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.

Targeting the Poor: Some States Propose Drug Testing for Unemployment, Welfare Benefits

Several states are considering whether to test recipients of unemployment or welfare benefits for drug use. Although the federal government is contemplating giving a second trillion-dollar package to the banking industry, these states are targeting poor and middle-class individuals under the guise of fiscal responsibility.

Craig Blair, a delegate to the West Virginia legislature, has started a website, Not With My Tax Dollars, to politicize the issue. He justifies his position, in part, by arguing that:

We should require random drug testing for every individual receiving welfare, food assistance or unemployment benefits. After all, more and more employers are requiring drug testing. Why not make sure that people who are supposed to be looking for work are already prequalified by being drug free?

Blair is also campaigning for re-election, and his proposal to drug test recipients of public assistance seems specifically designed to exploit the public's economic vulnerability, specifically by linking the issue to anti-tax sentiment. Although Blair says that he favors "less government intrusion on our daily lives," he opposes abortion, believes in expanding drug testing, and supports capital punishment. These positions do not limit, but rather augment, the role of government "in our daily lives" (in very invasive ways).

Why Not Apply the Policy Broadly?
Proponents of the legislation in other states have linked the tests to fiscal soundness and protection of taxpayers. But I have a question for legislators who believe the drug tests will protect taxpayers: Why not sponsor legislation requiring anyone -- including legislators, governors, judges, recipients of small business assistance or "farm aid," pensioners, owners of companies receiving tax abatements, participants in state-sponsored health care for the elderly, students receiving financial assistance or scholarships, and university professors -- who receives state subsidies, financial assistance, or tax dollars to submit to drug screening? In order to avoid the very reasonable claim that they are targeting poor people, they should broaden their proposals.

What (I Think) Progressives Should Have Done for Workers of Republic Windows and Doors

A comment from a reader is the immediate reason for this blog entry. But I feel obligated to keep this subject "in play" because the mainstream media have failed to examine this issues surrounding Republic Windows and Doors and its former workers deeply and critically.

In a comment on Dissenting Justice, reader "Brian" says:

While you point out some important reasons to continue the fight against
irresponsible employers, if the UE union didn't take action fast, the Chicago
workers would have been screwed. Hindsight is 20/20, but Christmas is coming,
and these good folks in Illinois needed their paychecks. Since Bank of America
was the easiest political target, these people will be having a merry Christmas.
My question for you is, what should progressives have done to ensure that these
folks got their due and that what should we do to ensure that Republic's owners
get their's?

Well, Brian, first of all, the angle I have taken is not "hindsight." The very first article detailing the Iowa move came before Bank of America caved to political pressure. This article appeared in the Chicago Tribune. But holding that aside, here's what I would have rather seen happen.

Better Analysis of the Bailout
I agree that the bailout helps banks. A lot of those banks engaged in risky lending and other bad investment practices. In many ways one could even construe the bailout as a "handout" to banks. Previously, I analyzed the bailout from this perspective, and I stand by those arguments.

But the bailout is also a tool of macroeconomic policy. Holding aside the bad behavior of lenders and consumers, pumping money into the nation's financial institutions can provide necessary liquidity to fuel economic activity, which is undeniably sluggish. The protestors acknowledged this aspect of the bailout, but they also distorted its purpose when they argued that participation in the bailout obligated Bank of America (or any other recipient of federal assistance) to "lend money on demand." Poor lending practices contributed greatly to the nation's poor economic conditions. Encouraging additional bad lending cannot fix this problem, but liberals nevertheless implied that Republic Windows and Doors was entitled to loan assistance simply because its creditor participated in the bailout. This is untrue. It is also pretty unwise as a matter banking policy.

I also do not agree with your implied assertion that the "ends justify the means" because the workers now have money for Christmas. First, this does respond to the true problem -- that distressed workers and unemployed people need stronger emergency aid. Also, this argument shifts responsibility away from the culpable party: the management of Republic Windows and Doors.

Getting to the True Problem: The Need for Emergency Aid
A central problem of the bailout with respect to "Main Street" is that in many instances, banks will not (or should not) deliver relief to distressed individuals or companies at all (because of derogatory credit histories or a lack of income or revenue). Even when individuals qualify for credit, banks might not deliver assistance rapidly enough. Rather than distort the intent of the bailout by arguing that it mandates lending to anyone, progressives should have advocated that state officials deliver emergency relief and more sustained welfare assistance to needy individuals.

