02-03-2009, 09:35 PM
There are a lot of misconceptions out there regarding the financial crisis, TARP, banks, etc so I am going to do my best to help clarify some of the most common misconceptions.
1. Despite what you may think, the economic crisis is not completely Bush's fault. Economic cycles have occurred every 5-7 years for a very long time and just about every President who serves two terms will serve through economic expansion and economic recession. Now, a President can do a lot of stupid things to magnify the outcome but there is only so much that is in his control.
2. EVERYONE, let me repeat, EVERYONE is to blame for the current economic crisis. If you had a pulse in the past 7 years then you benefited from what was going on. IMO, the blame should fall on (in no particular order): home sellers, home buyers, realtors, appraisers, title companies, insurance companies, mortgage brokers/loan officers, mortgage lenders, banks, rating agencies, investors, local governments, state government, federal government (Clinton and Bush administrations), private equity funds, pension funds, investment banks, broker dealers, investment advisors, home builders, real estate developers, credit card companies, building goods suppliers, other consumer goods suppliers, regulatory agencies. I could sit here and list how every person is to blame but that would be a very long post. The point is that this current crisis is the result of a collective failure by everyone.
3. TARP. There are many topics to cover on this subject but I'm going to leave it with a brief explanation of why it was necessary and how the money is used. You can love it, hate it, or be indifferent but don't think for one minute that it wasn't in YOUR best interest that it happened.
First and foremost, without banks there would be NO economy. Due to the unique set of regulations and requirements of banks, without the TARP there would have been some massive bank failures, which in turn would probably have sent us into a deep depression. The TARP was a CAPITAL infusion. Banks are required to have "X amount of capital" at all times. The bad assets (loans held on the balance sheet and other investments) were forcing banks to take write-downs. A write-down is a NON-CASH charge that marks down the value of the asset and goes against income (think about it as if you had a stock then went from $40 down to $30. The value decreased and you lost $10 but it was a non-realized gain/loss that you wouldn't recognize unless you actually sold that stock). More importantly, it eats away at the required capital a bank has. Since the banks could not access the capital markets (stock, private investors, etc) to help build up their capital cushion and bad loss reserves the only option was the government. The banks that the government deemed worthy received a % of TARP funds based on the dollar amount of risky assets on its books. That TARP money comes with 5% interest per year, principal to be repaid within 5 years or the interest goes up to 9%. The money was taken in exchange for Preferred Stock. Preferred shares typically do not have voting rights, can be convertible (into common shares), receive annual dividends, and are one notch above common in the claim on an institution's assets in the event of a bankruptcy. With that said, a bank can be perfectly healthy from an operational standpoint but the bad asset write-downs and build up of loss reserves could cause a bank to become insolvent. Just because banks received the TARP funds does not mean they were losing money from day-to-day operations.
There is a lot of outcry wondering why the banks haven't been lending more since they received the TARP money. There are several reasons for this, which include: the banks need to preserve capital, TARP is an expensive source of funding so in order for the banks to make money off of loaning TARP funds they would need to lend out at rates higher than 5%, and tighter underwriting. Okay, so let's backtrack a bit. The root of the problem we have right now is that banks loosened their underwriting standards, which in turn led them to make loans they normally would not have made. If the root of our problem was bad lending standards and the banks have recently tightened those standards up, then why is everyone crying for the banks to lend more?? We will not get out of this crisis, or prevent a near-term future crisis from reoccurring, if we force banks to make more loans (when you force banks they typically drop their standards, thus making more bad loans). Furthermore, the banks need to hold on to the capital for future write down losses.
Now, the thing that is absolutely getting under my skin is when people are crying about "they are spending TARP funds on bonuses, airplanes, parties, office redecorations, etc." ALL OF THOSE COULD NOT BE FURTHER FROM THE TRUTH. Just because a bank/company spends money does not mean that they are spending the TARP funds. More importantly, it is going to do absolutely no good to become big brother and hold these companies under a powerful microscope. Should they be held accountable? Yes, but they shouldn't be micromanaged. Stop and think to yourself for one second, do you honestly think the executives and employees like the situation they are in? The financial services sector has had more job losses than any other sector. In addition, the remaining and former employees of these banks had a lot of wealth tied up in the stock of their company and now every move they make and every penny they are paid comes with an extremely heavy dose of criticism from everyone with a microphone and a keyboard.
If the majority of the TARP recipients pay their annual interest and repay the majority of the principal then the government stands to make billions of dollars. If I was a concerned taxpayer then I would be concerned about what the government is going to do with THOSE profits, more than I am concerned about what the banks are doing with the first round of TARP funds.
