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What the banks owe America

Just a couple of thoughts on President Obama’s speech in Pittsburgh, which test-drove his party’s theme for the fall election: “We want to go forward, they want to go back.” I was struck by how little applause the president received -- until he renewed his call for a $90 billion tax on large financial institutions. Obama first unveiled the idea last January, declaring, “We want our money back.” It brought the house down again today.

While it may be a crowd-pleaser, this particular proposal has never struck me as entirely fair. The tax is supposed to recoup losses in the $700 billion Troubled Assets Relief Program authorized by Congress in 2008. But banks and financial institutions (with one exception I’ll get to in a minute) are not to blame for TARP’s losses. In fact, the major banks -- some of which didn't want or need the money in the first place -- have all paid back the capital injections they got from TARP, with interest. The taxpayer made money on that deal.

TARP’s total projected losses are down to $105 billion -- a modest price for avoiding a second Great Depression, I might add. According to the latest Treasury numbers, this reflects three major items: $49 billion for a mortgage relief program, which the banks are already supporting; $28 billion for the auto industry bailout; and $45 billion for AIG.

Of the three, the only one that can remotely be pinned on the financial institutions is AIG, whose bailout did, indeed, benefit counterparties such as Goldman Sachs and some banks -- including a lot of European ones. But AIG, like the auto companies, is on the mend and shows signs of paying back more of its aid than was once expected, notwithstanding the aborted sale of its Asian subsidiary to Britain’s Prudential.

If you accept the rationale for the AIG bailout -- that it was necessary to rescue the entire financial system, and, by extension, all the other big banks -- then I suppose there’s a case for taxing them, and only them, to pay for it. Why they should have to pay double the expected loss still escapes me, however.

There might be a separate argument for a bank tax to tamp down the sector’s risk-taking. This one, though, looks like an exercise in punitive populism.

By Charles Lane  | June 2, 2010; 4:36 PM ET
Categories:  Lane  | Tags:  Charles Lane  
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Comments

The TARP funds have (mostly) been paid back with interest. Too bad that money was spent on the endless, pork-filled "jobs" packages.

Now, the Congress wants to collect another $50 billion to have on hand when they take over a "troubled" institution and sell it off. Of course, the government will decide if it is troubled, the stockholders will be wiped out, and the government will determine which businesses will live or die.

Maybe the first institutions should be Fannie and Freddie. Nah, those are now government companies that hold over 90% of American mortgages.

Posted by: kitchendragon50 | June 2, 2010 6:43 PM | Report abuse

TARP was just one of several supports that the federal government used to bailout a sector that was effectively insolvent. The decision to allow the Bigs to become bank-holding companies and gain access to the Feds discount window was also a major support effectively underwritten by tax-payers. The Fed's holding of mortgage-securities and the purchase of mortgage-securities by federally-backed underwriters like Fannie and Freddie was yet another support.

$90 billion is a low-ball price for the actual harm that the financial sectors actions caused the rest of the economy.

TARP was just one element of a multi-faceted approach to save the Bigs from their own recklessness. Without taxpayer support none of the Bigs would exist today. In the scheme of things $90 billion is chump change for the Bigs. As far as this being a "punitive" measure; it's a pretty mild one in light of the actual damage that the large Financial firms caused to the broader economy.

Posted by: JPRS | June 3, 2010 1:02 AM | Report abuse


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Posted by: marysanzia | June 3, 2010 4:15 AM | Report abuse

"Maybe the first institutions should be Fannie and Freddie. Nah, those are now government companies that hold over 90% of American mortgages."
-----------------------------------------

Kitchendragon, what makes you think it's OK to simply make up wildly inaccurate figures? Fannie and Freddie's mortgage investments and guarantees comprise less than 50% of the American housing market. That's not even close to your claim that they "hold over 90% of American mortgages".

Did you even believe that figure was true when you wrote it?

