Bailouts That Are More Trouble Than They're Worth

Jacob Sullum | March 11, 2009

The New York Times reports that some banks are ready to give back their bailout money because of the multiplying strings attached to it, including limits on executive compensation, dividends, employee training, local philanthropy, and hiring of foreign citizens. Critics worry that "the conditions go beyond protecting taxpayers and border on social engineering." The most troubling complaint is that the government is pushing banks to make risky lending decisions that will undermine their profitability and stability:

The demands to modify mortgages or forestall evictions are especially onerous, some bank executives and experts say, because they could prompt some institutions to take steps that could lead to greater losses.

"We are taking an approach that wants the banks to help the economy and whether it is ultimately good for a particular bank is secondary," said L. William Seidman, the former senior regulator during the savings and loan bailout. "Weak banks are being asked to do things that will erode their position."...

A growing chorus of industry experts are warning that asking weak banks to carry out the government's economic and social policies could increase the drain on the public purse. These experts say that the financial assistance, while helpful in the short run, could force weak banks to engage in lending practices that will lose even more money, and that the government inevitably will become more heavily involved in dictating how banks do business.

The bailout conditions could not only contribute to bank failures; they could help set up the next boom-and-bust credit cycle by encouraging the sort of reckless lending practices that contributed to the current one:

Take Fannie Mae and Freddie Mac, the housing-finance companies that the government now controls. In recent months, they have been told to spend billions of dollars buying bundles of mortgages for which there are no other buyers, and to let homeowners refinance their loans—even if they have no equity.

Such commands are echoes of the 1990s, when Fannie and Freddie tried to balance dueling mandates that required them to make a profit for their shareholders and to serve a public mission of increasing homeownership.

In service of both shareholders and what they asserted was the public good, they borrowed extensively in order to buy and hold mortgages in their own investment portfolios. They purchased billions of dollars in risky subprime mortgages.

As a consequence of having a public mandate, they also had a credit line with the Treasury and their risky business strategies were viewed by the markets as being guaranteed by the government.

To satisfy both mandates, the companies also faced fewer restrictions and were allowed to take on more debt than other financial companies. But when buyers began defaulting and home prices plunged, the companies nearly collapsed and last fall were placed under government conservatorship. [Brookings Institution economics fellow Douglas Elliott] said that some banks participating in the bailout program are now in the same conflicting position that Fannie Mae and Freddie Mac were in.

[Thanks to Tricky Vic for the tip.]

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|3.11.09 @ 4:56PM|#

What? Social engineering? The government would never force banks to do anything like that!

It amazes me that people--especially the people running the country (into the ground)--get all persnickety when you suggest that, in fact, the financial crisis has a whole lot to do with this compulsory social engineering crap.

Stop already!

Nostradamus + Cassandra 4EVER|3.11.09 @ 5:01PM|#

"Critics worry that "the conditions go beyond protecting taxpayers and border on social engineering." "

Sigh.

|3.11.09 @ 5:11PM|#

But, but, but, ProL, how will Nancy Pelosi be able to bail everyone out again when this bailout screws the pooch even more than it already is?

Think of the congress critters!

HammeredHead|3.11.09 @ 5:15PM|#

In te article it was interesting that the banks didn't know how to return the money as the government hasn't set up a procss. It reminds me of the door to door salesmen who hand you some bogus liscense and ignore your attempts to hand it back while they go through their speech.

SpongePaul|3.11.09 @ 5:19PM|#

ya know what has been irking me? the economy supposedly is failing because of bad loans. well, would not the simplest most prudent occams razor have been to just restructure or pay off the loans. then the banks have money homes saved and economy hums again. but really, does anyone really feel sorry for all the idiots who bought more than they could afford. really?

