Earlier today, ten of the nation’s largest banks received permission from the Treasury to repay a fraction of the amounts loaned out.
I know, it’s kind of bizarre. Permission to pay back a loan early? You’d think the feds would be thrilled.
Here’s the scoop. While some of the banks were begging for funds, others were forced to take the funds at the insistence of the Bush administration in an attempt to stabilize the financial system. The idea was that forcing banks to take the money would free up capital for small business loans and home mortgages. Whether that happened or not has been argued at length. But at least ten banks have convinced the Obama administration that they now have sufficient capital to begin repayment efforts. Those banks are: American Express, Bank of New York Mellon, BB&T, Capital One, Goldman Sachs, JP Morgan, Morgan Stanley, Northern Trust, State Street, and U.S. Bancorp have all been approved by the Treasury to return some funds. None of the banks have disclosed when and exactly how much they will repay. My money’s on soon.
Why the rush to pay it all back? Congress has put limits all over financial institutions with TARP funds – from tax limitations to executive comp caps to restrictions on immigration visas. Not surprisingly, private corporations don’t like the politics so much and they want to get out.
The feds expect to get about $68 billion back from those banks. Smaller banks have already repaid about $2 billion (sad, isn’t it that we’ve gotten to the point where $2 billion seems like a tiny amount of money?). This means that more than a third of the money initially handed out to banks will be coming back to the Treasury. The $200 billion bank hand out is part of the overall $700 billion bailout using federal dollars to boost the economy.
Despite the “good” news, the Dow did not rally today, ending just slightly lower. It’s hard to know what that means – the market is so volatile these days. Is the worst over? We can hope.
The sooner the banks can pay of their TARP funds, the sooner they can get back to business as usual. At any rate, I’d take the significantly lower unemployment numbers and some of the housing data more seriously than I would what the banks are saying about their balance sheets…
Isn’t it interesting that the banks have to ask permission to pay the funds back? I understand that the liquidity of the banks is in questions, and the current administration does not want to have to shell additional funds out later, but the way business used to work, the board of directors would decide what happened in a business decision, and then the CEO would makes things happen.
I feel this is a really great step in the right direction, as I would rather see competition determine which banks survive, instead of government intervention. Bad decisions should equate to a bad outcome for a business.
I am curious, though. What do you think will happen with these banks in the future? Even after they have paid back their ‘loans’, will the government continue with increased ‘oversight’, possibly including executive management decisions and compensation decisions?
I hope not. I think the govt should be as far removed as possible. However, to the extent that tax dollars are at play, I totally believe the govt should be involved. Quite frankly, many of these banking CEOs have run these banks into the ground while taking 100s of millions of dollars for themselves. That’s fine if it’s shareholder money and those shareholders have voluntarily assumed the risk. But as a taxpayer, I didn’t assume the risk voluntarily and I want checks and balances in place.
If the worst is really over, and I hope that it is, then I hope things go back to “normal” – I just hope that we’ve all learned a little something from this whole mess (though I fear that, collectively, we haven’t).
It would seem weird that a bank has to get permission to pay back a loan…even a small amount at that…if you didn’t know it was all part of the plan to exercise government and executive control over business and the economy. The strings attached to the TARP funds have soooo many control features attached that the administration is reluctant to give up.
P.S. I’m back writing Home Biz Notes, Kelly.
My take is that well-compensated stupidity should be left to Hollywood, and not the financial system. If it’s only the shareholders who take the risk, then, I suppose, it’s okay — except that the shareholders usually are the last (in the company) to know when management has destroyed the firm.
I’ve never been a believer that private enterprise is always good and government enterprise is always bad. Lately we have had plenty of proof that “private enterprise” can screw things up at least as badly as any government enterprise ever did.
I’m an academic, and real estate is my field of study. Long ago I had serious concerns about the “hyperinflation” in the housing market and was appalled at the insanely stupid mortgage products that were invented to keep it going. That doesn’t mean I’m smarter that everyone else — it means that the antics in the housing/mortgage market were so egregious that anyone who was watching would have recoiled in disbelief.