4. "Bonuses": I can completely understand why some people are mad about bankers being paid "bonuses" but you have to understand the compensation structure at banks (specifically investment banks). Investment bankers are paid a modest (but nice in average US wages) salary, but the majority of their total compensation comes from the year end "bonus". In reality, it is more like deferred salary. You sign on taking a modest salary, work your *** off (80-100+ hours a week), and then at the end of the year you get the rest of your compensation. However, this comes with a big kicker. You can work the entire year, be told what your "bonus" will be, and if for some reason (fired, laid off, quit) before the "bonus" is paid you will not receive a dime. A lot of you can say what you want about how if the banks received TARP money they shouldn't be paid "bonuses", how if the banks are losing money then they should get them, and that these are the people (remember, not the only people) who got us into this mess that they should not receive them. If you honestly think that then I want you to go to your boss tomorrow and tell him/her that you are willing to take over a 50% (being conservative here) pay cut because your company isn't cutting the mustard this year. Of course you won't do that because your compensation structure is set up differently than those who work at banks and it's always easy to want other people to sacrifice their paycheck unless it's your paycheck that is hit. Another thing to consider is that not every banker at a bank worked in an area that dealt with mortgage related products (which led us to this mess). Why should those employees, who continue to produce, take 50-90% pay cuts just because other areas of the banks made some bad decisions several years ago? If you are going to demand that the bank employees take pay cuts and have their compensation capped, then you should be crying about the auto workers and their unions, which have absolutely crippled the auto industry. Or how about the raises, which are paid for DIRECTLY by taxpayer money, that the Senate (or Congress, or both??) gave themselves recently? By the way, the "bonuses" that are being paid are coming with A LOT of strings attached. There are limits on the amount of cash paid, some being paid with an interest in a pool of the bank's bad assets, clawback provisions, 3-year deferments, etc.
One more thing that I forgot regarding "bonuses"...the "bonuses" that the media and populist anger has targeted were paid in 2008 for the year of 2007. So, at that point the TARP wasn't even on the drawing board.
I can promise you this, the "bonuses" paid in 2009 for fiscal year 2008 are SIGNIFICANTLY lower than the fiscal year 2007 payouts...like 50-97% lower in most cases.
5. Personal responsibility. Let me remind everyone that even though the rating agencies f'd up, even though the banks were too highly leveraged, and even though bad loans were made, if the borrowers would have paid their loans and been financially responsible then we would not be in this mess. One thing that I hope comes out of this is a big wake up call for this country to be more financially responsible. There is nothing wrong with taking out a loan or having a credit card as long as they are handled with responsibility. The abuse of those products and the irresponsibility with them will surely land those people in hot water regardless of the economic climate.
That concludes my rant/educational post/clarification/whatever the hell you view this post as.
Flame away, but do me a favor and know damn well what you are talking about when you do. Please try to be constructive and have a rational dialog, rather than flaming and point fingers, or making wild accusations from something you heard in the media but really have no clue what you are talking about (yes, I know I'm guilty of that with the election but that's what campaigns are all about anyway).
1. Despite what you may think, the economic crisis is not completely Bush's fault. Economic cycles have occurred every 5-7 years for a very long time and just about every President who serves two terms will serve through economic expansion and economic recession. Now, a President can do a lot of stupid things to magnify the outcome but there is only so much that is in his control.
2. EVERYONE, let me repeat, EVERYONE is to blame for the current economic crisis. If you had a pulse in the past 7 years then you benefited from what was going on. IMO, the blame should fall on (in no particular order): home sellers, home buyers, realtors, appraisers, title companies, insurance companies, mortgage brokers/loan officers, mortgage lenders, banks, rating agencies, investors, local governments, state government, federal government (Clinton and Bush administrations), private equity funds, pension funds, investment banks, broker dealers, investment advisors, home builders, real estate developers, credit card companies, building goods suppliers, other consumer goods suppliers, regulatory agencies. I could sit here and list how every person is to blame but that would be a very long post. The point is that this current crisis is the result of a collective failure by everyone.
3. TARP. There are many topics to cover on this subject but I'm going to leave it with a brief explanation of why it was necessary and how the money is used. You can love it, hate it, or be indifferent but don't think for one minute that it wasn't in YOUR best interest that it happened.
First and foremost, without banks there would be NO economy. Due to the unique set of regulations and requirements of banks, without the TARP there would have been some massive bank failures, which in turn would probably have sent us into a deep depression. The TARP was a CAPITAL infusion. Banks are required to have "X amount of capital" at all times. The bad assets (loans held on the balance sheet and other investments) were forcing banks to take write-downs. A write-down is a NON-CASH charge that marks down the value of the asset and goes against income (think about it as if you had a stock then went from $40 down to $30. The value decreased and you lost $10 but it was a non-realized gain/loss that you wouldn't recognize unless you actually sold that stock). More importantly, it eats away at the required capital a bank has. Since the banks could not access the capital markets (stock, private investors, etc) to help build up their capital cushion and bad loss reserves the only option was the government. The banks that the government deemed worthy received a % of TARP funds based on the dollar amount of risky assets on its books. That TARP money comes with 5% interest per year, principal to be repaid within 5 years or the interest goes up to 9%. The money was taken in exchange for Preferred Stock. Preferred shares typically do not have voting rights, can be convertible (into common shares), receive annual dividends, and are one notch above common in the claim on an institution's assets in the event of a bankruptcy. With that said, a bank can be perfectly healthy from an operational standpoint but the bad asset write-downs and build up of loss reserves could cause a bank to become insolvent. Just because banks received the TARP funds does not mean they were losing money from day-to-day operations.
