these banks
passed their stress tests would only have mattered if the tests had any
value. As I discussed
when the tests were first unveiled, these tests were designed in tandem
with the banks, the evaluations were provided by the banks, and some of
the assumptions they were based upon-such as where unemployment would
be-had been exceeded before the test results were released.

In fact, the stress tests have little to do with anything, but two
other sources of capital for banks do. The main one is the Fed, which
loans money to banks at stupidly low rates through a variety of
facilities and loan-guarantee programs that total $7.9 trillion. In
return, the banks can post as collateral an assortment of complex
assets that no one but the Fed has any record of.

Banks can also borrow cheaply if they have an FDIC guarantee-and
then use that cheap money to do things like pay TARP back, which
explains why their stocks have gone up. The government opened this door
on October 14, 2008, with the FDIC's Temporary Liquidity Guarantee
Program. The idea was that it would prompt banks to start lending to
their customers again. But that didn't happen. Instead, cunning
institutions used the new program to raise cheap capital for their own
needs. By changing its status to a bank holding company, Goldman Sachs
was able to secure $29 billion of that FDIC-backed debt; Morgan Stanley
raised nearly $24 billion.

The banks paying back the TARP funds aren't doing any better than
their peers. In the first quarter of 2009, JPMorgan Chase's troubled
asset ratio-the ratio of bad loans to the cash a bank has set aside to
cover them-increased by nearly 16 percent, US Bancorp's by 21 percent,
and Capital One's by 17 percent, numbers that put them in the same
ballpark as many banks that are holding their TARP money.

In the meantime, average Americans, who don't have a $13 trillion
federal insurance policy to fall back upon, have fared poorly. Over the
past three months, unemployment has hopped a full point, to 9.4
percent-nearly double what it was one year earlier. For the third
straight month, home foreclosures have broken the 300,000 mark, with
the defaults reaching well into the prime loan turf, and home prices
are still falling.

Considering the true size of the bailout, the continued loan
deterioration, and the weakness in the overall economy and job market,
the economic signs simply aren't that positive. For Geithner to pretend
that a few banks paying back federal money with other federal money is
an encouraging sign is to miss all of them.

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