You are certainly entitled to regurgitate the Tea Party-inspired fallacy that the collapse of the housing market was completely the fault of liberals in Congress and Fannie/Freddie. But when peddling this myth, you at least should make an effort to use real numbers.

Posted by: Shadow9 | June 3, 2010 4:30 AM | Report abuse

is any bank still owned by Americans...
will these banks offsource to india soon as the india times says...
will we allow our financial information to be handled by foreigners and possibly used to single us out for fraud and thief...

Posted by: DwightCollins | June 3, 2010 5:20 AM | Report abuse

Again, a stooge for the suits misses the entire point.

The ship of Government in a democratic nation of hundreds of millions of souls is a slow, huge object with massive inertia, and it takes an incredible amount of will to alter its implacable course. The balance of 'positive outcomes' from the economy of this particular vast, slow-changing democracy has been shifting more and more to be to the benefit of those who already have 'more positive outcomes'. It has taken many years for this much populist anger to build about our financial system (banks), and to dismiss it like some fit of ignorant pique is just too convenient for a shill like Lane.

In a democracy, the recourse of those without an inside track in the financial system is to vote for those who will 'change the game' to have more positive outcomes for our interests. See, we all can't shuffle paper for a living, and spend all day and night studying the details of each sub-paragraph of each financial regulation. We have no highly paid lobbyists to assist in that pursuit. Some folks actually have to accomplish the day to day, 3 dimensional goods and services part of this reality while banks lord over the realm of finance for the good of us all, no doubt.

If they want the anger of the people to dissipate, they should perhaps change on their own, and it wouldn't have to be legislated, would it? Much like the insular health care industry, they prefer to squeeze everything to get that quarterly report they are slaves to looking good for the investing public. Like mayflies, they live in 3 month shots, seemingly not caring about the bigger picture and how they effect people.

It is just a function of capitalism, in the end, but that is why people will ALWAYS resist a 100% capitalistic state, as it is usually an extreme plutocracy, with a very few ultra-rich lords benefiting from the largess of a paid-for political system that is too cozy with industry.

As long as we have a vote, human nature will rein in some of your crazy banks, just because of what they are doing long term, not just some punishment for what they have done lately. Perhaps moving their corporate headquarters to another country would be preferable? If they haven't already...

Posted by: blackmask | June 3, 2010 6:16 AM | Report abuse

The taxpayer made money on that deal.

If you believe that, I have some land in Florida I want to sell you.

Posted by: theFieldMarshall | June 3, 2010 6:35 AM | Report abuse

"Maybe the first institutions should be Fannie and Freddie. Nah, those are now government companies that hold over 90% of American mortgages."
-----------------------------------------

Kitchendragon, what makes you think it's OK to simply make up wildly inaccurate figures? Fannie and Freddie's mortgage investments and guarantees comprise less than 50% of the American housing market. That's not even close to your claim that they "hold over 90% of American mortgages".

Did you even believe that figure was true when you wrote it?

You are certainly entitled to regurgitate the Tea Party-inspired fallacy that the collapse of the housing market was completely the fault of liberals in Congress and Fannie/Freddie. But when peddling this myth, you at least should make an effort to use real numbers.

Posted by: Shadow9 | June 3, 2010 4:30 AM | Report abuse
_________________________________________

Wouldn't you agree that Fannie and Freddie should be taxed accordingly for their irresponsible lending and criminal bookkeeping that led to the mortgage meltdown? Also, shouldn't Chrysler and GM be taxed for accepting huge sums of taxpayer money that will probably never be repaid?

We want our money back!

Posted by: bmadden3 | June 3, 2010 7:14 AM | Report abuse

The root cause of the crisis was home owners buying houses they could not afford,. The borrowed money that they could never pay back, they lied to obtain mortgages and they took out risky option ARM mortgages. Mortgage brokers pushed these risky mortgages and real estate agents all had incentives to push home prices higher. The subprime mortgage originators underwrote these risky loans without any due diligence.

