Good News: Government Responds to the TARP Payback Schemes

Last money, several banks, including Goldman Sachs and JP Morgan Chase, vowed publicly to pay their TARP loans and to make an early departure from the controversial program. Those banks, however, hold very substantial loan guarantees from the federal government through a program administered by FDIC. Under the FDIC program, the federal government guarantees loans issued to participating banks by private lenders. If the banks default, then the government repays the debt. TARP loans, by contrast, come directly from the government.

Because the federal government guarantees the private loans, they carry less risk than other private loans. Accordingly, banks that participate in the program receive lower interest rates than they would have received on the open market.

If banks pay back TARP loans while they still hold billions of dollars in loans backed by the federal government, then the government-secured loans would essentially help finance the banks' early departure from TARP. The situation is quite controversial because TARP, unlike the FDIC program, carries restrictions related to executive compensation. According to the Associated Press, however, the government will try to close the loophole:

A government official said Tuesday evening that banks eager to return infusions from the $700 billion Troubled Asset Relief Program will have to demonstrate that they can operate without debt guarantees provided by the Federal Deposit Insurance Corp. The FDIC program allows financial institutions to borrow money at lower costs. . . .

"It throws a hurdle as far as the banks repaying TARP," said Scott Talbott, a senior lobbyist for the Financial Services Roundtable, a bank industry group.

Kudos.

Related Readings on Dissenting Justice:

Startling Discovery: Banks Want Federal Financial Assistance Without Strings Attached

Surprise, Surprise: Potential Participants in Toxic Assets Plan Ask Government to Stay Away From Executive Compensation

Startling Discovery: Banks Want Federal Financial Assistance Without Strings Attached

The Washington Post has made a startling discovery: Banks want federal financial assistance without strings attached.

Earlier this week, Goldman Sachs announced that it would soon repay its "bailout" (or "TARP") loan and abandon the controversial program. But even though Goldman has pledged quickly to repay $10 billion it owes the federal government, the company has not promised rapid repayment of $28 billion in government-secured loans it received from private investors.

When financial markets froze last year, the government enacted TARP in order to provide direct financial assistance to banks. But in a separate program administered by FDIC, the government acts as the guarantor of loans made to banks by cautious investors. If the banks default on the loans, the government must pay the outstanding balance.

In addition, the Federal Reserve sponsors a discount lending program, which provides banks loans at a below market interest rate. The Federal Reserve does not disclose the list of beneficiaries.

After Goldman announced that it was pulling out of TARP, New York Times financial reporter Floyd Norris observed that the company was not forgoing governmental assistance altogether. Instead, Goldman elected to retain the benefit of $28 billion dollars in federally guaranteed loans -- not to mention nearly $12.9 billion in payments it received from AIG, which were undoubtedly funded by TARP assistance the embattled insurer received.

Companies Are Leaving TARP Because They Want "No Strings Attached" Federal Financial Aid
Today's Washington Post explains why companies are trying to repay TARP loans, while retaining the benefits of other government aid programs. The answer lies in the details of the various programs. TARP now has tougher conditions, including restraints on executive compensation. The FDIC loan guaranty program does not carry such restraints. Remarkably, banks want "free" money. [Note: "Remarkably" = sarcasm.]

The Washington Post reports that J.P. Morgan Chase has joined the list of banks that want to leave TARP. Jamie Dimon, the company's CEO, says that TARP is a "scarlet letter," and he renounces the idea of accepting additional funds from the government.

But while JPMC will rush to repay its $2.1 billion TARP loan, the company has no immediate plan to repay $40 billion in federally guaranteed loans it received from investors through the FDIC program. In fact, during the first week of April 2009, JPMC borrowed an additional $2.3 billion (which exceeds the amount of the company's TARP loan) through the FDIC program.

