Charging a bank for an implicit government guarantee to absorb losses? According to the Wall Street Journal, the Federal Reserve and Treasury are demanding that Bank of America pay $500 million to exit a bailout deal that was never actually signed.
That’s a nice chunk of change, but taxpayers shouldn’t be fooled into thinking this — or any other bailout — is a good deal.
A very dangerous misconception is taking root in the press, that in addition to saving the world financial system, the bank bailout is making taxpayers money.
“As big banks repay bailout, U.S. sees profit” read the headline in the New York Times on Monday. The story was parroted on evening newscasts.
The trouble is the popular view that TARP was the bailout. That very unpopular $700 billion program got all the attention because it was an easy story to tell a general audience. It had a big ugly price tag; it was debated very publicly in Congress; and, most important, the list of recipients and their take was made public all at once.
So when those recipients pay back TARP — at a decent profit for taxpayers — bailouts all of a sudden don’t seem so bad.
But the bailout was much larger than TARP. There is FDIC’s debt guarantee program, which still backs over $300 billion worth of financial sector debt; there are the Federal Reserve’s emerging lending facilities, which have showered hundreds of billions of cash on banks in exchange for, well, we don’t know what. There was the AIG bailout, which gave the company tens of billions more. There were changes in fair value accounting rules, which permitted banks to hide losses, and there is stupendous support for the housing market, which has rescued banks from huge write-offs.
All of these and more make up the implicit too-big-to-fail guarantee that the biggest financials have all received. The total cost won’t be known for years, and the price tag is likely to be enormous.
Look no further than Fannie Mae and Freddie Mac. The moral of their story is that implicit guarantees alter the investment landscape in ways that are very destructive and, ultimately, very expensive.
Portfolio managers kept buying Fan and Fred backed mortgage paper even after the companies’ capital structures had deteriorated significantly. They didn’t care about fundamentals because they were buying a government guarantee.
But eventually the bill comes due. In Fannie’s and Freddie’s case, taxpayers have promised $400 billion to absorb losses.
Instead of learning from that mistake, policy-makers thought it wise to repeat it on a larger scale, backing not just the housing market, but most of the financial sector, too.
The $500 million that the Fed and Treasury could collect from Bank of America is a nice token sum. But it doesn’t begin to pay the cost of BofA’s implicit guarantee against failure.
Taxpayers should keep that in mind whenever they see misguided reports that they are making money from bailouts. The truth is that the biggest banks are still insolvent and, ultimately, their losses are likely to be absorbed by taxpayers.