To ensure that there is not a repeat all homewners must borrow 30 year fixed rate mortgages, EASY FIX !

Why all the populist anger at Wall ST??

Posted by: PeterNYC | June 3, 2010 7:46 AM | Report abuse

As the old saying goes, Obama never lets facts get in the way of a good argument.

Posted by: diehardlib | June 3, 2010 7:47 AM | Report abuse

Its interesting to see people that ended up with loans they could not really afford getting blamed for the mess this economy is in but no menton of the complete fact that the banking and mortgage industries created and sold these same loans and approved each and every one....and don't forget those no doc loans...the individual borrowers did not create them..the banks did..they asked for and got them...then you have congress..which with all its so called smarts deregulated the financial industry so that those same loans could be created....way too many people were sold a bill of goods on the bad loans...loans they did not understand...and were told by brokers they could change them in 2 or so years...of course that fell out when the economy failed. Yet it was the banks that were helped out with millions of our tax dollars...got news folks, lobbyist own this country...and they get what they want...not us.

Posted by: ervinst | June 3, 2010 8:12 AM | Report abuse

The author of this article makes it sound like we have a balanced budget. I get the feeling something is missing!

Posted by: artg | June 3, 2010 8:51 AM | Report abuse

to PeterNYC, 7:46 a.m.: sir, the mortgage meltdown was not spurred by toxic debt over-load (although that played a role) nor did most people over-mortgage. the employment crisis that his places like Fla., my home state, is perhaps outside your view in NYC. Orlando has a real unemployment rate of more than 22%; six men on my small street are out of work.
The toxic subprime debt gets a lot of attention and it did indeed blow up. but regular people with typical mortgages constitute the bulk of the crisis, esp. in areas like mine where values fell 40% while jobs tanked. it's a toxic slew, with middle class families on the ropes. and it is getting worse.
I put down 20%, bought a 30-yr. loan and never used HELOC or other instrument. Credit score 802.
I pay dutifully on a home way underwater, but weighing my options now. please don't diss all the mtg. crisis folks with a wave of your hand, we were not all careless dupes for the financial mandarins who pumped us up with cash to run wild thru car dealerships and mall.
Not so.

Posted by: FloridaChick | June 3, 2010 9:03 AM | Report abuse

Obama wants to tax eveything. The banks who willl pass the costs on to us. Repeal tax breaks for oil so the price will go up. Again increased costs to us. His trillion dollar heathcare plan which will not pay for itself in the long run so more costs to us.

Posted by: FLvet | June 3, 2010 9:11 AM | Report abuse

Yes, those who have paid the government back did so with real money, not credit. The bailouts were nothing but issued credit, not real dollars exchanging hands. The government got the profits of the banks and the automakers in the form of real money, they didn't give to the banks and the automakers in the first place. Chicago tactics.

Posted by: houstonian | June 3, 2010 9:11 AM | Report abuse

TARP was never the big game in town. The big money was the $12 trillion in loan guarantees backed by Treasury and the Fed. Details about these transactions are kept tightly secret to this day. We don't know who got what, and no one is going to talk, not even to a Congressional committee.

TARP made it look like we were only spending $1 trillion on the bail out, and it gave everyone something to argue about in public. The fact that the supposedly nearly-bankrupt firms were able to immediately turn around and pay back the TARP funds is testament to how trivial they really were.

All the bailout has done is keep the very people who got us into this mess still in the game. So, yay, the same people are back in the saddle, doing the same kinds of deals, only worse, because now they really know they are too big to fail.

Sorry to be so downcast, but the way we handled the Wall St. bailout is nothing to be proud of.

Posted by: dmarney | June 3, 2010 9:23 AM | Report abuse

TARP was only one of several means of infusing capital into the banks. Its popular but inacurate to say most of the banks didn't need the funds. If AIG went down at least two other bigs here in the us would have gone down too - probably more. On the GSEs - yes they did historically back roughly only 1/2 of mortages but at this stage it is really 90% of new issues. Right now the money we are pouring into the GSEs is directly supporting all these banks that say they didn't need help and this proposed tax won't even come close to recovering those funds.

