Should banks have to repay the auto bailouts?

Old news, but I find this type of populism scary. Back in January, Obama proposed a tax on banks with greater than $50 billion in assets in order to pay back any losses on the Troubled Asset Relief Program (“TARP”).

The Obama Budget estimates that losses from TARP will amount to $117 billion. The White House estimates that it will take approximately 12 years for the banks to pay this $117 billion fee.

Here is the latest Transactions Report from the Treasury Department detailing where the funds from TARP went. As you can see, a total of $249,884,728,320 went to banks as part of TARP’s Capital Purchase Program, Targeted Investment Program, and Asset Guarantee Program. Of this amount, $120,363,159,320 has already been repaid. That does not count the billions that have been paid in the form of dividends and warrant repurchases. The vast majority of the remaining funds owed by banks are from smaller regional and community banks. In fact, by the government’s own estimate, after all is said and done, they will have profited from the money provided to banks through TARP.

So if the government expects to profit from the bank bailout, then why would there be a need to assess a fee on banks in order to recoup losses? Because the government expects to lose $117 billion on the other components of TARP: the auto bailout, the AIG bailout, and the mortgage modification program. As expected, the banks oppose having to repay the money provided to the auto companies, etc. Here is Obama’s response.

This fee has a high likelihood of passing. As the New York Times states:

Is there anything about this that is not simply populism? Any time TARP is mentioned, it is always called the $700 billion bank bailout. The fact is that approximately one third of that money went to banks and that the government will end up profiting on those dollars in the end. The only reason this will pass is that the Democrats need to score points in an election year and Republicans are too afraid to stand up for them.

Can anyone defend this?

Here is Obama’s budget with the relevant quotes as follows.

The legislation that created TARP obligated the President to propose taxes on the recipeants to recoup any losses. So I don’t think you can blame Obama for this.

But in anycase, I think its fair. Buying AIG benefited the banks, so its certainly was fair for them to have to bare the cost.

And in the wider sense, it was unfortunately necessary but unfair for the taxpayers to have to bail out the banks in general. So it certainly seems reasonable to charge the banks for the cost of other bail outs (such as the auto companies) rather then charge them to the tax-payer.

I don’t quite see what the auto companies have to do with this. I don’t believe that any of this would excuse GM and Chrysler from their set of government loans, so I don’t see how this tax on the banks would be considered as paying off that bailout.

AIG has already been mentioned. Much of the money to AIG went to paying banks 100 cents on the dollar for their insurance with AIG on bad paper. I think it is at least reasonable to get the banks to pay this back out of their profits.

Beyond that, the gigantic deficit we are running and the stimulus required comes directly as a result of the risks the banks took. The cost to the government from them screwing up went far beyond TARP. Is it that absurd to ask them to pay back some of this out of their again gigantic profits?

The original legislation that created TARP is so different from what it actually ended up being that I find this point meaningless. Banks are unpopular, so Obama (and most other politicians) is trying to gain political points by bashing them every chance he can.

The global economy benefitted from the AIG bailout. It’s not like the money was simply funneled to domestic banks at the exclusion of everyone else. The funds went to many different parties that were owed money including municipalities and many other types of companies. Further, the majority of funds that did go to banks went to foreign banks who would not be subject to this bank fee. Finally, banks such as Goldman Sachs that received funds from AIG state that they had credit default swaps on AIG that would have compensated them in case AIG was unable to pay them directly.

Why is it unfair for taxpayers to have had to give money to the banks? The taxpayers will make money off that deal. It seems more unfair to have to give money to companies that can’t pay it back such as GM and Chysler.

Actually, almost all of the money given to the auto companies was converted to equity. While a detailed breakdown of where the government expects to lose money on TARP has not been provided, a sizable amount of it is clearly money that was given to the auto companies. They are never paying it back and the government does not expect them.

More money was given to foreign banks than domestic banks. Further, we know at least that Goldman Sachs who received something like $13 billion would have been paid regardless as they had hedged their exposure.

You can’t possibly be serious that the deficit we are running is directly the result of the banks. That is an absolutely absurd statement. Are you seriously trying to say that we would have a balanced budget if it wasn’t for the banks? Do you maybe want to try to rephrase this into something less crazy?

I think that any tax assessed on banks should be tied to something that relates to them. Why tie the amount directly to what the government will lose on their bailout of the auto companies, AIG, and the mortgage modification program?

I don’t get your point. The legislation as written legally obligates Obama to propose these taxes. He can push it off for a few years (till 2013, I think), but he can’t ignore it.

OK, but we can’t tax foreign banks, so here we are. Plus the health of the global economy in general is in the interest of American banks, even if not all the money went directly to them.