The laid-off workers will need job training (potentially), health care, education, extended unemployment benefits, welfare payments, housing assistance, and other forms of relief. Beating up Bank of America does not give them these things. By contrast, emergency state aid could have provided them benefits by Christmas and beyond. If Illinois, a blue state and home to Obama/Lincoln, cannot provide rapid assistance to laid-off individuals in the face of intense national scrutiny, then we may as well retire all "hope" for "change" at the national level.

Additionally, because the Left validated a public narrative which depicted Bank of America as the sole enemy of workers, politicians involved in the protests can now claim "victory" without working to ensure a more longterm package of benefits for these workers and others who have lost their jobs. Their work is now done. Jesse Jackson delivered 300 turkeys, but will he do more after Christmas?

Strengthening the economic safety net is a matter of national and local importance. None of the politicians in this situation, however, publicly advocated a policy solution that focused on improving social welfare policy. Instead, they placed responsibility for solving the human dimensions of the recession on the bailout, which is principally designed to shape macroeconomic activity.

Now that Bank of America has capitulated, progressives and the media are treating the workers as yesterday's news. Absent public scrutiny, it is unclear who will help them once they exhaust their remaining salary and benefits. The argument against Bank of America will no longer have persuasive force (barring some bizarre chain of events).

Strange Silence Surrounding Republic Windows and Doors
As I have stated before, the most troubling aspect of this situation is that progressive advocacy has permitted Republic Windows and Doors to discard its workers, restart its operations in another state, and escape any bad press or liability. But the company is the most culpable (probably the only culpable) party involved in this scenario. If the company can afford to restart its operations in Iowa, then it could have delayed that move and paid its workers the wages and benefits to which state and federal law entitled them. By ignoring the employer, however, progressives helped direct public scrutiny away from the only party that violated the rights of workers.

According to scattered reports, the owners of the company seem well connected to the "Chicago machine." Mayor Daley helped them secure nearly $10 million dollars from the city to build a new factory, and his brother, who chairs JP Morgan Midwest, helped secure $400,000 in loans to pay the workers. Progressives could have pressured these known contacts to persuade the company to pay its workers. In other words, powerful officials connected to Republic Windows and Doors could have urged its managers to obey the law.

Instead, progressives cheered as recently indicted Governor Blagojevich made a rash, unfair -- and probably illegal -- decision to ban Bank of America from transacting business with the State of Illinois. If this is how a progressive victory looks, then I can do without it.

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?

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

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

* Factory Closes in Chicago; Workers Invoke Bailout During Protest

Bringing Back Welfare As We Knew It: My Indignant Take on the Wall Street Bail-Out

Bill Clinton’s 1996 "welfare reform" made him (and his wife) the enemy of the left and a hero to moderates and conservatives who apparently believed that single black mothers on welfare were the greatest threat to American taxpayers. Of course, AFDC payments constituted only 1% of the federal budget, and a majority of welfare beneficiaries were (and still are) white. Nevertheless, the "welfare queen" became a rallying cry for opponents to welfare. Welfare recipients, according to the royal rhetoric, are lazy, make bad choices, have ample opportunity for economic advancement, and are incentivized to idleness and pathology by governmental subsidies. The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 required recipients to work, curtailed benefits to unmarried individuals (under the false assumption that marriage ends poverty), and placed a lifetime limit on benefits. By contrast, the unconditional bail-out for Wall Street, as it currently stands, marks a return to welfare as we knew it.

Earlier this year, I wrote a column questioning why the Bear Stearns bail-out failed to trigger a discourse concerning the pathology of Wall Street’s "welfare kings." See (http://www.blackprof.com/?p=2002). Although some liberal commentators have attempted to blame the present financial unrest on "deregulation," most financial experts believe that reckless investment decisions created this havoc. Historically low interest rates in the early in 2000s made it very easy for banks to obtain money to lend (at a profit). The wide availability of credit increased demand for housing which caused rapid price appreciation. Banks, wanting to fatten their coffers, engaged in reckless lending, using "creative" products such as adjustable rate mortgages and no-income verification loans to finance home purchases for individuals with poor credit ratings or "A-credit," but insufficient income. Homeowners used their homes as ATM cards, dipping into their equity to purchase cars and other consumables. Investment banks purchased mortgages, bundled them together as securities, and sold them as assets to investors wanting a fixed return.