SpongePaul|3.11.09 @ 5:21PM|#

Actually the most prudent and economicall sound thing we could have done would have been nothing. let the idiots loose thier houses, let the banks fail, others come along to pick up slack. let the dinos of the American car manufactures die. Unprofitable buisness fails, plain and simple!

|3.11.09 @ 5:21PM|#

I wonder if the mortgage and mortgage derivative market would've figured everything out on its own if the freakin' government could've kept its meddling hands off? I bet we'd be a lot closer to a recovery in that sector without the near-divine wisdom of our brainless overlords.

|3.11.09 @ 5:25PM|#

How much of a crisis can it really be if banks can afford to give the money back because they don't like the terms? Not that I blame them.

|3.11.09 @ 5:27PM|#

Doing nothing is almost certainly the best choice for the long term. Problem is, you have to get through the short term first...and there would be a GREAT deal of pain and suffering in the short term if we do nothing. People would be out in the streets demanding a strongman to take over and DO SOMETHING, the pronouncements of "egghead college professors" notwithstanding.

This is the type of situation where you really have to thread the needle to avoid screwing up our future. You have to be willing to suffer some government action to soften the landing and keep people at least minimally content. Not that what Obama's doing is a good idea, but the people who were saying "doing nothing is not an option" were right (tho probably for the wrong reasons).

|3.11.09 @ 5:28PM|#

spongepaulcrazypants, what are you suggesting? That people and businesses should be responsible for their stupisity? That's just crazy talk. It would result in the complete failure of the economic system worldwide. That would result in billions of people dying from a total inability to provide for themselves in a moneyless society. While the end result might be worth it, It sure wouldn't be pretty while the herd was being culled.

"""I wonder if the mortgage and mortgage derivative market would've figured everything out on its own if the freakin' government could've kept its meddling hands off?"""

I say yes. But I don't think we would necessarily be closer to recovery, but the price tag would be a hell of a lot less.

Who other than socialist leanig worshippers of state economic control is surprised by this?

|3.11.09 @ 5:29PM|#

and the moron wins the joez law award for spelling stupidity, stupisity.

SpongePaul|3.11.09 @ 5:31PM|#

|3.11.09 @ 5:33PM|#

No, actually I'm serious about the consequences of doing nothing in this situation. I agree with crimethink at 5:27pm about threading the needle.

but really, does anyone really feel sorry for all the idiots who bought more than they could afford. really?

Haven't you been paying attention? These poor souls who bought adjustable rate mortgages and interest only loans were conned by unscrupulous lenders. It was all in the fine print that nobody could be expected to understand or get someone else to explain.

The chosen one has spoken on the matter.

|3.11.09 @ 5:36PM|#

TrickyVic,

I agree. Closer, not there yet. But I think the triage would be done as far as the various companies went. It's hilarious to watch banks try to opt out of government control, because they should've fought the whole deal on the front end. Of course, they've been too much in bed with the government all along.

|3.11.09 @ 5:37PM|#

It would be nice if our "leader" could get on TV and explain that, hey, we had it much better than we should have for the last decade or so and now we have to pay the piper for a few years...and appeal to Americans' sense of patriotism and community. Unfortunately, that wouldn't work for two reasons:

1. By and large Americans are spoiled brats whose sense of entitlement knows no bounds; and

2. The people who benefitted from the destructive economic policies -- eg, CEOs driving their companies into the ground and getting golden parachutes, Sorosesque stock and bond vultures, and well-connected lobbyists -- are precisely the ones who won't be suffering during a recession.

|3.11.09 @ 5:40PM|#

What's that?? You don't want strings attached? Then maybe you shouldn't have taken the fucking money to begin with.

I have Absolutely ZERO sympathy for these fucking deadbeat banks who were clamoring for a bailout but are now pissed that there are strings attached.

Especially when it's their own fucking fault that the strings were there. These fucking banks took public money and thought hey lets just keep doing business as usual.

Furthermore, the whole point of the cash infusion to banks was to loosen up credit markets -- not to give it to banks so they can make their balance sheets look better and to be able to pay huge bonuses or so that they can use that money for lobbying.

STFU bankers. No likey strings? Don't take public money. The time to think about these things was BEFORE you took the money. Now they have some buyers remorse? Sucks to be you.

How much of a crisis can it really be if banks can afford to give the money back because they don't like the terms? Not that I blame them.