The end result was that this stupidity and cupidity didn’t just jeopardize the firms engaging in it, it almost brought down the entire economy.
The blame lies squarely with the major investment banking firms — Bear Stearns, Lehman, Goldman Sachs, Morgan Stanley, Merrill Lynch, Citibank, Bankamerica. Their appetite for mortgage — any mortgages — that they could convert into excessively complex derivative securities was so insatiable that the mortgage bankers found that they could sell them anything they could dream up. Credit default swaps (essentially, private insurance against default of these instruments — think AIG) bamboozled Moody’s and S&P into rating the derivatives AAA — after all, if the securities went bad, the insurance companies would pay, so how could you lose?
The nature of business — any business — is to make profits and to find ways around any regulations that get in the way. Businesses like banks and other financial institutions keep their eyes on the short run and usually pay little attention to the long run. The lure of huge short-term profits vastly overwhelms the possibility of huge long-term risks. The “models” used on Wall Street to assess the risks of these weird securities had the built-in assumption that housing prices would contiunue to rise indefinitely, and at rapid rates as well. This is incredibly stupid; investment history is rich with centuries of examples of speculative bubbles that always burst. In 2005 and 2006 less than 15% of California households could afford (under reasonable assumptions) the median-priced California home ($550,000+). This is a fact that was broadcast all over the place and is NOT one which supports in any way a conclusion that home prices can continue to rise at double-digit rates indefinitely!
Sorry for the rant, but it leads to a conclusion: if Wall Street insists on being so monumentally stupid that it seriously jeopardizes the well-being of the whole country, then there has to be some restraint from somewhere. The investment bankers nearly destroyed the economy, and paid themselves hundreds of billions of dollars to do it. That money is gone, and the jackasses who “earned” it get to keep their illegitimate fortunes. We just have to find some way to see to it that this kind of compensation for that kind of recklessness is no longer in the mix.
JBruce makes an interesting point which affirms his claim to be an academic. Academics look at things from a text book perspective because in most cases they have only worked in the academic setting and haven’t really had practical experience. It is true that mortgage bankers went too far in their practices of lending money to people they shouldn’t have but there where several factors that he ignores. 1. It was government that promoted affordable housing which led to many standards of lending to change because the government was willing to back up and promote these bad loans due to their political desire to provide affordable housing and it was government regulatory agencies that failed to do their jobs. The fact is that there are more regulations on the books today than ever and it still didn’t stem the tide of bad lending practices because the government didn’t want to upset the housing boom apple cart. Anyone who thinks that the government and fed policies didn’t initially drive these bad loans into the market and then ignore the problems they were sure to cause in the future, is fooling themselves. 2. Irresponsible borrowers were not able to meet the commitments that THEY made. I have heard a lot of excuses about why people cannot repay their loans but most of them stink. I bought a house I could afford. Friends of mine thought that they were too good to live where I lived and bought much more expensive houses in areas that suited what they believed they deserved in a lifestyle. Now I can still make my payments and time has shown that they cannot. Everyone wants to blame big business for these problems when government and citizens had just as much blame in this mess. If everyone who got a sub-prime mortgage was still making their payments, we wouldn’t have this problem. Instead, people bought houses they couldn’t afford and then went out and ran up more dept to improve and outfit their unaffordable homes. Now it is the banks fault for letting them do this. The last I checked, people were considered adults at age 18. At that point, they were responsible for their actions. What I see is a bunch of irresponsible people who want the freedom to do what ever they want but don’t want to take responsibility for their actions. No matter how you slice it, you reap what you sow. That is real life outside the college campus.
Here’s a news flash: academics live in the same world as non-academics. We’re as much into “real life” as everybody else. I can change a tire, balance my checkbook, read a nutrition label, plan for retirement and, yes, even deal with a divorce. Why some people assume that academics have no “practical experience” is beyond me. Sure, some of us fit the “stereotype” of the seedy little prof who spends his life in the lab or the library researching and wallowing in some arcane specialty; there exist plenty of non-academics who are the same way.