Ultimately, market fundamentals could not sustain this excess, and the Federal Reserve began raising interest rates to bring the market back to reality. Adjustable rate loans caused payment shock for borrowers, and foreclosures soared. Suddenly, mortgage-backed securities became risky and unstable assets, and financial institutions that held these securities or traditional mortgages began to suffer huge losses. Lenders refused to extend credit to holders of these assets or to purchase them due to their risk. Essentially credit dried up. Foreign sources of money also ran from the United States, exacerbating the unavailability of credit. Bear Stearns, Lehman Brothers, and other venerable Wall Street institutions hit the dust. And the story continues to unfold.

In response to recent events, the Bush administration has requested $700 billion to allow the Secretary of Treasury to purchase mortgage-backed securities from troubled financial institutions. The companies would receive "market value" for the securities (whatever that is) and would presumably have a better credit rating without the risky assets. In addition to infusing capital into troubled firms, this plan, if successful, would help stabilize financial markets, attract foreign and domestic sources of credit, and prevent steep economic decline. Because a private-sector solution to this madness seems out of reach, governmental intervention is necessary.

Still, we need to label this intervention honestly: it is a handout to people who engaged in highly irresponsible behavior. Not only was their behavior reckless, but they, as financial professionals, had greater knowledge of the risks and consequences of their behavior than the average homeowner, who lacks sophistication concerning financial markets and lending parameters. Although many commentators have bashed "sub-prime" borrowers, which I view as the new "welfare queens" (http://www.blogger.com/(http://www.blackprof.com/?p=2002)) they have not similarly critiqued the companies which had the capital and power to create the current situation – and the financial expertise to avoid it!

The fact that this problem has intensified during a presidential election makes things even more dramatic. Democrats and Republicans are rightfully calling for more conditions placed on the receipt of federal money (and this seems inevitable). Hillary Clinton has even proposed that the government purchase individual mortgages and reiussue them to distressed homeowners under more favorable terms; a similar course of action took place during the Great Depression. But neither side can claim "clean hands" on this issue -- although Democrats have tried to do so. Liberals, in particular, have blamed the current mess on "deregulation," citing to several pieces of legislation, but most often, the Gramm-Leach-Bliley Act of 1999. That legislation allowed commercial banks, investment banks, and insurance companies to consolidate. This statute, however, did not create financial chaos; risky investments did. Countrywide and Washington Mutual are strictly commercial banks. The former has already folded into Bank of America, while the latter is on life support. Bear Sterns and Lehman Brothers were strictly investment banks, and they have both died. AIG is exclusively an insurer, but it too needed a federal rescue. On the other hand, JP Morgan Chase is a consolidated investment and commercial bank, but it is among the strongest of the remaining financial institutions in the country. Furthermore, Bill Clinton signed the legislation into law, and Robert Rubin (former head of Goldman Sachs, now Chairman of Citicorp), his Secretary of Treasury, lobbied for it. Democrats also voted for the measure in large numbers.

Recently, Obama called Rubin for "advice" on the economic crisis, and he initially chose James Johnson, a former managing director of Lehman Brothers and Vice President at Fannie Mae, to head his Vice President vetting team. Johnson resigned after the Republicans politicized his connection to Fannie Mae and his receipt of millions of dollars in "loans" from the troubled company. In the past, Democratic Senators Charles Schumer and Christopher Dodd have both rejected stricter regulation of financial institutions, as has Representative Barney Frank. All of these men sit on congressional banking and finance committees. And Fannie Mae employees gave Dodd, Obama, and Clinton most of their campaign contributions this year. No one is innocent.

McCain has "suspended" his campaign, but, ironically, this move is just a campaign strategy designed to delay having a presidential debate during this chaos. Polls have begun to shift towards Obama during the turmoil, proving the old maxim that "it’s the economy stupid." Statistical data indicate that voters tend to blame the incumbent’s party for economic distress. Obama says the show must go on and that presidents have to "multi-task." That’s a great response to McCain’s gimmick. But at the end of the day, both candidates, as leaders of their respective parties, need to endorse the solution. Because it is an election year, expect to hear emotional (and nauseating) appeals to bipartisanship – so that neither side will become vulnerable to charges of "playing politics" with the solution.

Ultimately, both candidates will ceremoniously help craft and endorse the legislation, which will likely have some conditions placed upon the Secretary of the Treasury and the companies that receive governmental assistance. But I do not expect "the people" to benefit directly from the legislation, in terms of mortgage-payment assistance or reissuance with more favorable terms. Nor do I expect that the "conditions" in the law will involve things like job training for financial professionals, a lifetime limit on the receipt of subsidies, or other similar conditions that were all placed in welfare reform legislation. Welfare as we knew has made a triumphant return.