AIG recently raised more than $6 billion to pay back the U.S. Treasury. Photo Credit: David Shankbone/Wikimedia Commons/CC-BY

AIG and General Motors have been making great progress in paying the United States Treasury back for the bailout loans both companies received. AIG and GM were both maligned for the huge amount of money the firms received from the government, but they are returning to solvency. AIG was the single largest bailout performed under the program.

MetLife stock sold to pay back loans from Treasury

Insurance giant AIG sold a portion of its shares in the MetLife insurance company and turned over the proceeds to the United States Treasury, according to USA Today. AIG gave up 146.8 million shares of MetLife stock, from which the company raised $6.3 billion to make payments to the United States Treasury. AIG is using the funds in the effort to repurchase the $18.2 billion the Treasury holds in preferred equity shares of AIG. The government also holds 92 percent of AIG’s common stock, which was a condition of the bailout package the insurance giant received from the Troubled Asset Relief Program, or TARP. AIG was the single largest bailout, receiving more than $182 billion in total. The bailout included the Treasury and the Federal Reserve purchasing toxic asset from the company and $68 billion in loans.

General Motors on the road to health

General Motors, another notorious bailout recipient, borrowed $49 billion from the government to stay afloat, and the company has been making huge strides toward paying it back. General Motors recently announced in an earnings report that the company had made a profit every quarter of 2010, according to Reuters. This marks the first time since 2004 that the automaker has been profitable for an entire year, and it made the largest profit since 1999. GM posted a profit of $4.7 billion for 2010, though the stock price for the company has barely moved since the initial public offering in November. The Treasury still holds 33 percent of GM stock, which is a significant reduction since November 2010, when the Treasury held 61 percent. It is projected that the GM share price will have to rise to $53 per share for the government to break even.

End result of TARP

David Miller, the chief investment officer for the Troubled Asset Relief Program, said that the cost of corporate bailouts is not likely to be more than the money allocated for the housing crisis, according to Reuters. Miller said the Congressional Budget Office estimates that TARP will cost a total of $25 billion, and the Obama administration estimates slightly more than $28 billion. Treasury Secretary Timothy Geithner has said the estimate of $25 billion may be high. Various companies still owe the government $135 billion for TARP loans.

Sources

USA Today

Reuters on General Motors

Reuters on TARP estimates

Some people think the installment loans lent in the bailouts weren't worth it, but Treasury Secretary Tim Geithner disagrees. Image from Wikimedia Commons.

In the financial crisis of the last few years, billions of dollars in installment loans to huge firms were lent in bailouts. Many have preached loudly about the waste involved and corporate favoritism. However, it may not cost as much as some think.

Rage at installment loans to big business

In 2008, the financial world was in turmoil, and the government moved to get some installment loans out to head off a collapse. Billions were lent to banks and investment houses from New York, New York, to Kansas City, Missouri, and the largest domestic auto manufacturers were given some enormous advance cash bundles to keep them afloat. Conservatives and liberals alike have raged about the bailout loans, but Treasury Secretary Timothy Geithner thinks the outrage is unfairly directed his way, according to the New York Times. Though officials, of course, don’t go out of their way to agree with their critics, he has a point.

Emergency loans could turn a profit

The emergency loans made to huge businesses could be justified. Geithner has maintained that the $25 billion estimated as losses by the Congressional Budget Office are estimates. He also has maintained losses will only come from bank loans and mortgages gone bad, but everything else will turn out. For instance, if the Treasury holds onto shares in GM and sells them over time, the loans GM received could eventually turn a profit on the long term. Citigroup, which received more than $45 billion in aid, turned a profit of more than $10 billion for the taxpayers already.

Proof will be in the pudding

Though it certainly seems ridiculous to only aid to the parties that created the economic problems in the first place when the people that have been hurt could use the help more, there may be an upside after the fact. If the profits realized from bailing out huge firms are more than the losses of bailing out Fannie and Freddie, then a rational basis for bailouts in dire straits will have appeared.

Sources

New York Times

It may be the richest few who get the most handouts. Image from Wikimedia Commons.

The financial reform bill that is heading for Obama’s desk is designed with Wall Street in mind.  The idea is to keep the recession of the last few years from happening again, and to not have to bail out any more banks.  However, that brings up the issue of which institutions actually were bailed out, or benefited the most.   The public is the one funding it, so we should know who it was receiving our dollars.

Wall street got the bulk of the bailout

According to CNN Money, there were 707 banks that participated in the Troubled Asset Relief Program, or TARP.   From those 707 banking institutions, 690 of them had to split $40 billion between them.  The average for those 690 banks is $57,971, 014.49 apiece.  That means that the bulk of bailout funds went to 17 of the largest financial institutions, 13 of which have already repaid the Treasury.  They are also starting to return to profitability, as it was announced today in the Market Watch that JP Morgan Chase had just posted $4.8 billion in second quarter income.