Irony: Is the Government Giving Banks the Money They Need to Get Out of TARP and Escape Restraints on Government Aid?
It appears that banks are taking advantage of governmental financial programs, such as the FDIC guaranty, in order to abandon TARP and its restrictions. Although the government has "toughened" requirements for TARP recipients, it provides less restrictive financial assistance to many of the same companies through other aid programs.

If the government provides banks with access to "unregulated" (or "less regulated") loans, the profits they make from lending this money could allow them to accelerate repayment of their TARP loans and evade the programs' tougher restrictions. At a minimum, government aid could free up other assets, which the banks could then apply to TARP payments. So, the government could actually fund banks' efforts to escape executive compensation limits that attach to TARP assistance. And if these firms subsequently participate in Tim Geithner's "toxic assets" purchase plan, they will receive additional governmental assistance that does not come with the conditions that TARP imposes, but which contains very generous risk formulas that allocate potential losses primarily to the government and potential gains primarily to private investors.

Unregulated Funds Can Generate Bank Profits
Furthermore, because banks that participate in the FDIC or Federal Reserve loan programs receive below market interest rates, they can make higher profits by using these cheaper money sources to finance their own loans to individuals and companies at higher interest rates. Accordingly, it is plausible that government aid has contributed to the sudden "profits" several banks have recently reported. As some commentators have argued, recent bank profits could in fact represent a government-sponsored windfall, rather than a real turnaround in financial markets.

Unequal "Welfare" Policies
Although the financial crisis warrants governmental intervention, it seems unconscionable to give many of the very companies that were largely responsible for causing the financial crisis easy access to governmental financial assistance. Furthermore, if the public supports extraordinary restraints on the receipt of governmental assistance for the poorest and most vulnerable persons in society, the public should demand similar concessions from bankers who want federal financial support. With some states callously considering whether to test recipients of unemployment assistance for drug use, it appears that the federal government is financing efforts by banks to escape politically popular restraints on the use of federal financial aid.

Republic Windows and Doors Received a Bailout from Chicago Before It Bailed Out of Chicago

This story gets deeper by the day, but only a few outlets are trying to paint a comprehensive picture. Thankfully, history will contain these alternative readings. The leading narrative describes the worker' sit-as a great historical moment in labor activism. I agree with that account. The rest of the dominant story, however, requires greater scrutiny and revision. While most accounts portray the workers' activism and political protests as a defeat of "greedy" banks, a closer look shows that this angle reflects fantasy more than reality.

Yesterday, I posted an essay that examines Republic Windows and Doors. To date, the company has been curiously missing from most accounts of the sit-in, even though it, not Bank of America, violated the workers' rights secured by state and federal law. While the company has basically escaped critical analysis, it is probably the most culpable player involved.

Although progressives have used this moment to vent anger over the bailout and banks, Republic Windows recently completed a series of transactions in which it shut down its Chicago factory, discarded its Chicago labor without providing the statutorily required notice, and purchased and combined its operations with a company located in Iowa where it can now process the same orders but pay workers less money. But due to misdirected progressive anger and a completely uncritical news media, Bank of America and JP Morgan Chase have provided financing to the company so it can complete these transactions and escape liability under labor law.

The Bailout No One Wants to Discuss
If that weren't already enough irony, it also turns out that Republic Windows and Doors, like Bank of America, received an enormous governmental subsidy, sometimes described as a "bailout." In 2002 and 2003, the company received $9.3 million from the Chicago to construct a new factory. Prior to the building project, the company threatened to leave the city, arguing that it had outgrown its space. Chicago provided the money using a development tool known as "Tax Increment Financing" (or TIF). Under a TIF setup, cities invest in development projects under the theory that the investments will generate higher tax revenue, as improvements to blighted areas increase property values. Chicago (and other cities) has created several TIF districts that fund various projects, hoping to profit from the development activity through future taxation. Now that Republic Windows and Doors has fled the scene, the whole theory behind the subsidy has evaporated. Some local politicians are trying to figure out how to recoup the city's subsidy. Good luck.