Posted by: bob29 | June 3, 2010 9:36 AM | Report abuse

However you want to breakdown the banking collapse, the root cause was excess, greed and unregulated lending and borrowing. Yes, too many ill prepared individuals took out home loans, but with home appreciation rates rising at 25% per year the bet on an ARM loan with a refi with 5 yrs was no worse than what the Wall Street hedgers were doing. The banking system was completely artificial and running on amphetamines. Of course it crashed.

What's clear is that a slow growing, sustainable economy is not acceptable to Americans. We want to get in, get out and get rich with everything else pretty much secondary. I have no confidence we will solve our boom and bust economic cycle. It requires sensibility. Free markets are not self regulating.

Posted by: citizen4truth1 | June 3, 2010 10:05 AM | Report abuse

It would be incredibly misleading to limit the costs, born by the American people, of the financial crisis to the unpaid portion of TARP. The reckless behavior of the banks that led to the financial crisis has cost American households 17 trillion dollars, in addition to the damage done to peoples lives and futures.

We won't get what we are "owed" until the banks are broken up and the practices led to this disaster, including the obscene compensation schemes in the financial sector, are ended. Which means, we probably won't get what we are owed until the next financial crisis when we find that the banks are too big to save and a second great depression is unavoidable.

Posted by: DonCarder | June 3, 2010 10:47 AM | Report abuse

The root cause of the crisis was home owners buying houses they could not afford,. The borrowed money that they could never pay back, they lied to obtain mortgages and they took out risky option ARM mortgages. Mortgage brokers pushed these risky mortgages and real estate agents all had incentives to push home prices higher. The subprime mortgage originators underwrote these risky loans without any due diligence.

To ensure that there is not a repeat all homewners must borrow 30 year fixed rate mortgages, EASY FIX !

Why all the populist anger at Wall ST??

Posted by: PeterNYC

//////////////////////////////

Wall Street financed and created Option ARMs, NINJA loans, 107 percent financing, etc and other mortgage products.

It was Wall Street that provided the capital to mortgage brokers to create those loans. It was Wall Street that provided incentives to said mortgage brokers to steer customers away from fixed rate mortgages into riskier mortgage products.

On top of this, it was Wall Street that created hundreds of billion dollars worth of derivative contracts, which amplified the downside of the mortgage meltdown (e.g. through things like naked CDSs).

If we were just dealing with a crisis involving bad mortgages underwritten by Fannie and Freddie from 1998 to 2008 we would not have had a major global financial crisis. Odds are the total costs wouldn't have even amounted to another Savings & Loan crisis.

The entrance of Wall Street into the mortgage market in a major way in the 2000s -- and its creation of subsidiary bets on the mortgage bubble were central in transforming a minor, localized bubble into a global financial crisis.

Posted by: JPRS | June 3, 2010 10:48 AM | Report abuse

Oh yeah, sure. Th eubiquitous "banks should pay". To bad the executives and boards of thoses institutions are gone. That leaves the shareholders and bondholders to suffer the brunt of the whiplash. Their crime: trust in those executives and the system.
Most people see shaeholders and bondholdrs in their mind's eye as wealthy investors. The truth is more illuminating. Try regular people trying to retire that have their portfolios (401K) or pension fund money placed in mutual funds.

Why punish these people?

Posted by: primegrop | June 3, 2010 11:11 AM | Report abuse


Oh Gosh. Oh Goodness.

What a SUPRISE that Lane doesn't want the
banks of New York to pay for their use of American's taxpayer money.

But he shouldn't worry....the likes of Lloyd Blankfein at Goldman Sachs, and Rubin, who has so much Citi money and JPMorgan have enough to funnel lots to Israel and still keep their billions to buy penthouses and islands.

