TAXPAYERS FOR COMMON SENSE – The federal bailout of the nation’s financial institutions (a.k.a. TARP – Troubled Asset Relief Program) expires Monday, and taxpayers have been receiving their share of good times/bad times lately, and finding themselves in the same old jam.
The good: Depending on who you talk to TARP will “only” cost taxpayers between $66 billion (Congressional Budget Office) and $105 billion (Treasury), which may drop further depending on the return for federal shares in insurance giant AIG. The plan is for Treasury to convert its holdings to common stock in early 2011 and slowly sell those shares. Taxpayers may profit given the rise in the company’s stock since the government infused $182.3 billion to keep it afloat, but the federal stake in AIG will rise from 80% to 92% in the meantime.
The bad: some 600 banks with approximately $65 billion in federal funds are so far unwilling or unable to pay back their TARP funds. Some small banks aren’t in the position to repay; larger, regional banks (Sun Trust, Fifth Third to name just two) could repay what they owe the Treasury but haven’t done so because it will negatively impact current shareholders. And 123 aren’t even making their quarterly dividend payments—essentially interest they owe taxpayers as investors. It’s past time for banks able to make good on their TARP debts to do so.
More bad: in the past 24 months, 279 banks have failed, the quickest pace since thousands of banks closed between 1982 and 1993. The FDIC lists another 829 as “problem banks”, up 6% in the second quarter of this year alone. Many are smaller banks that were crushed by reliance on unwise mortgage decisions in areas where foreclosures are high. This contraction is bad for customers, and may also be bad for taxpayers. Small banks are closing while Bank of America, JP Morgan Chase and Wells Fargo are growing and hold 33% of U.S. deposits, up from 21% in 2006. Who said the era of “too big to fail” was over?
Even more bad: Credit unions continue to struggle, and federal regulators announced a “rescue and revamp” of three more corporate, or wholesale, credit unions, which themselves don’t have retail customers, but invest funds for retail credit unions. Since the start of 2008, five corporate and 66 retail credit unions have closed. The $35 billion in bonds backed by the federal government to complete this deal are supposed to be fully repaid by future assessments on existing retail unions, but the bonds are backed by shaky mortgage-backed securities and leave taxpayers in control of 70% of the assets of corporate credit unions.
The good/bad dynamic continues in the government’s efforts to sell its remaining Citigroup shares. Though taxpayers have made $2 billion in profit, slow trading volume in the overall market will leave taxpayers holding billions of Citi shares past the first of the New Year deadline. Times are evidently good at Citigroup, though; it hired USB hot-shot energy banker Stephen Trauber for $30 million over three years. Just about as soon as they freed themselves from the yoke of the so-called pay czar Kenneth Feinberg, Citigroup returned to their profligate ways.
The worst news of all: Wall Street analyst Meredith Whitney predicted that state governments would be next in line for a trillion-dollar Washington bailout. She isn’t the first to say it, but has the research to prove it. States like California and Michigan face enormous budget shortfalls, and may risk defaulting on public debt without help from Washington. Not to mention municipal and other government debt that would also surely be at risk.
Backfilling state coffers (many states are obligated to balance budgets but in most cases can’t borrow to do so) with federal dollars (borrowed, of course) is a recipe to continue the slow drip of bad economic news without facing the painful realities that are going to come due at some point. Perhaps it’s time to rip off the band-aid once and for all. To do otherwise risks further inflating a federal debt and deficit balloon that is already threatening to pop.
Taxpayers for Common Sense