Bankrupt Deadbeat Banks Stiff Taxpayers

Only a few weeks ago, We The People seemed to be turning a profit on the U.S. Treasury’s investment in banks via the Troubled Asset Relief Program, or TARP.  Not so fast.  Yes, a few banks repaid the government with interest.  As I noted at the time, their main motivation was probably to escape compensation restrictions and other strings attached to the TARP money.

According to data published in USA Today, the government gave a total of $365 billion to 700 different banks under the TARP program.  The Treasury received preferrred stock from these banks which is supposed to pay a quarterly dividend.   Now we learn that 33 of these banks simply decided not to pay dividends this quarter.  American International Group (AIG), which also received TARP money but is not technically a bank, also failed to pay its dividend.

A Treasury spokesperson claims that the banks are contractually permitted to skip these payments – and of course the federal government respects their rights.  This is laughable.  The federal government is probably the least contract-respecting institution in the world today.   The rights that need to be respected are those of the taxpayers whose capital is being used to prop up institutions that would otherwise have collapsed. 

Why are these institutions stiffing us?  From their point of view, why not?  They were handed free cash at a time when their very existence was being threatened.  Of course they took it.  Maybe now their existence is threatened again due to loan losses and they need to conserve cash.  Or maybe they would just rather use the TARP money for other things.  We don’t know.  What we do know is that the odds the government will  make a “profit” from TARP are not high.

AIG alone owes the Treasury $69.8 billion, according to Reuters.  The automotive industry owes $80 billion.  The 600 banks that haven’t yet repaid their TARP money owe a total of $134 billion.  I, for one, feel sure that the AIG and automotive “investments” will be near-total losses.  One of the dividend-skippers is CIT Group (CIT), which owes $2.3 billion and is probably going to file bankruptcy soon.   This will wipe out preferred shareholders like TARP. 

None of these numbers include the various other bail-out programs and Federal Reserve lending facilities.   The bottom line is that billions (and probably trillions of dollars) have been transferred from the public to politically favored industries like banks.  Most of it is probably never coming back.  A shocking number of people appear to be okay with this.  They say it is distasteful but necessary to save our capitalist system.

No, no, no.  This is not capitalism.  If it were capitalism, incompetent and unprofitable businesses would cease to exist.  Their directors, managers and employees would lose their jobs.  Investors would lose their investments.   This is what happens in industries that lack the ability to extract capital from the public with the government as intermediary/collection agency.  Call it whatever you like, but it’s not capitalism.

The final insult: if you happen to owe money to one of these deadbeat banks, do you get the right to skip payments?  Does your lender simply shrug and tell you to pay when you feel like it?  I didn’t think so.