Somewhat understandably because of the way Hank Paulson, umm handled, the first round of bailout funds, it now appears that many of the institutions that took funds from the Troubled Asset Relief Program (TARP) thought it was free money with no strings attached.
So when Wells Fargo announced this week that it would be repaying TARP funds before the end of the year, Wall Street cheered and their share price jumped. The second wave of news revealed that the real reason for the seemingly miraculous turnaround was the $500,000 limit in cash compensation for executives of organizations that participate in TARP. Basically these bankers don’t want to participate in capitalism if they can’t get a King’s ransom for it. I talk a lot about value and linkages, and clearly banking executives value getting paid a lot, and I wouldn’t be surprised if there’s a correlation, if not a cause, between a certain minimum pay and bank performance. I can live with that.
The part that got my dander up, and it is up, was hearing that the banks that took TARP funds are now pushing back on paying the significant premiums they agreed to pay when they took the money. They are refusing to make a payment they agreed to when they took the money. . .Do you think people buy cars from schlunky used car dealers with outrageous interest rates because they like it? NO! They do it because no one else will loan them the money because they have crummy credit ratings and the schlunky car dealer is their last resort (in some cases I think it is actually because they are bad at math, but I will come back to that). And do those people on Main Street driving those used cars get to refuse to make payments they agreed to? I don’t think so. Who are these people running these banks behaving like this and why don’t we get rid of them like we did with Rick Wagoner at GM?
But it gets worse.
Now the banks are being pressured to sell off their worst mortgages, their toxic assets, what industry analysts have said is more than $1 trillion in the US, and the banks are saying “no” to that as well. The issue is that the banks value these assets much higher than the investors are willing to pay. The New York Times reported this morning that Frank Pallotta, a former Morgan Stanley mortgage trader said that because the gap is so wide “if every bank was forced to sell at the market clearing price, you would have only five banks left in the market.” I am sorry if the timing isn’t convenient for these banks to sell their toxic assets, but as I understand it, many of them would have died without TARP anyway, so they lost their right to decide whether it is, or is not, good timing.
As I understand it, to be a great banker, you need to be good at math, and understand risk. Clearly, the bankers that got us into this mess failed at that simple formula (I get that it’s slightly more complex than that). I am not an expert in banking, but my question to Frank Pallotta is, “why can’t we have just five banks?” let’s rethink that and see if, in the long run, that is a good solution.
This is all about getting the outcome we want, and as usual, I don’t care “how” we get there. We already saw what a disaster relief funds without strings were, if Treasury gets lax and fails to enforce what was agreed to up front, I don’t know why we would expect a different outcome.
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