They can't pay it back. It's a lot of tough talk. Maybe some of the smaller banks who had healthy balance sheets to begin with can, but the big guys, Goldman, Wells Fargo BoA and Citi -- the can't pay it back.

It's hilarious to watch banks try to opt out of government control, because they should've fought the whole deal on the front end.

Er, didn't Wells Fargo try that? Only to have Uncle Hank force feed them like a fat-livered goose?

crimethink, I have to wonder if americans sense of patriotism and community is worn thin from our illogical war on terror and its associated costs?

|3.11.09 @ 5:43PM|#

Oh, yes, the banks are guilty, too. But the government is going to screw up the financial services industry but good. And the rest of the market will suffer for much longer than it needed to.

I have Absolutely ZERO sympathy for these fucking deadbeat banks who were clamoring for a bailout but are now pissed that there are strings attached.

They were pissed about there being strings attached at the time, dude. Wells Fargo even tried to "bail" on the whole bailout thing before being forced to comply. Which is why, in the original bailout, there weren't any strings attached. Now the Obama administration is trying to change the rules in the middle of the game.

|3.11.09 @ 5:47PM|#

I don't care where you live politically, you've got to be concerned about this government's motives when multiple members of the administration have said that a crisis is a great opportunity to get things done. That's worse than offensive, and it makes it less than surprising when the government's actions seem to be prolonging the various crises and sub-crises.

|3.11.09 @ 5:48PM|#

Of course it is amusing to see the people who piss and moan about unscrupulous lenders victimizing poor house-flippers with their fine print contracts...turn around and say that the banks have to obey whatever the administration says, because the administration gave them money.

If the Obama administration wants to find the unscrupulous lenders, they need to install some mirrors in the White House.

|3.11.09 @ 5:50PM|#

Which is why, in the original bailout, there weren't any strings attached. Now the Obama administration is trying to change the rules in the middle of the game.

As they should be. Without any strings, the banks were taking the money and giving out bonuses and spending it on lobbying or spending it on Resort getaways or just sitting on it.

That wasn't the point of the bailout. The bailout had a specific purpose.

The banks acted poorly and now they get restrictions.

Furthermore, the american people wanted restrictions on the banks and they wanted conditions set on them.

No one should get no strings attached money merely because they ran their business into the ground.

|3.11.09 @ 5:53PM|#

crimethink, I have to wonder if americans sense of patriotism and community is worn thin from our illogical war on terror and its associated costs?

That's absolutely right. I do however think that Obama had a great reservoir of trust available on Jan. 20, and if he'd come out and said we had to tighten our belts and ride out this crisis for a brighter future, most people would have listened.

Of course, his own party would have turned on him like a pack of wolves, and I don't think his life spent surrounded by people telling him he's the Messiah has given him the personal integrity to face something like that (ahem, as Reagan did in the early 80s recession).

|3.11.09 @ 5:55PM|#

To borrowers and lenders alike,

You made your bed, now you fucking lie in it.

|3.11.09 @ 5:57PM|#

Without any strings, the banks were taking the money and giving out bonuses and spending it on lobbying or spending it on Resort getaways or just sitting on it.

And WITH strings, the banks would never have taken the bailout money in the first place. You have a short memory, no?

|3.11.09 @ 6:00PM|#

Imagine a lender gave someone a loan, with a certain installment plan to pay it back, and said, "I want you to pay me back, but I'm not going to charge you any late fees or interest if you don't make payments on time."

Then, a year later, after the borrower hasn't made any payments on time, the lender decides to impose late fees and interest penalties, as the borrower is totally violating the spirit of the agreement.

You and your ilk would be screeching about predatory lending and such, and rightly so! But somehow when it's the govt changing the rules in the middle of the game it's OK.

|3.11.09 @ 6:02PM|#

border on social engineering

As we used to say in 7th grade, "Light dawns over Marblehead".

|3.11.09 @ 6:05PM|#

And WITH strings, the banks would never have taken the bailout money in the first place. You have a short memory, no?

