Thread: Obama seeking bank fees to cover billions in TARP losses

I've seen a couple of incorrect assumptions in this thread. Let's clear a couple of things up.

First a disclosure - I represent several banks who received TARP Money.

When the law was passed, we did pour over the statutory rules. You need to understand that the landscape was changing literally daily. The Treasury was coming out with proposed rules interpreting the law and designing the system and changing it continually. Many Banks were in fact strong-armed into taking the money by the bank regulators in the early stage.

The money wasn't provided in the form of a loan - it was actually a stock purchase by the Gov't. The Gov't bought preferred stock in the bank which carried a 5% dividend rate (so is essence a loan), but the Gov't also got warrants to purchase common stock at a deep discount. The dividend rate jumped up after 5 years. A bank could only repurchase the stock (repay the loan) if the regulators determined that they were financially sound enough to do so. Additionally, if you accepted TARP money the compensation for the top executives was capped at $500K per year - hence why so many banks are eager to repay the funds.

Turning to the new proposal from Obama. My understanding from talking to Treasury is the focus of the new tax (.15% on the liabilities of banks with over $50billion in assets) is to recoup TARP money which the Gov't doesn't expect to recover. The problem at this point isn't the Banks paying back the TARP money - my bet is that all of the TARP money paid to Banks will be fully recovered and will actually generate a profit for the Gov't. The problem is that TARP funds were used to support Insurance Companies - AIG most notably - and the US Auto industry. This is where the Gov't isn't going to see a full recovery. You may ask why TARP which was intended for the Banking industry was used to help insurance companies and the Auto industry? Well many of the problems there were the result of the insurance companies and the auto makers getting heavily invested in the sub-prime industry. AIG and GMAC were heavily involved in the sub-prime derivatives which were the core cause of the meltdown. They bought and sold along side the big banks trying to make a quick buck.

Right now the Media has cast the big banks as the enemy and Obama is playing to that. He has created a huge budget deficit problem and is looking for ways to fill the holes. The logic is that the big banks created the mess which caused the Gov't to lose money saving the insurers and auto makers so even though the banks paid back their loans they should be the ones to help foot the bill for the problem they created.

Is it a good idea - maybe. Will the cost ultimately be borne by the customers of the big banks - absolutely. Even though the tax is targeted at the largest banks in the country, it will ripple down through the banking system to even the smallest banks. At the end of the day this is a tax which will be borne by anyone who has a bank account.

I say anything that screws BoA is a good thing. I hate them. :P

Originally Posted by draco7891

2. Government injects huge amounts of capital into the banks to keep them afloat. (Buys "stock", in this case a controlling share).

Actually going from the information given by Ira, if the Gov't bought mostly Preferred Stock, then If i recall, they don't have any control of the company compared to the common stock holder. in fact:

http://www.investopedia.com/terms/p/preferredstock.asp

Or if you don't want to read, it tells us the preferred stockholders have priority in terms of earnings, as well as assets if the company liquidated. They also get a fixed dividend, which is paid before common stock holders get theirs. But they also don't have any voting rights.

Basically, if i own 1 million shares of GM in preferred stock, and you a million shares of GM in common stock, I likely earn more in most cases, but unlike you, can't vote on any decisions.

Originally Posted by draco7891

The point I was making is that the government did a massive end-run around actually buying stock; they got all the benefits with none of the risks or public outcry, and now they expect to reap their reward just like a stockholder.

Draco

The difference that you conveniently leave out is that the companies can repay the funds thus regaining complete control of their firms. That wouldn't happen under socialism.

On a side note, why do you end every post with your name? Do you fear we'll forget you?