Listening to some bank executives these days, you might get the idea that their institutions are good credit risks, borrowers who repay their loans promptly and willingly. We took government TARP (Troubled Assets Relief Program) money unwillingly, they say. We did it as a kind of public service, they say. But darn it, they say, we’re going to pay it back with interest now because we don’t want our businesses run by the government.
My, my. Doesn’t that sound public-spirited. Heroic even. The kind of thing free market guys might say as part of their crusade to check the incursions of a semi-socialist Administration in Washington.
The reality, though, is that this loan payback is a hypocritical, self-serving sham.
TARP funds padded the books of big banks at a time when some of these banks might have gone under without such infusions. The reason bankers felt queasy about accepting these funds, however, was because it came with a few strings. Namely, that the government, like every other provider of funding, demanded a chunk of equity for its trouble. Even worse, and also like every private provider of funding, the government expected TARP-taking executives to limit the compensation they could receive after driving their businesses to the brink of bankruptcy. Horrors!
That’s why big bank execs now want to pay back TARP funds. But don’t they still need government support, you ask? Well, yes. But fortuantely for them there’s another source of this support that comes from the Fed, and it has no strings attached.
At the Fed’s “lending window,” banks have gotten literally trillions of dollars at interest rates that vary between nothing and one-half percent. Recipient banks can then lend this money out at three percent to favored borrowers and far more to their best-paying credit card borrowers (slow credit card payers need not apply at all).
This, then, is the naughty little secret of the good new numbers appearing on bank quarterly reports. Banks are getting Fed money (our money) for virtually noting, then lending it back at far, far higher rates to those who gave them the money in the first place—us.
It’s the best deal in banking history. Best, that is, for the banks. And it’s what now gives them the wherewithal to free themselves from those quasi-socialist restrictions on executive compensation.
Now don’t you wish you had a deal like this instead of queuing up at the local unemployment office?