Many people believe “banks” have gotten “bailed out” by the US government and therefore “owe” the American tax-payer.
Recently folks were outraged that interest rates on their credit cards were raised by the same banks that “received bail-out money.” They raised such a fuss that President Obama met with the leaders of major credit card companies today to address the issue.[1]
In fact, the word “bail out” is almost always used by just about everybody (government, the media, Wall Street, Main Street) to describe the U.S. Treasury’s Troubled Asset Relief Program (TARP).[2]
But exactly how many banks have “received bail-out money?”
Presuming that being “bailed-out” means a private corporation gets tax-payer money they won’t be able to pay back (i.e. tax-payers take a hit) a number of companies have indeed received bail-out money.
Bear Stearns, Fannie Mae & Freddie Mac were bailed out.[3]
AIG got bailed out.[4]
Citigroup and Bank of America have certain portions of their loan portfolios guaranteed by the US government (see note 2).
That’s a bail out. Public outrage over credit card interest rate hikes by these 2 banks is justifiable.
But the similarities stop there: Uncle Sam is charging all banks (including Citi & Bank of America) that participated in TARP (i.e. “received bail-out money”).
The banks aren’t getting something for nothing.
Any bank that received government money had to, in exchange, issue preferred shares that pay the government a minimum 5% dividend and grant equity warrants that allow the government to buy common shares of the company in the future.[5]
As such, every single bank that has allegedly “received bailout money” has given up a piece of their company to get the money. They are paying a fee for using tax-payer money and as long as they pay it back the tax-payer will come out ahead. Some want to pay it back right now but the government won’t take it.[6]
Translation: most banks haven’t “received bail out money” at all. Everyone just keeps calling it that.
[1] http://news.yahoo.com/s/ap/20090423/ap_on_go_pr_wh/us_obama_credit_cards
[2] http://en.wikipedia.org/wiki/Troubled_Assets_Relief_Program
[3] http://www.usnews.com/blogs/flowchart/2008/9/9/year-of-the-bailout.html
[4] http://www.nytimes.com/2009/03/16/business/16rescue.html;
[5] http://www.treas.gov/press/releases/hp1207.htm
[6] http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5192039/US-Treasury-Secretary-Tim-Geithner-dampens-TARP-repayment-hopes.html
(Disclaimer: the author of this post owns positions in various securities discussed above).
{ 2 comments… read them below or add one }
The reason it is a bailout, is that the government stepped in and made loans to banks that are insolvent. All of the other market participants looked at the current economic situation, the balance sheet of these banks, and each one decided that it would be stupid, stupid, stupid to loan money to an insolvent bank.
Fortunately, (for the bankers), the Federal Reserve and the Treasury department are imagining that there _must_ be a pony somewhere under that pile of “stuff.”
That depends on your definition of insolvency which apparently is quite different for banks than for other corporations. There are many major corporations out there with negative tangible common equity ratio’s (Proctor & Gamble, AT&T, Boeing, Kraft, HP & more) and no one considers them insolvent as long as they have funds or can obtain funds to keep operating. As long as banks can do the same I see no issue. Except that in the world of fractional reserve banking even apparent issues can cause great harm (for example, National City or Wachovia). Anyway, some are ready to pay the money back. Obviously they aren’t insolvent!