No, The Big Banks Have Not "Paid Back" Government Bailouts and Subsidies

The big banks claim that they have paid back all of the bailout money they received, and that the taxpayers have actually made money on the bailouts.

Pro Publica has been maintaining a list of bailout recipients, updating the amount lent versus what was repaid.

So far, 938 Recipients have had $607,822,512,238 dollars committed to them, with $553,918,968,267 disbursed. Of that $554b disbursed, less than half — $220,782,546,084 — has been returned.

Whenever you hear pronunciations of how much money the TARP is making, check back and look at this list. It shows the TARP is deeply underwater. Moreover, as I pointed out in May, the big banks have received enormous windfall profits from guaranteed spreads on interest rates:

Bloomberg notes: “The trading profits of the Street is just another way of measuring the subsidy the Fed is giving to the banks,” said Christopher Whalen, managing director of Torrance, California-based Institutional Risk Analytics. “It’s a transfer from savers to banks.”

The trading results, which helped the banks report higher quarterly profit than analysts estimated even as unemployment stagnated at a 27-year high, came with a big assist from the Federal Reserve. The U.S. central bank helped lenders by holding short-term borrowing costs near zero, giving them a chance to profit by carrying even 10-year government notes that yielded an average of 3.70 percent last quarter.

The gap between short-term interest rates, such as what banks may pay to borrow in interbank markets or on savings accounts, and longer-term rates, known as the yield curve, has been at record levels. The difference between yields on 2- and 10-year Treasuries yesterday touched 2.71 percentage points, near the all-time high of 2.94 percentage points set Feb. 18.

Harry Blodget explains: The latest quarterly reports from the big Wall Street banks revealed a startling fact: None of the big four banks had a single day in the quarter in which they lost money trading.

For the 63 straight trading days in Q1, in other words, Goldman Sachs (GS), JP Morgan (JPM), Bank of America (BAC), and Citigroup (C) made money trading for their own accounts.

Trading, of course, is supposed to be a risky business: You win some, you lose some. That's how traders justify their gargantuan bonuses--their jobs are so risky that they deserve to be paid millions for protecting their firms' precious capital. (Of course, the only thing that happens if traders fail to protect that capital is that taxpayers bail out the bank and the traders are paid huge "retention" bonuses to prevent them from leaving to trade somewhere else, but that's a different story).

But these days, trading isn't risky at all. In fact, it's safer than walking down the street.

Because the US government is lending money to the big banks at near-zero interest rates. And the banks are then turning around and lending that money back to the US government at 3%-4% interest rates, making 3%+ on the spread. What's more, the banks are leveraging this trade, borrowing at least $10 for every $1 of equity capital they have, to increase the size of their bets. Which means the banks can turn relatively small amounts of equity into huge profits--by borrowing from the taxpayer and then lending back to the taxpayer.

The government's zero-interest-rate policy, in other words, is the biggest Wall Street subsidy yet. So far, it has done little to increase the supply of credit in the real economy. But it has hosed responsible people who lived within their means and are now earning next-to-nothing on their savings. It has also allowed the big Wall Street banks to print money to offset all the dumb bets that brought the financial system to the brink of collapse two years ago. And it has fattened Wall Street bonus pools to record levels again.

Paul Abrams chimes in: To get a clear picture of what is going on here, ignore the intermediate steps (borrowing money from the fed, investing in Treasuries), as they are riskless, and it immediately becomes clear that this is merely a direct payment from the Fed to the banking executives...for nothing. No nifty new tech product has been created. No illness has been treated. No teacher has figured out how to get a third-grader to understand fractions. No singer's voice has entertained a packed stadium. No batter has hit a walk-off double. No "risk"has even been "managed", the current mantra for what big banks do that is so goddamned important that it is doing "god's work".

Nor has any credit been extended to allow the real value-producers to meet payroll, to reserve a stadium, to purchase capital equipment, to hire employees. Nothing.

Congress should put an immediate halt to this practice. Banks should have to show that the money they are borrowing from the Fed is to provide credit to businesses, or consumers, or homeowners. Not a penny should be allowed to be used to purchase Treasuries. Otherwise, the Fed window should be slammed shut on their manicured fingers.

And, stiff criminal penalties should be enacted for those banks that mislead the Fed about the destination of the money they are borrowing. Bernie Madoff needs company. There is another type of guaranteed spread that allows the giant banks to make money hand over fist. Specifically, the Fed pays the big banks interest to borrow money at no interest and then keep money parked at the Fed itself. (The Fed is intentionally doing this for the express purpose of preventing too much money from being lent out to Main Street.)

The newly-released Fed data shows that the Fed also threw money at many of the big banks at ridiculously low interest rates.

