Wednesday, January 13, 2010

"If these firms are such rugged individualists, why do they persist in borrowing on the public's credit rather than their own?"

The Subsidy That Won't Die

The big banks claim the government isn't helping them anymore. Not exactly. Check out this little-known subsidy.


By Daniel Gross
Copyright 2009

The big bankers are in the news again, and they're steamed. On Wednesday, bank CEOs will testify before the Financial Crisis Inquiry Commission. Meanwhile, the industry is pushing back against plans from the Obama administration to tax large banks as part of an effort to recoup bailout costs. JPMorgan Chase CEO Jamie Dimon, bristling at criticism of his hardworking bankers, told employees: "I am a little tired of the constant vilification of these people." Wall Street's big shots have had enough They've paid back their TARP money—which, some of them say, they didn't need anyway—with interest. They've got the government off their balance sheets, so now the government should stop meddling with them.

But the big American banks aren't nearly so independent as they would have us believe. JPMorgan Chase, Goldman Sachs, and their peers are still benefitting hugely from significant post-crisis subsidy programs that boost their profits. I'm talking mostly about the Temporary Liquidity Guarantee Program (TLGP). This was a program started in the wake of the Lehman Bros. collapse to deal with the fact that banks were having a tough time raising short-term capital on decent terms. Under the TLGP, the Federal Deposit Insurance Corp., which is ultimately backed by the taxpayers, would guarantee debt in exchange for fees paid by the banks issuing debt.

The TGLP was ended to new entrants in June 2009 and thus far has gone without a loss. But the fact remains: Private companies were allowed to borrow massive amounts of money—$345 billion at the peak in May 2009—on the public's credit. At the end of the third quarter, there was still $313 billion outstanding.

Banks and financial institutions have to pay money to get money. When they pay less to borrow, it's much easier to make profits, and they tend to borrow more of it. When they have to pay more to borrow, it's more difficult to make money. This chart (from Bloomberg, via Zero Hedge) breaks down the TLGP borrowings of individual institutions as of Nov. 30 and the interest rates they're paying. General Electric was the largest user, with nearly $88 billion. (Its GE Capital unit has prodigious borrowing needs.) But GE was followed by the big bailed-out banks: Citigroup ($64.6 billion), Bank of America ($44.5 billion), JPMorgan ($39.7 billion), Morgan Stanley ($25 billion), Goldman Sachs ($21.26 billion), and Wells Fargo ($9.5 billion). With the exception of Citi, the government no longer owns shares in these firms. And so they feel the government should have no say in their practices going forward.

But if these firms are such rugged individualists, why do they persist in borrowing on the public's credit rather than their own? And why did they do it in the first place? After all, unlike with the TARP, participation in the TLGP program was entirely voluntary. Here's a list of the banks that opted out of the program: You'll note that the Wall Street biggies aren't on it. At any time, the banks could go out into the public markets and raise debt to replace the taxpayer-subsidized borrowings. But they haven't. The reason: It would make them less profitable.

Take Goldman. The chart shows that Goldman was paying a blended rate of 0.767 percent annual interest on $21.3 billion in FDIC-guaranteed debt. For every 100 basis points (i.e., if that debt bore an interest rate of 1.7 percent instead of 0.7 percent), Goldman is saving $213 million in interest costs per year. In the spring of 2009, when much of this debt was issued, the spread—i.e., the difference between the interest rates charged to private-sector corporate borrowers and to the government borrowers—was significant. In April 2009, it stood at 540 basis points. I don't know what to call this other than a huge subsidy.

There are more ongoing subsidies for the big banks. The fact that taxpayers guarantee the debt of Fannie Mae and Freddie Mac preserved the value of mortgage-backed securities owned by these banks. One of the components of the TARP is the HAMP, under which the government writes checks to lenders who made reckless loans so that they can modify them and keep people in their homes. Funds issued under the HAMP are not expected to be paid back. From April through December 2009, more than $35 billion in such funds have been disbursed to lenders, with more to come. Check out Page 20 of the most recent TARP transactions report, and you'll see that the list of participants in HAMP includes CitiMortgage (a unit of Citi), Wells Fargo, Saxon (owned by Morgan Stanley), and Bank of America and one of its subsidiaries, Countrywide.

Among the first questions the Financial Crisis Inquiry Commissioners should ask each CEO: How much worse would their profits be if taxpayers weren't insuring huge chunks of their debt—and if they had to borrow on their own credit instead of on the public's? And would they care to quantify the amount of the subsidies they're getting?

© 2010 Newsweek:

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