Didn't we give the banks a loan? Didn't they pay it back?
November 17, 2011 8:44pm CST
Well that's an interesting topic. The answer is "Yes and No". I'll try and explain is plain talk, though I will be oversimplifying some concepts. Here goes... TARP was originally a fairly specific program designed for a single purpose. To stabilize the banks. For this, the program specifically did one thing... it purchased non-voting Preferred stocks. This is a special type of stock, that still gains dividends, and you still have a share in the company if it fails.... but it is non-intrusive because you can't vote like a common stock owner can. So when the company decided to buy back the stock, the government would get the money back. It wasn't so much a loan per say. Plus, you would assume that the stock values would go up automatically, because, the company now had a Billions more dollars. The fatal flaw in this plan was that, the government coerced the banks to make bad choices, which resulted in damaging the value of the stock, which then hurt the government when they sold off the stock. Take Bank of America. BOA was not in trouble prior to 2009, nor did they need any money. BUT.... the government coerced BOA to buy Merrill Lynch, and buy out some of AIG. In the process, BOA received $45 Billion dollars from the government, in exchange for buying up parts of AIG and all of Merrill Lynch. So the Fed has BOA preferred stock, and BOA has really horrible investments by Merrill Lynch and AIG. And shockingly.... those investments continued to fail, which then started dragging down BOA, which in turn ruined the value of the stocks. And who owns $45 Billion in stock? The US government. So when the government tried to sell off some of those stocks, the value was garbage. But government then had another problem. They gave money to the banks, and the banks kept operating like normal, and this ticked people off. They got huge bailouts, and yet they gave themselves bonuses. And so the bonus thing really made people mad. FYI, and this is something few people know about. Most of the bonuses were specifically setup by the government. Many of these failed banks, still had tons of work to be done, and yet there was no money. The Fed agree to pay these people $1 for the year... plus the bonus. The bonus was to offset these people working for no pay. But the general public is ignorant, and so the screaming and yelling began. So first big modification! In comes Obama, and the first thing he's going to do, is respond to the people ticked off about the bonuses. So they change the program, making a bunch of intrusive requirements. Suddenly, banks refuse to join the program, and thousands of banks immediately paid back the cash (or I should say, bought back the preferred stock from the government). Which causes a new problem... Banks are still failing left and right, but now no one is willing to join the program because they don't want intrusive government regulations. So the third modification! We can't try buying stock, and letting you do whatever you want. But we can't buy stock and make a bunch of demands, because you refused that. So how about we simply buy the troubled assets? The new plan was for the Fed to use the TARP money to merely buy the toxic assets themselves. See, those sub-prime loans were what was crashing the banks. So since we can't give money to the banks directly, we'll just buy the sub-prime loans from the banks. Then as the market heals, we'll sell the mortgages back to them, and get our money back. Back to Bank of America. When BOA "paid back the government"... they didn't actually pay back the cash. Out of the $45 Billion BOA got, $26.2 billion, and the rest was in securities. So, the Fed got $26.2 Billion, and then exchanged $18.8 Billion dollars worth of... Preferred Stock... with... Sub-prime Mortgage backed securities. Yes... that's right. Instead of money, they got crappy sub-prime mortgages that no one wants. But not only that... but the value of the sub-prime loan wasn't the market value. This is hard to understand, but let us say that a bank makes a sub-prime loan for $200K. Now before 2009, that loan would be worth on the open market... about $200K. But after the crash, no one wanted that loan. It's a sub-prime loan, it could default. So the open market value of the loan was not $200K, or even close. But how much did government pay for those loans? Full face value. $200K. The Fed in June of this year, attempted to sell off $30 Billion (face value) of securities. AIG themselves offered only $15 Billion for the entire pool, and yet many believe that the Fed would only get $10 Billion total for $30 Billion worth of crap mortgages. In other words, they are selling off at a 2/3rds loss. Far from the "we may come out ahead!" they were claiming back when Obama first got in office. The Fed suspended selling mortgage securities in June of this year (2011). To date the Fed has approximately $1.2 Trillion dollars in sub-prime toxic mortgage backed securities. This is what happens when you allow the left to run the government. If anything wasn't clear enough, or if you have a question, just ask. Maybe I'll know, and maybe I won't, but I'll try.
1 person likes this
• United States
25 Nov 11
Wow..lots of info there. I think the question that I have...is that although the government coerced banks to buy stuff that had failing value...didn't the banks think there would be huge profits in their purchases initially? I mean..that's kind of how stocks work right? Buy them when their down..sell them when their up? I think the thing is that with the economy the way it is...it didn't go up..banks were blindsided and the government felt responsibility to bail them out...is that right? I have to say that although I am not savvy about politics I think the regulations on taking the bailout was warranted. The thing is that for many years banks have given people loans knowing that they would default...they simply did not have the means to pay. Their income would stink but their credit would fit the bill. SO...banks got a healthy down payment..a few months..possibly a few years worth of payments and then boom...there would be a repossession and they would be property holders again during a time when people were trying to buy homes. Very profitable for a while. That doesn't even count the fees imposed for overdrafts or credit card interest.