The reason why banks are suddenly repaying their bailout funds | Hacker News Reader

The reason why banks are suddenly repaying their bailout funds

slate.com

57 pointscwan27 comments

Isn't there a kind of catch 22 going on in the media with regards to banks these days?

If they pay back (with interest), they're bad guys because they just want to get the government off their backs (what would you do if you were them?).

If they don't pay back, they're bad guys because they took money from the government and that hasn't somehow turned them into "nice" banks that lend to whoever you'd want them to lend to.

Don't get me wrong, there are a lot of shady characters involved in this story. But it still seems like a case of damned if you do, damned if you don't.

I didn't get the sense this piece was criticizing... just explaining.

I did get the feeling the piece was criticizing, but not that the author was a critic of the banks actually paying the gov't back, but of their motivations for doing so. "Yes, I'm thrilled they're paying back the money they owe sooner rather than later, but it's sad that the only reason they're doing so is because their execs are money-grubbing bastards."

There was another article here the other day about how the banks were basically exchanging TARP money for guaranteed loans from the government. Now that is shady.

The point is that many of them including Goldman Sachs would have collapsed outright without the bailout money. Now that the funds gave them enough liquidity to survive the crisis, they were given money to increase the cash flow in a depressed markets: the crucial role that banks play in society.

Instead of doing this, they decided to use the money to pay their employees gigantic bonuses, or by using it to acquire smaller banks that didn't get TARP money. The banks even pumped several hundred million dollars into lobbying.

This is a clear abuse of the system and the only reason more people aren't angry about what's happening is because they don't know something like this is happening.

GS had already arranged to be "bailed out" by Warren Buffett. They took the TARP money because the government made it mandatory to do so (so banks that needed it wouldn't be seen as weak in the marketplace). They simply sat on it, then repaid it with interest (20% APR, how likely is the government to get that from the bond market?!).

There is a paradox here: banks were simultaneously supposed to a) increase their lending and b) increase their capital reserves. Those two are mutually contradictory, and the banks chose b.

I'm not saying that TARP wasn't abused at all, but I will say that it presented an enormous moral hazard. Also here in the UK, the government knew that the state of Lloyds was far worse that it was, and didn't tell anyone 'til the risk had been transfered to the market... If a bank did that, people would be going to jail for insider trading.

Warren Buffet only invested $5 billion into GS. Look at their cash flow here: http://www.google.com/finance?q=NYSE:GS&fstype=ii

$5 billion is peanuts compared to the amount of money being lost during that period, but of course it is impossible for outsiders to tell for sure if GS needed the TARP money, there were strong signs that say yes.

I think most of the criticism revolves around the (sometimes record) bonuses they have received while also receiving bailout funds. That is what they are damned for. If they had not paid out such decadent sums of money, I don't think anyone would be criticizing them for paying back their debt.

The problem is that the only thing TARP is good at motivating banks to do is get the hell out of TARP so they can get back to taking outrageous risks, now even safer in the knowledge that if it all goes south the US taxpayer will bail them out rather than destroy the economy.

The banks should not be allowed to leave TARP. As long as these banks continue to enjoy an implicit government guarantee, the government should maintain its stake, and its say, in the running of those banks. If they want to stop being under the control of the government, they need to split themselves into entities that are Small Enough To Fail.

Banks should be Small Enough To Fail. They should also have compliance divisions the size of entire corporations. They should charge reasonable rates of interest. They should also offer money to good customers for free. They need to stop charging so many late and overdraft fees. They should offer free checking. They should revise any policy which has a disparate impact on minorities. They should stop giving out risky mortgages to people who are going to default on them. They should stop relying so much on impersonal credit scoring and have more humans in the loop. They should return credit decisions in under a minute at 3 AM in the morning. They should have customer service employees who speak proper English and can actually help with issues. They should be glad to get a phone call from a $100 a year account at 3 AM in the morning. They should do more to protect customers from fraud. They should stop freezing the accounts of perfectly innocent people.

I am so glad I am not a bank.

It took a while, but I finally detected the sarcasm above.

I am not making this up: Just yesterday I went to reorder checks on-line, and got told "FAIL" and to contact my bank. So I called the main branch in this state and a human being answered. I told her my tale and she said she could help me right then, which she did. Are banks again serving (as opposed to "servicing") their customers?

