The big banks claim the government isn't helping them anymore. Not exactly. Check out this little-known subsidy.
JPMorgan Chase CEO Jamie Dimon, bristling at criticism of his hardworking bankers, told employees: "I am a little tired of the constant vilification of these people." Wall Street's big shots have had enough They've paid back their TARP money—which, some of them say, they didn't need anyway—with interest. They've got the government off their balance sheets, so now the government should stop meddling with them.
But the big American banks aren't nearly so independent as they would have us believe. JPMorgan Chase, Goldman Sachs, and their peers are still benefitting hugely from significant post-crisis subsidy programs that boost their profits. I'm talking mostly about the Temporary Liquidity Guarantee Program (TLGP). This was a program started in the wake of the Lehman Bros. collapse to deal with the fact that banks were having a tough time raising short-term capital on decent terms. Under the TLGP, the Federal Deposit Insurance Corp., which is ultimately backed by the taxpayers, would guarantee debt in exchange for fees paid by the banks issuing debt.
The TGLP was ended to new entrants in June 2009 and thus far has gone without a loss. But the fact remains: Private companies were allowed to borrow massive amounts of money—$345 billion at the peak in May 2009—on the public's credit. At the end of the third quarter, there was still $313 billion outstanding.
But if these firms are such rugged individualists, why do they persist in borrowing on the public's credit rather than their own? And why did they do it in the first place? After all, unlike with the TARP, participation in the TLGP program was entirely voluntary. Here's a list of the banks that opted out of the program: You'll note that the Wall Street biggies aren't on it. At any time, the banks could go out into the public markets and raise debt to replace the taxpayer-subsidized borrowings. But they haven't. The reason: It would make them less profitable. Take Goldman. The chart shows that Goldman was paying a blended rate of 0.767 percent annual interest on $21.3 billion in FDIC-guaranteed debt. For every 100 basis points (i.e., if that debt bore an interest rate of 1.7 percent instead of 0.7 percent), Goldman is saving $213 million in interest costs per year. In the spring of 2009, when much of this debt was issued, the spread—i.e., the difference between the interest rates charged to private-sector corporate borrowers and to the government borrowers—was significant. In April 2009, it stood at 540 basis points. I don't know what to call this other than a huge subsidy.
There are more ongoing subsidies for the big banks. The fact that taxpayers guarantee the debt of Fannie Mae and Freddie Mac preserved the value of mortgage-backed securities owned by these banks. One of the components of the TARP is the HAMP, under which the government writes checks to lenders who made reckless loans so that they can modify them and keep people in their homes. Funds issued under the HAMP are not expected to be paid back. From April through December 2009, more than $35 billion in such funds have been disbursed to lenders, with more to come. Check out Page 20 of the most recent TARP transactions report, and you'll see that the list of participants in HAMP includes CitiMortgage (a unit of Citi), Wells Fargo, Saxon (owned by Morgan Stanley), and Bank of America and one of its subsidiaries, Countrywide.