And as I also pointed out, the government gave tax subsidies to the too big to fails:

The Treasury Department encouraged banks to use the bailout money to buy their competitors, and pushed through an amendment to the tax laws which rewards mergers in the banking industry (this has caused a lot of companies to bite off more than they can chew, destabilizing the acquiring companies). Indeed, the Wall Street Journal noted this week:

A series of tax relief measures is saving companies bailed out by the government billions of dollars at a time when concern over tax revenues has risen. Although the Treasury Department first provided the tax guidance in the fall of 2008, the magnitude of the tax savings has become clearer in the past year ....

"The agencies are literally throwing gratuities at banks and other companies," said Christopher Whalen, a bank stock analyst at Institutional Risk Analytics. And as I've previously reported:

The fact that the giant banks are "too big to fail" encourages them to take huge, risky gambles that they would not otherwise take. If they win, they make big bucks. If they lose, they know the government will just bail them out. This is a gambling subsidy.

The very size of the too big to fails also decreases the ability of the smaller banks to compete. And - since the government itself helped make the giants even bigger - that is also a subsidy to the big boys (see this).

The monopoly power given to the big banks (technically an "oligopoly") is a subsidy in other ways as well. For example, Nobel prize winning economist Joseph Stiglitz said in September that giants like Goldman are using their size to manipulate the market:

"The main problem that Goldman raises is a question of size: 'too big to fail.' In some markets, they have a significant fraction of trades. Why is that important? They trade both on their proprietary desk and on behalf of customers. When you do that and you have a significant fraction of all trades, you have a lot of information."

Further, he says, "That raises the potential of conflicts of interest, problems of front-running, using that inside information for your proprietary desk. And that's why the Volcker report came out and said that we need to restrict the kinds of activity that these large institutions have. If you're going to trade on behalf of others, if you're going to be a commercial bank, you can't engage in certain kinds of risk-taking behavior."

The giants (especially Goldman Sachs) have also used high-frequency program trading which not only distorted the markets - making up more than 70% of stock trades - but which also let the program trading giants take a sneak peak at what the real (aka “human”) traders are buying and selling, and then trade on the insider information. See this, this, this, this and this. (This is frontrunning, which is illegal; but it is a lot bigger than garden variety frontrunning, because the program traders are not only trading based on inside knowledge of what their own clients are doing, they are also trading based on knowledge of what all other traders are doing).

Goldman also admitted that its proprietary trading program can "manipulate the markets in unfair ways". The giant banks have also allegedly used their Counterparty Risk Management Policy Group (CRMPG) to exchange secret information and formulate coordinated mutually beneficial actions, all with the government's blessings.

In addition, the giants receive many billions in subsidies by receiving government guarantees that they are "too big to fail", ensuring that they have to pay lower interest rates to attract depositors.

The government's failure to rein in derivatives or break up the giant banks also constitute enormous subsidies, as it allows the giants to make huge sums by keeping the true price points of their derivatives secret. See this and this.

The PPIP program - which was supposed to reduce the toxic assets held by banks - actually increased them, and just let the banks make a quick buck.

In addition, the government suspended mark-to-market valuation of the toxic assets held by the giant banks, and is allowing the banks to value the assets at whatever price they desire. This constitutes a huge giveaway to the big banks.

As one writer notes: By allowing banks to legally disregard mark-to-market accounting rules, government allows banks to maintain investment grade ratings.

By maintaining investment grade ratings, banks attract institutional funds. That would be the insurance and pension funds money that is contributed by the citizen.

PhD economists John Hussman and Dean Baker (and fund manager and financial writer Barry Ritholtz) say that the only reason the government keeps giving billions to Fannie and Freddie is that it is really a huge, ongoing, back-door bailout of the big banks.

Many also accuse Obama's foreclosure relief programs as being backdoor bailouts for the banks. (See this, this and this).

The big banks - such as JP Morgan - also benefit from foreign bailouts, such as the European bailout, as they are some of the largest creditors of the bailed out countries, and the bailouts allow them to get paid in full, instead of having to write down their foreign losses.

When all of the different bailouts and subsidies given to the big banks are added up, it is obvious that they have not come anywhere close to "paying back" what we gave to them.

Like most Zerohedge articles, its facts are misinformative and "logic" based on thes facts is twisted. There are too many things wrong with it to count so I'll just point out a few:

First, the sources in the article are almost entirely from the left political spectrum:

Barry Ritholtz, for instance, thinks that GM bailout was orderly and a "single best decision of the bailout era" (essentially a takeover by the Government via "prepackaged bankruptcy") but the banks' "bailout" was bad and messy, and his prescription for "solving" that was the "GM treatment" for the banking industry - a government takeover of the banks via "prepackaged bankruptcy"... see Ritholtz: Too Bad Banks Missed Out On the GM Treatment...

Anybody else who thinks like that, except maybe Nobel Prize for economics winner PhD Paul Krugman? Krugman, unfortunately, was not quoted in the article (leftist bias would be too obvious?) but the leftist "PhD economists John Hussman and Dean Baker" (of "progressive" Center for Economic and Policy Research) and Clinton's economic advisor, another Nobel Prize winner Joseph Stiglitz did.