Main street left struggling

The same CNN article also highlighted that only $15 billion of the $40 billion lent to small and medium banks participating in the Capital Purchase Program, or CPP.  Main street banks weren’t definitively left in the lurch, but the banks that were too big to fail certainly weren’t allowed to.  Only 10 percent of the smaller banks that received CPP loans have been able to repay their debts already.  Out of the small banks that still owe money from CPP loans, 15 percent have missed at least one payment.

Feed the wolves to save the sheep

Wall Street is still at the heart of the fallout from the financial crash in 2008.  The financial reform bill that just passed is testament to the call for them to run things more responsibly, and with the $550 million fine just slapped on Goldman Sachs from the SEC, it seems that more stringent standards may become the norm.  However, what happens if Main street banks go under?  Will we have to choose from a small list of institutions that just cost us $700 billion or more to watch over our money?

Further Reading:

CNN Money on TARP: http://money.cnn.com/2010/07/14/news/economy/Main_Street_banks_TARP/index.htm

CNN on Goldman: http://money.cnn.com/2010/07/15/news/companies/SEC_goldman/index.htm

Market Watch: http://www.marketwatch.com/story/jpmorgan-chase-reports-second-quarter-2010-net-income-of-48-billion-or-109-per-share-on-revenue1-of-256-billion-2010-07-15?reflink=MW_news_stmp

Federal Reserve building, Washington, D.C.

Federal Reserve Chairman Ben S. Bernanke opposes a draft bill now in the Senate which would remove much of the central bank’s supervisory role and limit its authority to regulation of large bank holding companies. The bill, proposed by Senate Banking Committee Chairman Christopher Dodd, would limit the Fed’s supervisory authority to banks with more than $50 billion in assets. Smaller banks would be regulated by the FDIC and the Office of the Comptroller of the Currency. By contrast, under a House version of the bill, the Federal Reserve would keep most of its bank supervisory duties.  Neither bill would have any bearing on personal installment loans from private money lenders.

Bernanke: Fed promotes stability

Bernanke told the House Financial Services Committee that the central bank does not want the responsibility of regulating only those banks that are “too big to fail.” CNN Money quotes Bernanke as saying that the Fed’s oversight of all banks “significantly improves its ability to carry out its central banking functions, including making monetary policy, lending through the discount window, and fostering financial stability.” According to Business Week, Bernanke contends that the Fed is “uniquely suited to supervise large, complex financial organizations and to address both safety and soundness risks and risks to the stability of the financial system as a whole.”

Dodd: Continued risk of bailouts promotes instability

Dodd, who has been highly critical of the Fed’s banking supervision, hopes the proposed bill will prevent future crises requiring taxpayer-funded bailouts of large banking firms. Bernanke, however, believes that the central bank should retain oversight of banks of all sizes.

The Federal Reserve currently oversees about 5,000 bank holding companies and about 850 state member banks. Supervisory authority is delegated to 12 regional Fed banks by the Board of Governors in Washington. Under Dodd’s draft bill, the Fed would supervise only about 35 of the largest financial institutions. Legislators are scheduled to review and amend Dodd’s draft bill on March 22.

GMAC in Trouble?

The troubled auto lender GMAC needs more money, like everyone else does today, but on the last day of the decade; the federal government has agreed to bail them out with an additional $3.8 billion. This government is certainly kind, because even as they raise taxes and cut jobs, they have no qualms about giving big handouts to mismanaged companies. This comes at a time when unemployment benefits are needing to be reduced, sending the unemployed to money lenders for more loans.

GMAC Not the First

The troubled auto lender is not the first beneficiaries of a bailout. Bigger conglomerates such as Citigroup, Bank of America, General Motors and the insurance giant, American International Group, have all been getting bailouts. GMAC has already received $12.5 billion in federal aid as it grappled to hold itself together, but now, word has come out that they will get a further $3.8 billion from the government to help them stay afloat. As people read the news, or hear it on TV, they may begin to wonder if this mess will ever be sorted out. There was hope on Christmas Eve when the major banks decided to return the money they received, and there was even optimism that perhaps the worst was coming to an end. Banks had their reasons when they decided to return money received as a bailout. This was not money; they had received as loans from money lenders. This was a bailout provided by the federal government. Now comes the GMAC news on the eve of a decade change. Is this the end or the beginning?

Reason to Worry

The federal government has its reasons for offering the massive aid package to GMAC. As one of the largest money lenders to General Motors and Chrysler dealers for their customers, there is every reason to keep GMAC running. Attempts by GMAC to raise private capital on their own had failed, after which they approached the federal government. The question that now must be asked is: why do these companies not have to provide credit checks like everyone else? What is it that makes these companies eligible for federal aid coming from the taxpayer’s money, while the taxpayer himself must run to a money lender for a loan? While the tax payer will not definitely like it, they can take solace in the fact that there none of the aid is being spent on high wage executive salaries.