I still think the major part of the blame lies with mortgage lenders. After all, they always had the power to say “NO!”, and they didn’t. There’s no law against an unemployed drug addict applying for a $1 million loan; there’s no law against a lender granting such a loan, either, but if it happens then which one is the fool?
You can’t blame government’s “promotion” of “affordable housing” for this mess either. Promoting homeownership has been national policy since at least 1934 when FHA was established, and 1946 when the guaranteed VA loan was created. Tax deductions for mortgage interest and property taxes are reflections of that policy. At no time did the government encourage people to buy homes they couldn’t afford. Fannie and Freddy always have had strict income-qualification guidelines for mortgages they bought.
Government didn’t invent sub-prime lending and didn’t invest in subprime loans. Government didn’t invent the option-ARM, which allows borrowers to make payments so low they didn’t even cover interest.
One area where you can stick it to government is that Mr Greenspan’s Feceral Reserve kept interest rates very low, probably too low. This made mortgage payments low and did encourage homebuying.
It doesn’t take an academic to notice this or figure it out. The real world is there to see for anyone who wants to look. Would “garagefather” have dumped on me if I’d said I was a real estate broker instead of an academic? I am both. Would he have done so if I’d said I’d done real estate development? I have.
The bottom line is that until about five or six years ago mortgage lenders were “reasonable”. They wouldn’t make loans if there was genuine doubt about the borrower’s ability to repay — because they couldn’t sell those loans to investors. It wasn’t until these investors (mostly Wall Streeters) figured out how to create profitable derivative securities for any kinds of mortgages that the sub-prime and “funny-money” mortgage market really took off.
Yes, you can put some of the blame on people who bought more than they could afford. The point is that when they got these loans, they COULD afford the artificially low payments. It wasn’t until later, when the fine print kicked in, that they got stuck. And I defy anyone to read and understand the fine print in these loan documents, especially while a loan salesperson is giving them the song and dance and hurry-up.
The real point is that if there hadn’t been a market for these toxic loans, no one would have made them. Ultimately, the willing buyers of these loans allowed this mess to happen — they didn’t say “NO!”
Jbruce, your point is well taken. People that can’t afford a loan shouldn’t take one.
However, think of the position many of these people are in.
Imagine yourself uneducated, never having been taught about the realities of credit, or the actual costs of home ownership (repairs and maintenance, homeowners associations, utilities, etc.). You have been living in a cramped appartment, and suddenly you have the government say ‘Hey, live the American Dream! You can own a house! Just apply!’.
The reality is that a huge number of loans come about because of government first-time owner programs, or other financial assistance. So, a person who has not worked hard to come up with a down payment, and who has no reason qualifying for a house, can suddenly get a loan. They can’t afford it, but they haven’t been trained NOT to get something they can;t afford.
I will use a paraphrase from Michael Crighton in ‘Jurrasic Park’. In a discussion of the power of genetics, Ian Malcom says something like ‘The problem with science is that scientists build on each others work. They take shortcuts, and don’t have the discipline to understand that they SHOULDN’T do something. A master of the martial arts has to go through the training, and learn the power and discipline of their art. When they have the ability, they also understand not to use it. Science skips that learning process.’
The same is true of the uneducated consumer. They have not been taught, through the school of hard knocks or through formal education, what will happen if they default, or what the real cost is. They don;t understand the lingo, and are therefore in a very poor position to make rational decisions.
The mortgage companies do have fault. However, remember that they were looking to sell a loan to a consumer, and then turn around and get rid of that loan. This ‘flip’ mentality was just business. The whole process would not have been available without the Clinton administration opening the doors to a whole new group of highly unqualified individuals being able to get loans.
I really don;t care what a persons background or job is. Academic or not, there are two sides to every discussion. I personally feel that government intrusion into a companies decision to lend, and the governments policy of relaxing the requirements for a mortgage, have directly contributed to the crisis we have. The unfortunate reality is that many thousands of people were, and are hurt by these policies and the fact that lenders took advantage of a bad situation.