There is a lot of outcry wondering why the banks haven't been lending more since they received the TARP money. There are several reasons for this, which include: the banks need to preserve capital, TARP is an expensive source of funding so in order for the banks to make money off of loaning TARP funds they would need to lend out at rates higher than 5%, and tighter underwriting. Okay, so let's backtrack a bit. The root of the problem we have right now is that banks loosened their underwriting standards, which in turn led them to make loans they normally would not have made. If the root of our problem was bad lending standards and the banks have recently tightened those standards up, then why is everyone crying for the banks to lend more?? We will not get out of this crisis, or prevent a near-term future crisis from reoccurring, if we force banks to make more loans (when you force banks they typically drop their standards, thus making more bad loans). Furthermore, the banks need to hold on to the capital for future write down losses.
Now, the thing that is absolutely getting under my skin is when people are crying about "they are spending TARP funds on bonuses, airplanes, parties, office redecorations, etc." ALL OF THOSE COULD NOT BE FURTHER FROM THE TRUTH. Just because a bank/company spends money does not mean that they are spending the TARP funds. More importantly, it is going to do absolutely no good to become big brother and hold these companies under a powerful microscope. Should they be held accountable? Yes, but they shouldn't be micromanaged. Stop and think to yourself for one second, do you honestly think the executives and employees like the situation they are in? The financial services sector has had more job losses than any other sector. In addition, the remaining and former employees of these banks had a lot of wealth tied up in the stock of their company and now every move they make and every penny they are paid comes with an extremely heavy dose of criticism from everyone with a microphone and a keyboard.
If the majority of the TARP recipients pay their annual interest and repay the majority of the principal then the government stands to make billions of dollars. If I was a concerned taxpayer then I would be concerned about what the government is going to do with THOSE profits, more than I am concerned about what the banks are doing with the first round of TARP funds.
4. "Bonuses": I can completely understand why some people are mad about bankers being paid "bonuses" but you have to understand the compensation structure at banks (specifically investment banks). Investment bankers are paid a modest (but nice in average US wages) salary, but the majority of their total compensation comes from the year end "bonus". In reality, it is more like deferred salary. You sign on taking a modest salary, work your *** off (80-100+ hours a week), and then at the end of the year you get the rest of your compensation. However, this comes with a big kicker. You can work the entire year, be told what your "bonus" will be, and if for some reason (fired, laid off, quit) before the "bonus" is paid you will not receive a dime. A lot of you can say what you want about how if the banks received TARP money they shouldn't be paid "bonuses", how if the banks are losing money then they should get them, and that these are the people (remember, not the only people) who got us into this mess that they should not receive them. If you honestly think that then I want you to go to your boss tomorrow and tell him/her that you are willing to take over a 50% (being conservative here) pay cut because your company isn't cutting the mustard this year. Of course you won't do that because your compensation structure is set up differently than those who work at banks and it's always easy to want other people to sacrifice their paycheck unless it's your paycheck that is hit. Another thing to consider is that not every banker at a bank worked in an area that dealt with mortgage related products (which led us to this mess). Why should those employees, who continue to produce, take 50-90% pay cuts just because other areas of the banks made some bad decisions several years ago? If you are going to demand that the bank employees take pay cuts and have their compensation capped, then you should be crying about the auto workers and their unions, which have absolutely crippled the auto industry. Or how about the raises, which are paid for DIRECTLY by taxpayer money, that the Senate (or Congress, or both??) gave themselves recently? By the way, the "bonuses" that are being paid are coming with A LOT of strings attached. There are limits on the amount of cash paid, some being paid with an interest in a pool of the bank's bad assets, clawback provisions, 3-year deferments, etc.
One more thing that I forgot regarding "bonuses"...the "bonuses" that the media and populist anger has targeted were paid in 2008 for the year of 2007. So, at that point the TARP wasn't even on the drawing board.
I can promise you this, the "bonuses" paid in 2009 for fiscal year 2008 are SIGNIFICANTLY lower than the fiscal year 2007 payouts...like 50-97% lower in most cases.
5. Personal responsibility. Let me remind everyone that even though the rating agencies f'd up, even though the banks were too highly leveraged, and even though bad loans were made, if the borrowers would have paid their loans and been financially responsible then we would not be in this mess. One thing that I hope comes out of this is a big wake up call for this country to be more financially responsible. There is nothing wrong with taking out a loan or having a credit card as long as they are handled with responsibility. The abuse of those products and the irresponsibility with them will surely land those people in hot water regardless of the economic climate.
That concludes my rant/educational post/clarification/whatever the hell you view this post as.
Flame away, but do me a favor and know damn well what you are talking about when you do. Please try to be constructive and have a rational dialog, rather than flaming and point fingers, or making wild accusations from something you heard in the media but really have no clue what you are talking about (yes, I know I'm guilty of that with the election but that's what campaigns are all about anyway).