Not to worry Lane. American taxpayers were meant to be fleeced. Their small horrible little houses in the midwest flyover country were too ugly to matter. Let 'em eat cake.

Posted by: whistling | June 3, 2010 11:22 AM | Report abuse

Oh yeah, sure. Th ubiquitous "banks should pay". To bad the executives and boards of those institutions are gone. That leaves the shareholders and bondholders to suffer the brunt of the whiplash. Their crime: trust in those executives and the system.
Most people see shaeholders and bondholdrs in their mind's eye as wealthy investors. The truth is more illuminating. Try regular people trying to retire that have their portfolios (401K) or pension fund money placed in mutual funds.

Why punish these people?

Posted by: primegrop

//////////////////////////////

Sure, some kind of a claw-back for the now departed Execs is probably in order. This can probably be resolved in part through criminal and civil litigation. Although the risk should have been priced into the product on the front end.

Having said that several of the Bigs are still on the job (the most notably -- Blankfein and Dimon) and the Board of Directors are the same at most of the financial firms.

That's part of the problem.

Posted by: JPRS | June 3, 2010 11:27 AM | Report abuse


You don't think you're a little OBVIOUS, Lane?

You think the Jewish bankers of New York, and make NO MISTAKE, that's where the
TARP taxpayer money went...

shold highhandedly bring the WORLD economy to it's knees....
use American taxpayer money to bail them out...

and pay NO PENALTY?

But you are what you are, aren't you. And apparently unaware of how sick Americans are of it.

Posted by: whistling | June 3, 2010 11:28 AM | Report abuse

You have got to be kidding, right? The banks caused the second greatest economic meltdown in history and you don't think that they bear partial blame for the automaker's troubles? The big banks are a danger to the economy and should be broken up. Unfortunately that won't happen. But, one thing is for sure, they are in no way good for America or average Americans.

Posted by: davidjaycrispin_2000 | June 3, 2010 11:34 AM | Report abuse

I think the problem is even if Obama and the government goes through with taxing the banks $90 billion as punishment for the tax payers bail out. It's not as if the government will be sending us checks for our portion for helping the bailout. No one will ever see it and the government will turn around and say how much more they need.

Posted by: yellowfever | June 3, 2010 11:47 AM | Report abuse

The Fed's zero rate policy is a subsidy from savers to the banks, in the amount of hundreds of billions of dollars. The banks bear much of the responsibility for trillions in lost wealth and productive activity caused by decades of boom and bust. What's not "fair" is having to waste my time pointing this out to a highly-educated writer for the Washington Post, and to suggest that I'm concerned about who's been paying for his lunches.

Posted by: Namazu | June 3, 2010 11:52 AM | Report abuse

Lost in all the discussion as to whether or not TARP was a good decision and investment is the fact that the Federal Reserve has opened its discount window to banks and finanical institutions and allowed them to borrow an estimated TWO TRILLION dollars to help clean up their balance sheets at ZERO interest rate.

So what our government and the Fed did was to not only give the banks a short term cash infusion to avoid a cataclysm but also to set them up with operating capital at no cost. So, if one is really interested in asking if what our government did was, in fact, effective in avoiding either an outright financial collpse or in "solving" the problem of a mortgage market run wild, you should ask how are the banks using the two trillion in capital they now have borrowed at no cost.

And, here the fact remains the banks have not used any of this money to really clean up their balance sheets and write down, at a cost to them, the trillions in bad loans and foreclosed propeties still on their books. Instead they are using this free captial to sell more credit cards and issue more short term loans at 14 to 18% interest rates. In case you didn't take Business 101 an 18% spread between what you pay for money and what you charge for it is very very profitable. Particularly in the short run when you continue to defer taking the hit for the bad debts you still have on your books but have chosen not to write off lest you make this quarter's results look bad.