Well, it wasn’t obvious that there would be a profit, otherwise the banks could’ve just raised the money from other sources. So the taxpayers took an undesirable risk to subsidize the banks for making foolish investments, and the result put the American gov’t further into debt. So regardless of the eventual outcome, it was an unfair (but necessary) moving of concequences off of the banks and onto taxpayers.

And even now, the banks are profiting in part on the impression that the taxpayers will bail them out of future troubles, so making them pay for bailouts to other hardly seems unreasonable. Think of it sort of like the FDIC, the banks are paying into an institution that has in the past and will probably in the future provide funds when they can’t be had from other sources.

Well, that’s unfair to. But there isn’t any remedy for that unfairness, since GM and Chrysler are both still in the red.

Well, my point is that the TARP bill that passed is very different from what actually went into action. Essentially, they ignored one tremendously large component of the initial legislation, why wouldn’t they ignore another. Further, the legislation certainly doesn’t obligate Obama to pass this specific tax. I believe it requires him to propose a plan five years from when TARP was enacted. It’s not like he is following it to the letter now, he is, in my opinion, moving much quicker than obligated so he can score political points. Further, he is targeting the large banks because it is an easy victory.

Nothing you say here is incorrect, however, it is too limited. The health of the global economy benefits a whole lot more than just banks. Why not tax other industries that benefit just as much if not much than banks?

As is well known, many of the banks did not need the funds and in fact had raised money from other sources. Furthermore, do you realize that the federal government borrows more money from JPMorgan than JPMorgan ever received in TARP funds?

I have seen no evidence that banks benefit from any implied federal governement guarantee, but that point really isn’t worth discussing. The FDIC is true insurance, and I don’t think a very good comparison at all. The banks pay the FDIC and the FDIC bears the costs of failed banks.

Why not tax Ford and other auto companies to pay back the funds given to Chysler and GM? Why not tax other insurance companies to pay back the funds given to AIG? Could it perhaps be that the banks are an easy target that Obama knows no one will defend?

Your saying he should break the law, and your angry that he’s not?

The timing is probably politically motivated, but whether he does it now or later doesn’t have much bearing on how “fair” it is, IMHO.

TARP requires him to raise the money from financial institutions. But in anycase, they were the most direct beneficiaries, so I’m OK with them paying it back.

Then they shouldn’t have taken them.

But the existence of FDIC makes investors more confident in banks, and thus more willing to invest their money with them, hence benefiting the banks. Hence the comparison. The possiblity of future bailouts makes investors put more willing to invest in banks, which isn’t really fair, but at least recouping the loss of past bailouts from the banks makes it more fair.

See above. The tax is required to be on financial institutions. But in any case, they were the main

It is my understanding that GM is already trying to figure out how to pay the money back, since the fact that Ford didn’t take any money was a competitive advantage. Chrysler is in worse shape. There is definitely a risk, but if GM recovers the government can make a tidy profit by selling the equity as soon as feasible - which they should do and will do. In any case, they haven’t lost any money yet.

Sadly, I think you are right about the foreign banks. Tax their US operations also. The AIG instruments were the hedge. It would have been perfectly feasible to have forced Goldman and the others to take something less then 100 cents on the dollar for AIGs obligations, and thus reduced the government bailout of AIG. if you want to rail at Treasury for being pussies, I’m right behind you.

I was trying to keep it simple. We all know the entire deficit is Bush’s fault. :wink: But seriously I meant the incremental deficit from the stimulus money and the decrease in tax revenues due to the recession. The banks are clearly not 100% to blame, but they are not expected to pay 100% of the money back either. Much as I’d like to collect it from those really responsible, I don’t think Greenspan has that kind of money.

As I said, if any is directly tied to the auto companies, I agree that the banks had little to do with that particular problem. What mortgage modification program do you mean? The one I know of has had precious little traction. AIG is directly related. The banks leveraged to an absurd extent, though AIG was stupid enough to write the policies. Once they start making money again, and we unload our equity in them, we should tax them also.

Cyrano Jones had to clean up the tribbles - the banks should pay to clean up their mess also.

There is one more reason this good, and that’s the moral hazard. The banks took major risks, got clobbered, trashed the economy, and now are making money like crazy on trading, not loans, while the economy is still on crutches. Why would any bank CEO not do exactly the same crap again? Having a big tax stuck on them, reducing their profitability, should at least help them consider the consequences. Many of you guys said you wanted them to fail because of the moral hazard issue. That’s okay but a tax isn’t?