Second, the BIG banks have either already paid back TARP loans (with exorbitant interest) or have been delayed from doing it by the Treasury or FDIC Chair Sheila Bear, for supposed "capital reserves ratio maintenance" reasons... What has not been paid is coming mostly from smaller banks (BTW, "FDIC Friday's takeovers" have quieted down substantially), GM / Chrysler debacle, and some AIG assets that have not yet been sold or IPO'd.

BofA says it has satisfied TARP exit condition - Reuters / CNBC, 2010 December 05

Bank of America has told regulators that it has met the final condition in repaying the government's $45 billion bail-out funding, according to the Financial Times on Sunday. The bank was able to meet the required $3 billion in capital raised through the scaling back and disposition of certain assets, said the media report. BofA was given until the end of this year to record the gains. ..... < snip >

After Citigroup and GM, Treasury Turns to AIG - CNBC, by David Faber, 2010 December 07

The U.S. Treasury can claim victory in its bailout of Citigroup with the huge “cleanup” trade completed Monday that took Treasury out of its remaining 2.4 billion shares at $4.35 a piece. It was a well orchestrated deal that removed the overhang in Citi shares and gave the government an average of $4.15 for the 7.7 billion shares of Citi it began selling last spring. ..... < snip > ..... Most likely: a road show next year in which AIG re-introduces itself to the investing public, paving the way for the first in what will be another series of offerings from Treasury of its shares.

Fed Critics Run Risk Their Attacks Will Backfire - Financial Times / CNBC, 2010 December 06

Fed Bernanke's been right - NYP, by Terry Keenan, 2010 December 06

So it looks like Fed Chairman Ben Bernanke may have been right all along. After enduring a month of unprecedented criticism, beginning with an open revolt against his easy-money policies by some notable and not-so-notable economists, a YouTube satire that went viral, and a full assault on the central bank's independence by Vermont Sen. Bernie Sanders, this weekend Bernanke's extraordinary measures to fire up the economy don't appear so laughable. ..... < snip >

Third, private proprietary trading for their own accounts (mostly they do it for their customers who were paying for risk) was never a big source of income even for the investment banks, relative to their other operations. And GS, JPM and other U.S. banks have either shut down or sold their PT operations after FinReg has passed - not worth the trouble, they will make the money off their good customers (that's you and me) by charging them more in fees on formerly cheap or free services. Yes, the traders (or other professionals) are getting paid millions when they create tens or hundreds of millions in profits, that's the nature of compensation in the capitalist world - high return = high risk. When there is manipulation or insider trading, prove it and stop the individuals doing it.

Fourth, on this: Because the US government is lending money to the big banks at near-zero interest rates. And the banks are then turning around and lending that money back to the US government at 3%-4% interest rates, making 3%+ on the spread.

That's just a stupid statement from someone claiming to understand economics or banking industry... Banks have always lived off of "real rates" spreads - by getting short-term loans at smaller rate of interest (short end of the interest curve) from the Fed or other banks and taking the "rate" risk of lending them long-term (10-30 years), obviously at higher rate of return, to customers such as businesses, commercial or residential real estate... or the Treasury. That's, partially, what liquidity crisis was about - the value of long term assets on balance sheets could not be determined at the time because, in deflation, the "normal" market rules and valuations no longer applied or worked. TARP almost immediately stabilized the financial industry, without which the economy couldn't function properly.

Where do they think the banks would get the money to pay back the short-term loan if they just loaned the sum for 30 years? If you think riding a short-long term spread is "easy money" - try starting a bank... after all, you have nothing to worry about, the Fed / government / taxpayers will "bail you out" if rates or bad loan defaults rise.

We don't need to deny that the economy has a lot of problems or that "progressive" policies of the government (both Democrats and Republicans) piled up debts and unfunded mandates is not a problem, but pointing out the obvious doesn't mean we should join the leftists in misinforming and misdirecting what the sources of these problems are (a BIG government "progressive" policies) and helping them to make government even bigger by destroying private industries. Have Barney Frank and Bernie Sanders and the "Wall Street crusaders" Spitzer and Cuomo, and the newly installed unaccountable "consumer czar" Elizabeth Warren, among others, not been doing enough damage and cost good banking customers enough grief and money?

There is plenty to be mad about, but that's no reason to join hands with Bernie Sanders and Barney Frank in their "solutions" to misidentified "problems". Let's not be their dupes yet again (see Paul Kangor's just published book "DUPES: How America's Adversaries Have Manipulated Progressives for a Century") and then wonder how people lose their freedoms (like Germans wondered about how they let Hitler and fascism happen... only after WWII).

Just because we are mad, we don't have to lose our minds.

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