Reduce Debt or Give It All to Those Who Helped Cause It?
by FRANK HILL
May 2, 2012
Do you ever get the feeling that 'something just ain't right' and that maybe, just maybe, the Wall Street guys have everything rigged so they always win and you, the taxpayer, always lose?
Well, get ready to wonder again.
Yadkin Valley Bank, headquartered in Elkin, North Carolina just made a filing to announce that it will auction the preferred shares they have as a result of their acceptance of TARP funds in 2008 to outside investors as part of the Obama Administration's Treasury plan to get the government out of the TARP business altogether.
Most likely to some of the same Wall Street banks and investors, who were probably at the core of the problem to begin with in 2008 with some of the worst financial decision-making this nation and world has ever known.
This story here is about the people who are going to benefit handsomely from the Federal Government's desire to exit TARP. Yep. The same accursed TARP program everyone was screaming about in October 2008 that pumped billions of 'real' cash and digital manufactured credit on the spot from the Fed that put liquidity into the financial system and apparently saved the day, didn't it?
These are (for the most part) the same people who: 1) made all the bad and imprudent financial decisions 2) to lend money to unqualified buyers 3) and then bundled up the bad 1st, 2nd and 3rd mortgages into complex financial packages such as derivatives and then 4) sold them as 'great investments' to people around the globe.
They now say: 'It was the fault of Congress!' 'These people should have known they couldn't afford the loans to build homes they couldn't afford!' 'We were just following orders!' and/or 'doing our jobs!'
When you leverage your company's assets at the tune of 35-to-1 or 50-to-1, even a dumb bunny who has never been to one basic business class or much less attended Harvard MBA School or went through a rigorous training program at one of the most prestigious Wall Street investment firms would know that 'that just ain't right!'
This current iteration of the Wall Street Saga of 2008-2012 might make you yearn for some shots of the white whiskey from Troy & Sons we just wrote about.
Let's not gloss over one very important point. In 2008, when all of the major banks and investment houses were over-extended through no fault of anyone but their own due to their avarice and greed, the decision was made by then-Treasury Secretary Hank Paulson and former Goldman Sachs Chairman (coincidence?) that every bank in the nation was going to be forced to take on TARP debt 'just so the American business community and public would not know which banks were in REAL trouble'.
Thus avoiding 'disintermediation' (withdrawal of funds from banks) and all that banking nomenclature.
Once these TARP preferred shares are sold to new investors, they will then own the debt and the federal government will finally be out of TARP. The community bank is then responsible for repayment of 100% of the original amount to the new holder of the debt, not the government as originally planned and contracted.
Government has done its job. Check. Getting out of the banking business. Check. Taxpayer has been paid back for 100% of all the TARP money that was spewed out of the Fed firehose in 2008. Check.
All well and good up to this point.
Right? Wrong. The new private sector holders of the debt will have been given a huge gift and, in many instances, these beneficiaries are the 'bad guys' from the worst financial debacle of the last 80 years. They made their bed...and ruined the lives of millions of people they falsely led into believing they could buy homes well beyond their means. They sold billions of dollars of worthless derivative investments around the world to unsuspecting investors who had the rug pulled out from under them when the US housing market collapsed.
How can that be 'right' under any acceptable standards of human ethics and rectitude?
Specifically, let's say The Bubba Gump Bank of Greenbow, Alabama owes $60,000,000 to the government for their TARP obligation and has to pay 5% interest for the first 5 years of TARP and 9% thereafter. Now with 2 years remaining, the government wants out and they are willing to "sell" its interest for $40,000,000 or a discount of close to 30%.
If the government stayed in the TARP collection business, the American taxpayer would benefit from the repayment of their remaining $20 million owed plus receive the previously agreed-upon payments of interest to the federal treasury.
Surplus funds from repayments by the banks that could conceivably go to pay down existing debt or prevent equal amounts of new debt from being issued at the federal government level. God knows we need to find clever ways to pay down our national debt, don't we?
However, now that Snidely Whiplash, the Chairman of Dewey, Cheatam and Howe Brothers investment bank, owns the discounted debt from the federal government, THEY, the private investment bank and partners, will collect the original face amount of the loan of $60,000,000 for a tidy profit of $20,000,000 plus the interest for the time it takes to pay off the loan.
That is at least a 50% return on investment plus interest earned, all protected under the auspices of the US Federal Taxpayer-Supported Government (because do you think the Government is going to let any bank fail now after ALL this work and money and effort has been undertaken to save them?)
In other words, what could have been going to help reduce the debt of the United States of America is now going to line the pockets of the very same culprits still running our major banks who caused the debacle in the first place.
We think part of the problem is that our business schools no longer teach the classical education curricula that might bring up a full discussion of ethics and what it means to be a well-rounded honest businessperson in the modern world.
It is very easy to make cold-blooded decisions based on the 'numbers'. Numbers 'don't lie' and the 'bottom-line is the only thing that matters' in a truly capitalistic system.
But is it 'right' and 'the right thing to do' in many instances?
That is what was missing in the investment banking world pre-Crash of 2008.
Maybe we have learned our lessons.
(But then again, based on this situation....maybe not.)
Contributing Editor Frank Hill ran for Congress at the age of 28 and served as chief of staff for former Congressman Alex McMillan (NC-9) and Senator Elizabeth Dole (NC). He was a budget associate on the House Budget Committee for 4 years and worked on the 1994 Commission on Entitlement and Tax Reform. He now lives in Charlotte, North Carolina where he does some consulting and lots of worrying about federal spending issues.