Republic Windows and Doors took $9.6 million from the City of Chicago, and now two banks have provided nearly $2 million to pay the company's debt to its employees. But the only villain in this story remains Bank of America. What interests are served by not telling a fuller story that includes scrutiny of this company? Given Chicago's deep history of political corruption, news media should at least try to determine whether any powerful individuals helped the owners of the company vanish from Chicago overnight, set up shop in another state, discard its workers, escape negative media attention, and avoid liability under state and federal law.

Possible Leads?
Some websites report that Chicago Monarch (sorry - I mean "Mayor") Richard Daley secured TIF funding for the company. According to a report by a Chicago NBC affiliate, Daley backed financing after previously expressing deep disagreement with the concept of TIF investments altogether. Also, his brother William Daley chairs the JP Morgan Midwest regional offices. Yesterday, JP Morgan extended $400,000 to the company for the purpose of paying the workers. And Governor Blagojevich abruptly banned Bank of America from transacting business with the State of Illinois one day prior to his arrest for trying to sell Obama's vacated Senate seat. Apparently, the bank gave in to the governor's pressure. All of these moves benefit the company primarily and the workers incidentally. Fox Mulder keeps coming to mind with this story: "Trust No One."

Related Readings on Dissenting Justice:

* MADE IN IOWA: Did Company in Chicago Sit-In Illegally Discard Its Workers and Quietly Relocate While Liberals Forced BOA to Pay for the Shady Scheme?

* Laid-Off Republic Windows and Doors Workers: Pawns in Political Football

Breaking News: JP Morgan Chase and Bank of America to Buy the United States!

The Associated Press has just released a stunning news item. JP Morgan Chase and Bank of America, the nation’s last two remaining banks, have tentatively entered into an agreement to buy the United States of America. The transaction includes all federally and state-owned real and personal property, natural resources, and prisons. The contract, however, does not permit the purchase of citizens of the United States, because lawyers feared such a provision would violate the constitutional prohibition of slavery. Both companies, however, expect to hire many U.S. workers to run the government and would likely pay them "slave wages." When asked what this meant, company officials said that "employees would earn the minimum wage." The constitution does not explicitly prevent employers from paying "slave wages."

Another provision would release all incumbent political officials from their respective offices. A source close to the transaction said angrily that "this bunch of yahoos has absolutely no damn business presiding over such a huge and complex economy as the U.S.A." He said that their "mismanagement and shenanigans have landed the country on the ‘clearance’ table at Wal-Mart. Buying it was a no-brainer. It’s a great financial opportunity for us."

One heavily negotiated provision would allow the candidate who wins the upcoming presidential election to serve as president, although the companies expect to refashion the presidency into a symbolic leadership position. A spokesperson for one of the banks who wished to remain anonymous said that the president would "become more like the Queen of England – adored and important – but not having a bit of power over what we say or do."

Both presidential candidates have responded to the shocking news. The Obama campaign said that "Now, as a result of this unprecedented transaction, no one can doubt or deny that if Barack Obama is elected as President of the United States, the presidency and the nation will have changed dramatically. In fact, things will change beyond our wildest expectations."

The McCain team said that "As a former POW and decorated veteran, John McCain is well prepared to guide the country through this difficult period of readjustment." The McCain campaign also said that the "proposed reduction of the president’s role should finally put to rest those nasty fears spread by our opponent concerning Sarah Palin being a ‘heartbeat away from the Oval Office.’"

President Bush has also released a statement responding to the transaction, which his administration reportedly helped negotiate. President Bush says that "I’m outta here anyway, so it don’t mean a hill of beans to me." Bush’s statement also attempts to calm likely anxiety among voters over the idea of two banks owning the country. Bush says that "People need to just relax and get used to it. At this point, these guys own about everything of value in the country anyway, so this is the next logical step." Members of Congress are recuperating from actually having to work last week to complete the bailout negotiations. Consequently, no member of Congress has responded to requests for comments.

Dissenting Justice will have more analysis of the situation as it develops. Although this is a satire, you never know what might happen!