TARP banks pay back some loans: Treasury reaps some profits
In news you may not have heard yet: Some big banks and some not-so-big banks are repaying their bailout money, and the US Treasury is actually seeing a profit.
“The taxpayers want their money back and they want the government out of our banking system,” Representative Jeb Hensarling, a Texas Republican and a member of the Congressional Oversight Panel examining the relief program, said in an interview.
Profits were hardly high on the list of government priorities last October, when a financial panic was in full swing and the Treasury Department started spending roughly $240 billion to buy preferred shares from hundreds of banks that were facing huge potential losses from troubled mortgages. Bank stocks began teetering after Lehman Brothers collapsed and the government rescued A.I.G., and fear gripped the financial industry around the world.
But critics at the time warned that taxpayers might not see any profits, and that it could take years for the banks to repay the loans.
As Congress debated the bailout bill last September that would authorize the Treasury Department to spend up to $700 billion to stem the financial crisis, Representative Mac Thornberry, Republican of Texas, said: “Seven hundred billion dollars of taxpayer money should not be used as a hopeful experiment.”
So far, that experiment is more than paying off. The government has taken profits of about $1.4 billion on its investment in Goldman Sachs, $1.3 billion on Morgan Stanley and $414 million on American Express. The five other banks that repaid the government — Northern Trust, Bank of New York Mellon, State Street, U.S. Bancorp and BB&T — each brought in $100 million to $334 million in profit.
The figure does not include the roughly $35 million the government has earned from 14 smaller banks that have paid back their loans. The government bought shares in these and many other financial companies last fall, when sinking confidence among investors pushed down many bank stocks to just a few dollars a share. As the banks strengthened and became profitable, the government authorized them to pay back the preferred stock, which had been paying quarterly dividends since October.
Hmm. So it appears that Texas' House Republicans,
Jeb Hensarling and Mac Thornberry, were wrong, at least.
(Surprise, surprise, surprise!! NOT.)
Now I'm not apologizing for the banks or the banksters. Nor do I think the builders of the TARP deal did the best they could (witness the higher profits reported for other governments on their deals) by the US taxpayer.
I am saying that sometimes you have to wait and see what happens to find out whether it will play out the way you want or not.
For justification I'll quote the Times' recount of a report on international banking:
The Swiss government said Thursday that its net gain was equivalent to an annualized rate of return of about 32 percent.
“They are substantially in the money,” Guy de Blonay, a fund manager at Henderson New Star in London, said. “It looks pretty good.”
The sale puts other governments with troubled banks in the spotlight. At the height of the financial crisis, government interventions on both sides of the Atlantic helped to avoid a collapse of the credit system — especially after the failure of Lehman Brothers in September — as traditional financing dried up. Now that markets have started to recover, attention is turning to exit strategies.
In the United States, several financial firms — including American Express, Goldman Sachs, JPMorgan Chase and Morgan Stanley — have already bought back warrants from the Treasury Department, which the government received as part of its $700 billion bailout plan.
Some analysts said that several deals yielded a profit for taxpayers, with Goldman Sachs calculating a 23 percent annualized return for the government on its $1.1 billion warrant purchase. But analysts have said that other firms, like Morgan Stanley, paid less than the full value of their warrants.
A report by the Bank for International Settlements, released in July, found that the overall amount of resources committed to bank bailouts in 11 countries — including France, Germany, Japan, the Netherlands, Switzerland, Britain and the United States — was 5 trillion euros, or $7.1 trillion.
The bank, based in Basel, Switzerland, said interventions were most significant in countries like Britain — outlays reached 44.1 percent of gross domestic product there — and in the Netherlands. The British government has said that it does not want to be a long-term investor in its largest banks and expects to sell the stakes as soon as possible, with pressure to sell at a profit growing before a general election within the year.
“The U.K. government would love to get out and wave some pound notes at the voters,” Gordon Scott, a banking analyst at Fitch Ratings in London, said. “The markets have recovered a bit, but we’re not yet there for them to make a profit.”
Daniel Gros, director of the Center for European Policy Studies in Brussels, said there was no blanket model for divestment, and no fixed timetable.
In cases like UBS where governments supported investment banks, the governments should soon be able to exit profitably, Mr. Gros said. Those companies have been helped by stronger interbank lending and the rise in asset prices.
Other cases, where governments supported deposit-taking institutions like Northern Rock and Royal Bank of Scotland in Britain, Fortis in the Netherlands and Commerzbank in Germany, are more complex.
“The problems at these banks tend to be slower to come to the surface and show up on the balance sheet,” Mr. Gros said. “It may take years to have an idea of how large the losses are.”
The report by the Bank for International Settlements said governments should start preparing an exit strategy “right now,” but that those plans should be put in play only when there was a “virtuous circle” for banks of “mutually reinforcing increase in capital and borrowing, on the one hand, and lending and profits on the other.”
Britain, for example, took a 43 percent stake in the Lloyds Banking Group last year and owns 70 percent of the Royal bank of Scotland, whose shares rose this month — meaning the government would book a profit by selling now.
But British Financial Investments, which manages the holdings for the government, has said that it may take years to sell the stake.
The Swiss government had said on several occasions that it wanted to sell its UBS stake as soon as justifiable, but that UBS had to be on solid ground first. The government and regulators now judge that to be the case after its deal with the United States government and after a capital increase in June that lifted the bank’s Tier 1 capital ratio, a measure of financial strength, to 13.2 percent, from 10.5 percent at the end of March.
“People were afraid that the government would hold the stake and try to influence the business strategy,” said Mathias Büeler at Kepler Capital Markets in Zurich. “That concern is now resolved.”
The sale of the Swiss stake, Mr. Büeler added, also calmed investors’ concerns that UBS would become uncompetitive with American banks.
France participated in a cross-border bailout of Dexia and injected funds into large domestic lenders. A French official, granted anonymity because he was not authorized to speak publicly, said there were advantages to waiting. The French government, he said, is earning interest on its assets and would like to retain leverage to make sure credit is flowing. The finance ministry would like to see durable signs of a recovery before considering an exit, he said.
In Germany, the government hinted Thursday that it was too early to discuss selling its stakes. The government is reorganizing Hypo Real Estate, a major mortgage lender. Chancellor Angela Merkel said in February that the bailout of Hypo must be “as justifiable and cheap as possible for taxpayers.”
The Netherlands does not foresee disposing of its core holdings until at least 2011. First, it needs assurance that the banks’ stability is guaranteed, that they can stand alone in a competitive market and earn back the taxpayer’s investment, said Lies Weitenberg, spokeswoman for the Dutch finance ministry.
No, the TARP saga isn't over. But this is a good sign as it lurches past its first anniversary.
It also looks like the Swiss, who jumped in to help their giant bank in last year's worldwide crisis, UBS (home of the Gramms, he of repealing Glass-Steagall and she of Enron board membership infamy) actually got a bigger bonus out of that action than the US did from its attempt to shore up a staggering financial sector.