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Bankers Want Out of Bailout Conditions

by Michael Wolraich 4/11/2009 - 2:12 pm   |

Banks are chafing under Federal bailout terms, according to today's New York Times. Fearing that they will be forced to sell off toxic assets and curtail executive compensation, some banks are trying to return bailout money. But there's a catch. In order to receive the bailout loans, the banks had to grant the Federal Government stock warrants. The warrants give the Federal Government the option to buy stock in the company at a specified price. The Treasury will only allow the banks to opt out of the bailout program if they buy back the warrants, a steep penalty.

And the bankers don't like it one bit. Last month, three C.E.O.'s of large banks asked President Obama to tell the Treasury not to exercise the warrants. Douglas Leech, the C.E.O. of a small West Virginia bank that wants to repay its bailout loan, was so incensed that he used the U-word:

What they did is wrong and fundamentally un-American. Even though the government told us to take this money to increase our lending, the extra charge meant we had less money to lend. It was the equivalent of a penalty for early withdrawal.

I feel your pain, Douglas Leech (great name, btw) and other unnamed C.E.O.'s. When the government made you take its money, you didn't expect any annoying conditions. The government is supposed to be the nice Sugar Daddy, not the mean Money Lender. That's your job. And now that you've discovered that the government isn't as generous as you thought, you should at least be able to get out of your contractual obligations. We're in a recession for crying out loud; it's an obligation-free-zone. Except of course for mortgage defaulters and overpaid executives.

PS Fox News feels your pain too.

One angle that I don't hear discussed very often (at least outside of the Austrian/Libertarian circles that perennially detest the Fed, fractional reserve banking and fiat currency on principle) is that we, the people, grant banks license via the central banking system to create money and charge interest on that money.  I'm not judging that practice as fundamentally good or bad, but rather stating it as fact.  That's how the system works.

This is the basis for government oversight of the banking system.  It's not merely that the big bad Federal government is mean and nasty and totalitarian and wants to tell private entities what to do.  It's that we've allowed the private sector to participate actively and profit from monetary policy.

In light of this, I'd say that there's an option we can offer any bank that is now in the position you describe: Receivership.  If they don't like the (arbuable lax) terms under which they accepted these funds, they can be received and sold off.

by DF 4/11/2009 - 2:58 pm

Well, to be fair, the banks that want to return bailout money are not AIGs and Lehmans on the verge of collapse. They can afford to pay the penalties; they just don't want to. That raises the question: Why were these banks given bailout money in the first place if they didn't really need it?

In the article, Mr. Leech implies that the government pressured him into taking bailout money. That's probably spin for the most part, but it is my sense that the government wanted banks that weren't at extreme risk to participate in the bailout in order to encourage them to lend, and that's also why it wants these banks to stay in the bailout program. Is this true? Was it necessary? I don't feel that I understand the issues will enough here.

by Michael Wolraich 4/12/2009 - 12:09 pm (re: DF)

It's tough to get complete information and disclosure - a problem in itself - but I feel pretty confident that when the proverbial shit was hitting the fan, the government likely encouraged all financial institutions of significant size to take the bailout money so that Americans wouldn't discriminate too much versus healthy and unhealthy institutions.

So if true, was it necessary to encourage all banks to take bailout money?? If all banks hadn't participated, it's quite possible that the ones that did would have found themselves tainted for having taken the TARP money. Also, you could argue that banks which seemed 'healthy' could quickly find themselves in danger if the actions we took weren't dramatic enough to keep the system from really shutting down.

However, I think in general throughout this process, we have been way too concerned about protecting weakened institutions and not nearly concerned enough with determining in a frank and forthright manner how bad our situation really is.

by Deadman 4/12/2009 - 5:57 pm (re: Genghis)

Those are good questions.  If those things are true, how close is this scenario to a contract under duress?

by DF 4/13/2009 - 1:07 am (re: Genghis)

I knew it. Pitchfork looks good on you.

by Orlando 4/12/2009 - 6:27 pm

More like a flail, goes in all directions.

by Michael Wolraich 4/12/2009 - 7:44 pm (re: Orlando)

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