"Bankers, especially investment bankers, aren't interested particularly in long-term shareholder returns or even in providing capital to businesses. They're interested making money and getting paid. If you want to do God's work, you don't work at a bank.."

vs.

"Bank of America ... raised $20 billion from the public" and "Citi raised $20.5 billion of capital..."

How do they raise so much capital if the investors know that it's just to change their TARP structure to enable the execs to get high bonuses?

Probably because investors aren't that rational after all and don't really care why the offering came out.

I think the issue is that the Federal Reserve and Congress has allowed the banks to remove bad assets from their balance sheets which makes the companies look better off than they actually are. The banks are pretty much insolvent right now and they know it. The problem is that Congress doesn't really know it. I think that Bernanke knows its though and that's why he's paying interest on reserves held at the Fed right now.

The money supply is still contracting and while that's happening all this nonsense about the recession being over is just that-nonsense. No one wants to lend and no one wants to borrow and for good reasons.

Investors aren't really interested in doing God's work, either. They are interested in getting paid. They are able to raise funds because investors think that they might be able to buy BofA and Citi stock cheap.

So who is buying all these banks' assets? (Assets = money owed to these banks, like loans, credit card balances, etc.) Wells Fargo's news release didn't say.

I don't like it when they say "$90 billion in repayments to the taxpayers in a week"

That makes it seem like us taxpayers will actually see some of that money as a return, but we never will.

With an 11 trillion dollar debt it was never ours to begin with.

It was ours to begin with, but with an 11 trillion dollar debt, we'll just never get it back.

I was hoping for better reporting when I saw this post. The article didn't show a causal link between regulating bonuses and the payback, it showed correlation:

"The investment banks that were capable of paying back did so in June, the month when lawyer Kenneth Feinberg was appointed as TARP's special master for executive compensation. Coincidence?

In October, Feinberg issued compensation guidelines for the companies receiving special assistance, including Citi and Bank of America. That, and the approach of the bonus season, lit a fire under executives at the largest remaining TARP recipients."

Interesting to note too that at the same time all this is going on, Citibank is jacking up credit card interest rates to 29.9% for many of its customers:

http://www.associatedcontent.com/article/2370258/citibank_ra...

Laughing all the way to the bank indeed...

Simplifying slightly, the way consumer credit works is, if you expect 10% of your customers to default then you need to change 10% interest to even break even, let alone cover your administrative costs, and let alone to make a profit. If you are in a market segment that has somewhere near 30% chance of defaulting then your options are a) a 30% credit card b) no credit at all.

It's not a question of chance of failure but rate of failure. If 10% of your customers failed every 10 years then you could make a lot of money at 10%APR compounded monthly. You can also be extremely profitable with a 3% failure rate per month and 30% interest rate, because you can sell that bad debt for more than 0$.

PS: How it's called an APR when they charge you APR / 12 per month is beyond me.

Well, your other option is to be a little more discriminating on who you issue credit to in the first place.

I use credit cards, but only as a convenience. I never carry a balance. Why should I subsidize deadbeats?

Yeah that's what I mean. The alternative to high interest isn't low interest, it's no credit at all.

FWIW I use a charge card, which has to be paid off in full every month.

I actually have personal experience with this. I got a letter from my credit card company saying there was going to be a 20% interest rate hike on my card. It's pretty embarassing to admit I have a credit card with a sizable balance on it, but I'd like to point out that my company gave an easy way out:

I was allowed to "opt-out" of my card to avoid having the interest rate hike affect my existing balance. This means my account is not closed, but I am not allowed to use the card anymore and my balance is still charged the pre-existing interest rate. I have no need to use this card, it is mainly a towering specter of shameful debt to be paid down, so this option was a dream come true.

towering specter of shameful debt

Stop that! There is nothing "shameful" about borrowing money. Nothing!

Banks exist for a reason, and that reason isn't going away any time soon. People and businesses need liquidity and while you should always carefully manage your financial situation, saving up your pennies for years because you need/want a $25,000 car is silly if you can get a loan right now that you are perfectly capable of servicing.

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