And to add to the above points, the Fed has bought over two trillion dollars of toxic mortgage securities at full boat (and guaranteed trillions more) and scrapped mark-to-market and replaced it with mark-to-make-believe. If it hadn’t had done either of those things the banks would all be clearly insolvent right now. To claim that the banks have paid all the bailout money back because one (1) of the alphabet soup of bailout programs that we know about, the TARP, will eventually be mostly paid back is hilarious. The TARP is a shell game anyway. The banks that are really broke are just allowed to borrow from one of the other programs or are given a bailout by other means, see below, so they can keep repaying what they owe to it. That way the government can claim “they paid the TARP back, everything’s OK!” when in fact everything is not OK. Anybody running one of the big bailout banks should be facing a mountain of federal charges right now and a lot of time, the fact that they’re whining about paying back a fraction of the money they blew and that some people apparently are feeling sorry for them would be funny if this wasn’t such a disaster. Do you seriously think we’re only going to lose $117 billion, not even to mention the cratering of GDP growth/government revenues/soaring debt and deficits, when this is all over? Jeebus.
U.S. gave up billions in tax money in deal for Citigroup’s bailout repayment

By Binyamin Appelbaum
Washington Post Staff Writer
Wednesday, December 16, 2009
The federal government quietly agreed to forgo billions of dollars in potential tax payments from Citigroup as part of the deal announced this week to wean the company from the massive taxpayer bailout that helped it survive the financial crisis.

The Internal Revenue Service on Friday issued an exception to long-standing tax rules for the benefit of Citigroup and a few other companies partially owned by the government. As a result, Citigroup will be allowed to retain billions of dollars worth of tax breaks that otherwise would decline in value when the government sells its stake to private investors.
While theObama administration has said taxpayers are likely to profit from the sale of the Citigroup shares, accounting experts said the lost tax revenue could easily outstrip those profits.
The IRS, an arm of the Treasury Department, has changed a number of rules during the financial crisis to reduce the tax burden on financial firms. The rule changed Friday also was altered last fall by the Bush administration to encourage mergers, letting Wells Fargo cut billions of dollars from its tax bill by buying the ailing Wachovia.
“The government is consciously forfeiting future tax revenues. It’s another form of assistance, maybe not as obvious as direct assistance but certainly another form,” said Robert Willens, an expert on tax accounting who runs a firm of the same name. “I’ve been doing taxes for almost 40 years, and I’ve never seen anything like this, where the IRS and Treasury acted unilaterally on so many fronts.”
Treasury officials said the most recent change was part of a broader decision initially made last year to shelter companies that accepted federal aid under the Troubled Assets Relief Program from the normal consequences of such an investment. Officials also said the ruling benefited taxpayers because it made shares in Citigroup more valuable and asserted that without the ruling, Citigroup could not have repaid the government at this time.
“This rule was designed to stop corporate raiders from using loss corporations to evade taxes, and was never intended to address the unprecedented situation where the government owned shares in banks,” Treasury spokeswoman Nayyera Haq said. “And it was certainly not written to prevent the government from selling its shares for a profit.”
Congress, concerned that Treasury was rewriting tax laws, passed legislation earlier this year that reversed the ruling that benefited Wells Fargo and restricted the ability of the IRS to make further changes. A Democratic aide to the Senate Finance Committee, which oversees federal tax policy, said the Obama administration had the legal authority to issue the new exception, but Republican aides to the committee said they were reviewing the issue.
A senior Republican staffer also questioned the government’s rationale. “You’re manipulating tax rules so that the market value of the stock is higher than it would be under current law,” said the aide, speaking on the condition of anonymity. “It inflates the returns that they’re showing from TARP and that looks good for them.”…

I’m not saying he shoudl break the law. First, what I am saying is that if it were the law that only banks were responsible for repayment, then it would seem hypocritical to strictly adhere to that portion of the law while ignoring the other 90%. Lest we forget, the TARP that was passed provided for the government to purchase troubled or toxic and illiquid assets from primarily banks. I assume you at least agree that that isn’t what happened. Second, I am saying that I do not believe it is the law that the President is required to tax banks to recover any losses. I believe the actual law is that the President propose a plan five years after TARP was passed for repayment from the financial industry. I presume that financial industry includes investment banks, commercial banks, hedge funds, insurance companies, mortgage companies, financing arms of auto companies, etc. Third, I believe that since the original funds of TARP were used in a completely different manner and even incorporated other industries, is it really such a stretch to think that the combined powers of the executive and legislative branches could change the law to have those who benefitted be responsible for the repayment?

The received approximately one third of the total $700 billion. They currently owe approximately one third of the remaining $367 billion. They are expected to more than pay back the amount owed to them meaning that the remaining $238 billion paid to the auto companies, AIG, and the mortgage modification program is expected to lose at least 50%. Explain again how they are the most direct beneficiaries of this program?