The banks may have averted bankruptcy but are still siting on a lot of bad debt; until that is resolved we cannot say, for certain, we have averted a collapse; and until that is resolved this economy will continue to limp along and businesses will not make any real commitment to long term expansion and hiring. Why? Because any half way intelligent business person realizes the possible downside of what will occur if, God forbid, the Fed ever called its loans or started charging a reasonable rate for the money lent.

Point is our government continues to have the banks on life support and cannot pull the plug to see if the patient is healthy enough to make it on its own.

Posted by: bobfbell | June 3, 2010 12:10 PM | Report abuse

You undercut your own argument; The AIG bailout was a bailout for the banks that received the payoffs, therefore the banks WERE bailed out whether you think it went to AIG or not!

The banks owe the money and should be taxed.

Posted by: BattleOffSamar | June 3, 2010 12:11 PM | Report abuse

AIG on the mend? What are you smoking, can I have some???

Posted by: Impeachbush99 | June 3, 2010 12:13 PM | Report abuse

I think you missed a couple of hundred billion in that accounting. That's about what Fannie Mae and Freddie Mac have cost us so far. You can make the argument that by creating institutions that collaterialized mortgages it allowed banks to be more profitable then they would have been. Now taxpayers are picking up the tab for the junk mortgages written by banks while they collected billions in fees.

How the Gov't came up with the $90 Billion number I have no idea and would bet that same $90 Billion that they never thought of the above argument as it would actually require understanding how the financial system works.

Posted by: kchses1 | June 3, 2010 12:32 PM | Report abuse

It amazes me that even now, over a year and a half since the meltdown and bailout, that the newsmedia -- in the hands of people like Charles Lane -- still doesn't get it.

The giant banks want us to focus on TARP, as if that were the whole story. But, I have counted 11 different ways in which the federal government has bailed Goldman Sachs since this disaster began – besides TARP. TARP was a minor part of the government exercise, and the “repayment” of TARP has been used by Goldman and their apologists in the media and government as a distraction from the massive tax-payer backed effort to keep the stumbling goliath on its feet which goes on, even today (see below). Here are the key elements of the bailout, in my view:

1. Overnight re-constitution of Goldman as a “bank holding company”: Bernanke’s move here instantly transmitted to the world that Goldman was too big to fail and would not be allowed to. It is also noteworthy that this move gave Goldman access to the Fed’s discount window, where the interest rate for advances from the Fed have been at 0.0% now for over a year and will not be changing anytime soon (see below);

2. FDIC-guaranteed loans (related to the holding company status): at one point Goldman had borrowed as much as $ 28 billion using what is essentially a government (read, taxpayer) guarantee. Incredibly, they still have $21.6 billion outstanding under this program --- today ! I also found it amazing that Goldman itself stated in a public filing for these FDIC backed bonds that they were “…unable to raise significant amounts of long-term unsecured debts in the public markets, other than as a result of the issuance of securities guaranteed by the FDIC…” This is as clear an admission of the failure of a financial firm as you will ever get -- Goldman Sachs paper could not be sold in the market without the taxpayers standing behind it. Read Bethany Mclean's story in Vanity Fair, which is where most of this analysis comes from.

3. Last, and least mentioned in the media and yet most important: The Fed’s action to flood the financial markets with liquidity to repair the banks and fight the recession. Financial analyst Meredith Whitney called this “…government manipulation (through monetary loosening) …the strongest, most important theme of the capital markets in 2009…” Basically, the Fed took the discount rates down to zero. The cost of funds for financial intermediaries followed suit. The costs to these hugely leveraged financial intermediaries of carrying their massive debts plummeted.

We are often reminded by the likes of Lane and the Post how smart the people at Goldman are. Maybe so, but I think most anybody could make money borrowing at 0% interest. They could, for example, put this money into treasuries and earn a risk-free 2-3% -- a trade that Goldman and the other banks have done as the Fed (and we taxpayers) have helped them claw back from the brink.


Posted by: rebel4 | June 3, 2010 5:13 PM | Report abuse

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