by Linda Beale (cross posted from ataxingmatter)
Banks exiting TARP
Citibank has confirmed its plans to pay back the bailout funds directly provided to it. See NY Times. Of course, the fact that banks are paying back direct bailout funds does not mean that there is no further bank bailout going on. The government now stands as guarantor, an assurance that has provided a significant cost-of-funds advantage to big banks. One has to wonder whehter there will ever be a complete reckoning regarding the total amount of the assistance that big banks and insurers have received. It is something that is terribly important, if we want to make wise decisions on financial system reforms. One suspects that whatever bill passes the Congress will have a number of poor provisions, given the influence of bank lobbyists and the vulnerability of Congress to that influence. Without public pressure expressing the rightious rage at bank’s profiting from the bailout without corresponding assistant to Main Street and bankers’ profiting personally while middle America hemorhages jobs, we’ll continue without the significant changes that are needed.
Not surprisingly, the banks that exit the US bailout program are going to continue to benefit from the “special” rules written to override the regular rules preventing loss trafficking. Last week, Treasury made clear that government sales of stakes in banks won’t be taken into account in determining whether there has been a sufficient ownership change to invoke the rules under section 382 et seq that limit loss use to a formula intended to keep losses used at pre-ownership change use rate.
And lifted from comments by Rdan.
Ken Houghton says:
I don’t wonder. The word is already out: it was profitable, no matter what the reality is. (To paraphrase a combination of John Anderson in 1980 and Lloyd Bentsen in 1984, let me borrow at -0,25%, loan at 30%, and write $300 billion in hot checks, and I can balance the budget too.)
Linda Beale responds:
Ken is certainly right–the research so far on cost-of-funds analysis for Big Banks aided by TARP suggests that as much as 48% of the Big Banks’ current profits are due to the cost-of-funds advantage from the government guarantee. They have soaked up corporate welfare and loved it, while still fighting with every breath any possibility of a “mortgage cramdown” which would permit homeowners to reduce the principal amount of their home mortgages in bankruptcy. Why the shoveback against the cramdown? Because it would require them to recognize the real losses now, rather than at their timing. And would lower their market cap value, making it harder for them to continue merging and growing ever bigger and even more “too big to fail.”