As the year comes to a close, the nation’s big banks are falling all over themselves to pay back the government money that kept them from falling into a financial black hole.
Bank of America did it recently, followed by Citigroup and Wells Fargo. J.P.Morgan Chase & Co., Morgan Stanley, Capital One Financial Corp. and Goldman Sachs Group paid back Uncle Sam, or should we say Uncle Santa, earlier this year.
At first blush, I was happy to hear that the money was coming back so quickly. The banks that were called “too big to fail” got billions in bailouts at a pretty low interest rate to keep them from the abyss. In return, the government got preferred stock and a big chunk of common stock in the companies, essentially becoming major owners.
Like a lot of people, I was uncomfortable with my government becoming a huge shareholders in the banks, so I initially liked the idea of a quick payback.
And the chief executives seemed so appreciative of what you and I, the taxpaying public, had done for them.
Here are some comments:
“We owe the American taxpayers a debt of gratitude and recognize our obligation to support the economic recovery through lending and assistance to homeowners and other borrowers in need,” said Vikram Pandit, chief executive of Citigroup, which paid back $20 billion,
“With repayment of the (government) investment, we can intensify our focus on what we do best: helping consumers and businesses achieve financial success,” said John Stumpf, chief executive of Wells Fargo.
“We owe taxpayers our thanks for making these funds available to the company during a very difficult time,” said Bank of America CEO Ken Lewis.
Sounds pretty good until you look more carefully at why the big banks are in such a hurry to pay back the government money and what it means to them.
What the chief executives didn’t say is that while the government help came at a good interest rate, it wasn’t without some rules they found painful.
For one thing, government officials knew that taxpayers wouldn’t put up with the huge salary and bonus checks the big banks put out each year, so it limited top executive pay and bonuses in return for bailout money.
Bank of America CEO Lewis had planned to retire at the end of the year, but the government rules made it hard for him to find a successor. I’m sure that figured in his decision to go for the early payback.
For other CEOs, the issue was passing up big year-end bonuses, so again, they couldn’t wait to get out from under government control.
And, of course, there’s money to be made in paying back the government.
First there are the fees collected in underwriting the stock offerings sold to raise the money for the payback.
According to the New York Times, the banks raising new capital paid themselves 2.5 percent of the stock’s offering price, or: Bank of America’s $19.3 billion offering generated $482 million in fees; Citigroup’s $17 billion (plus an over allotment of $2.55 billion) created $425 million in fees; and Wells Fargo’s $12.2 billion brought $275.6 million in fees.
And that’s not all.
In a Dec. 21 article for The Nation, writer Zach Carter took a look at the Citigroup payback, noting that the government had both preferred stock and common stock in Citigroup. For the preferred stock, it received an 8 percent return, which Carter noted was pretty puny for the risk it took.
It also owned about a third of the company’s $90 billion worth of common stock. When Citigroup announced its plans to repay the bailout money, the government’s stake was valued at about $30.7 billion, a gain of $5.7 billion from when it bought in. Having the company sell another $20 billion more in common stock will lower the value of the existing shares, dropping the government’s stake by about $6.8 billion, according to The Nation.
The stock sale wipes out any profits the government made by keeping Citibank from plunging into bankruptcy. It means taxpayers actually lost money in their investment, a difficult thing to do in today’s booming stock market.
No wonder Citigroup’s Pikram said he “owed taxpayers a debt of gratitude.” By selling more stock to pay off the taxpayers, his bank gets rescued with cheap money and makes a windfall on fees that it can use to pad its suddenly allowable huge bonuses.
And it’s all happening right around Christmas. I can see why Pikram is grateful.
For me, I’m just sad. I’m sad because after a recession that was triggered by replacing sound financial decisions with greed, our major financial leaders can’t wait to return to a system of big payouts, no matter where they come from.
Mike Benbow: 425-339-3459; benbow@heraldnet.com.
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