Are you actually serious with this statement? I can’t tell. It is common knowledge that many of the original nine banks were forced to take the funds. Many of the following hundreds of banks were pressured to take the funds. Further, banks that were forced to take the funds were begging to be allowed to pay it back. Jamie Dimon even personally brought a $25 billion check to Washington to hand to Tim Geitner and was still not allowed to pay it back.

I’m assuming that you are using incorrect terminology here. Otherwise you are ignorant of the FDIC process. When the FDIC gets involved, the bank’s investors get wiped out. I assume you mean the depositors of a bank. However, if so your analogy makes even less sense. In bailouts investors are usually similarly either wiped out or else severely diluted. I thought you were previously trying to say that a bank’s counterparties would be more willing to do business with them if they thought there was at least some sort of implied government support. That would at least make a shred of sense. So unless you are saying that the FDIC gives depositors more confidence in the same way that the financial bailouts have given counterparties more confidence, then your analogy really makes no sense at all.

See my response above. Financial institutions should include many other entities besides comercial and investment banks. It should include hedge funds, insurance companies, financiang arms of auto companies, and many other types of companies.

Sure, all of that is possible. However, the government’s projections are that they will lose money on the auto companies and make money on the banks. That’s the best we can go on at this point. Perhaps the correct thing would be to wait the entire five year period before rushing to try to get the banks to pay back money that it is assumed the auto companies will lose … you know, go by the actual recoupment plan described in the legislation.

I think you need to reread what you wrote here. You are saying that Goldman Sachs hedged their AIG exposure with AIG hedges? In what world would that possibly make sense. We obviously know that isn’t the case. Goldman Sachs has come out and stated that they had essentially no net exposure to AIG when factoring in their hedges. Obviously that means that they hedged with a different counterparty than AIG. Further, if you think the Treasury or any governmental agency had a firm grasp on what sort of counterparty exposure any of these entities had then I’ll point you to the following quote.

I take it then that you at least partially disagree with this tax/fee.

Take a look at the Transaction Report in my original posting. It details exactly where the money from TARP went and who has paid it back. $23.7 billion was provided from TARP for the mortgage modification program and the government essentially expects to lose all of that money.

So again, why not wait the five year period originally prescribed, so you can see if AIG will be able to repay more of the funds than currently projected. We’re a little more than a year in now and the governement is saying they will lose $117 billion and that he will charge a fee on the banks to recover it even though none of the losses will be from the banks. Wouldn’t it make more sense to wait until you actually have a firm understanding of exactly how much will be lost and by whom?

As fair as it is that the rest of us are suffering from the mess they made.

Tax the living shit out of them.

Wouldn’t adding regulation be a better fix? I have personally heard Jamie Dimon state that he would be in favor of limiting or even eliminating proprietary trading and adding a skin-in-the-game component to securities and mortgages. That seems a much better fix that simply a fee. that seems completely decoupled from banking activities.

Sounds like a ringing endorsement that this is populism and nothing else. In other words, you seem to be in a round-a-bout way, agreeing with my original post entirely.

Adding regulation is also necessary, of course. However banks have been proficient about getting around the intent of regulation, and there is certainly the possibility that a later President or Congress would remove any regulations now put into place. So this would set a good precedent.

As for all the other stuff, I don’t have time to respond in detail. In general, no matter what the spin from the White House is, my view is that the banks should pay for some of the damage they caused directly or indirectly out of their profits. I see that the auto bailout was thrown into TARP, but IIRC that was not one of the original parts of it. I’m fine with that part not being used for justification, since the auto companies were heading down the path to collapse before the general economic collapse. We’ll see how much actually does get paid back. I was thinking of the first level of hedging, not the second level. If the banks had tried to recover their AIG losses from this level, would that have caused another level of collapse? If so, the government covering the AIG policies was good, but perhaps not at the level they did. I don’t remember reading about the second level of hedging at the time of the initial bailout, which is why I misinterpreted what you wrote.

I do think the banks should cover mortgage modification, since the market they created for risky mortgages contributed to the problem. If the rating agencies were making billions in profits, I’d say tax them also. Most of the smaller mortgage companies responsible have already gone under, so we can’t get anything from them directly.

As far as the Fed not knowing what was going on, I agree, since at the beginning of this mess we read that the Fed chair didn’t understand the complex instruments being used. However it is not at all clear that the banks did either. An important part of regulation is to forbid the use of instruments that no one understands. We do that in medicine, why not finance?

Well, he doesn’t look to be agreeing with the part about it being scary…