Things Need to Change NOW

The federal government will soon reach a position where they will have to call off further bailout packages and raise taxes to cover for the financial deficits of the major companies they have funded. They may be doing a good job at the moment in trying to shore up the weaker of these companies, but whether this will be enough will remain to be seen. Major changes cannot be expected though. With the economy recovering at just 2.2%, and unemployment figures expected to stay at 10%, the government will soon be helpless. They will have to bring in additional levies which will be a burden on the tax payer, but great business for the money lenders in times of acute recession.

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Everyone, including President Obama, has been cautious in their movements when major banks announced last week that they were returning over $50 billion in loans that they had received as bailouts from the government. The taxpayers’ money was used as a loan from the government to bail out the banks on the promise to create more jobs in return for the favor. While President Obama had pressured them to do this, one wonders whether there is more to this than what has been revealed.

Cash Strapped Banks?

With the recession in full force, even the banks have begun feeling the pinch. Stock markets are stumbling while investors are looking to offload stocks. Banks are facing a cash crunch, which led them to borrow money on reasonable terms to tide them over until the recession eases up a bit. Major banks such as Wells Fargo, Citibank and Bank of America are still standing, hats in hand, on the doorstep of the federal government for more money. The government felt it was their obligation to give these banks a patient hearing and bail them out at a low cost and a promise to cut wages of their highly paid executives. The banks had no alternatives but to agree, as this was what they needed. Soon after this, the government decided to exercise its option to control executive salaries. The lawyer, Kenneth Fienberg, was appointed as TARP’s master for executive compensation in the month of June. It might be a coincidence that some banks decided to return the money they had borrowed just before the appointment took place.

‘No Thank You’

Kenneth Fienberg sent out guidelines during October, 2009 to banks that were still receiving the bailout loans from the federal government. October, incidentally, is also the time of year when executive bonuses are paid out. Soon after this, statements started emerging from the banks still receiving funds that they were looking to return all of the money that the government had loaned them. It sure indicates that these banks did not want to adhere to the guidelines that Mr. Fienberg gave them, so the best way to get out from these requirements was to return the money they had borrowed from the government.

Lean and Mean Times for Banks

Banks are trying their best to trim some of the costs they have incurred by letting go of some executives and hiring new ones. Share value, by way of issuing more shares, has been diluted, which investors have bought up immediately. There have been no change in executive salaries, and one can make a wild guess to say that the banks did not want to offer personal loans to the very people they served all this time. The speed at which the taxpayer’s money is being returned can only suggest that banks are doing more than necessary to keep executive salaries as they are. Instead, they have promised to be more strict with any further loans they make. It could be said that they could have done better for their customers.

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The recession credit freeze is thawing. Will banks who deigned to borrow money repay those bailouts?

A year ago, most of the banking industry was knocking on the doors of the federal government for a bailout to allow them stay afloat. As we know, the government obliged, pumping in billions of dollars of taxpayer money into these banks. Now that the situation seems to be improving and banks are looking to return some of the money provided by the government, President Obama has pressured them to become better lending facilities for those who are looking to borrow money against homes and businesses.

Are Banks Stronger Now?

Banks and Wall Street were standing in line, hats in hand for a bailout from the financial mess they found themselves in a year ago. Even as the government obliged with assistance at the time, it wasted no time in asking the banks to return the favor and take a step in helping rebuild the economy. Banks have been repaying the money that the government had provided out of taxpayers’ money, with the latest among these to do so being Citigroup and Wells Fargo. Citigroup’s announcement stated that they were ready to return $20 billion borrowed from the government set in motion a series of meetings leading to the current scenario.

Banks’ Strong Commitment

The President has sought assurances from these banks that they would look to serve the interests of the very people from whose money they had been bailed out. This statement certainly set the ball rolling. Bank of America has announced that it will increase lending to small business and homeowners by $5 billion over the next year, which will make people much happier knowing that their applications for borrowing money may be approved. Banks have also assured the President that they would look at all applications that had been denied over the past year. Better times are surely ahead for people with applications that had been denied, as well as for those who are ready to apply for a loan.

Lending Practices Tightened

Banks have assured the President that they would look to revive the economy, thereby keeping the commitment they made. Some banks have suggested plans for an improvement in unemployment figures, which are currently hovering at 10 percent, by looking to hire more people as well as extending their loan portfolios. However, they have also stated that they would look at lending practices and be more stringent with the requirements than they were a few years ago. They do this to make sure they are avoiding non-performing assets, such as what happened with the foreclosure fiasco. Banks are willing to lend to borrowers who qualify for the loans, but not without several procedures designed to keep them from needing another bailout.

Credit checks will be used without exception, as well as requiring more documentation to be provided. Difficult as this will be for some people to borrow money, it will keep bankers satisfied about the kind of loans they make, and it will keep in check the number of defaults that banks had to face prior to the bailout coming into play. Consumers who meet these stricter qualifications can look to borrow money from banks at reasonable interest rates in the coming days if all goes well.

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