My memory is just fine. I remember that when Helicopter Ben and the Bush admin first discussed TARP they used that rationale as a reason why there were no strings.

But I don't buy it. They (the bankers) were screaming for bailouts -- bailouts come with conditions (as they should so as not to reward poor behavior).

Furthermore, anyone who honestly expected that the American people wouldn't demand conditions for getting bailed out is STUPID. Let's not pretend like Geithner wanted to put any conditions on the money. The pressure to do so was big though once the media started reporting about huge bonuses being given out by firms that received bailout money.

|3.11.09 @ 6:17PM|#

But somehow when it's the govt changing the rules in the middle of the game it's OK.

My understanding is that the restrctions applied to whomever took money after the restrictions were announced. And those restrictins by the admin. were for money that goes outside of TARP (direct infusions from the Fed and the Treasury which are funds seperate from TARP)

I don't think they changed the rules of the game. Banks that got TARP I funds only didn't have those restrictions, but new monies coming from the Fed and the Treasury were subject to the conditions, and I think Congress added restrictions for TARP II funds.

I may be wrong, but this is my understanding of the conditions imposed.

|3.11.09 @ 6:22PM|#

But I don't buy it. They (the ~~bankers~~ homebuyers) were screaming for ~~bailouts~~ $0 down mortgages -- ~~bailouts~~ mortgages come with conditions (as they should so as not to reward poor behavior).

Furthermore, anyone who honestly expected that the ~~American people~~ lenders wouldn't demand ~~conditions~~ riskier interest rates and balloon payments for getting ~~bailed out~~ $0 down mortgages is STUPID.

economist|3.11.09 @ 6:23PM|#

I have an even better idea for not rewarding poor behavior: Don't give failing banks bailouts in the first place. It's cheaper and simpler.

|3.11.09 @ 6:27PM|#

My understanding is that the restrctions applied to whomever took money after the restrictions were announced.

So why are the banks trying to return money they've already been given, if keeping it doesn't force them to abide by the new pronouncements? In your interpretation, there's no incentive whatsoever for them to do this.

|3.11.09 @ 6:41PM|#

crimethink,

I dunno why you think I have any sympathy for home-buyers who can't pay and who got stuck in bad mortgages. You seem to be having that debate with the ChicagoTom in your head.

Shit I want people to lose their homes to foreclosure to help drive prices down. I want to buy a home and move out of my Condo.

|3.11.09 @ 6:44PM|#

Well good for you CT. I made the unwarranted assumption that you were cut from the joe/MNG cloth.

|3.11.09 @ 6:48PM|#

Well good for you CT. I made the unwarranted assumption that you were cut from the joe/MNG cloth.

Please don't assume.

The reason I personally harp about the bailout vs. the homeowners is because deadbeat homeowners aren't getting tax dollars.

I could care less about private lenders and private borrowers -- let them all burn in hell. But once you start asking to socialize your losses, then you better be prepared to lick the publics balls.

|3.11.09 @ 6:49PM|#

So why are the banks trying to return money they've already been given, if keeping it doesn't force them to abide by the new pronouncements? In your interpretation, there's no incentive whatsoever for them to do this.

Are the banks really trying to return the money?
No they aren't. They are essentially making a big noise and talking about going Galt.

Let's see if anyone actually gives the money back.

MNG|3.11.09 @ 7:15PM|#

If these banks needed the money so very badly then they would take it strings or no. The fact that they now think the strings are not worth it demonstrates that they should never have qualified for the "bailout" in the first place.

Really, Obama's problem is trying to hard to appease you guys and the hard-on for private enterprise. He should just nationalize the stupid banks that need bailouts.

MNG|3.11.09 @ 7:19PM|#

"I made the unwarranted assumption that you were cut from the joe/MNG cloth."

I also don't have much pity for people who took out mortgages they could not afford. Many of these people were doing this on second and third houses to just turn over some money. Hardly the kind of folk I sympathize with.

I can see an argument for bolstering homeowners facing foreclosure because them going under may harm me and other people who paid for our houses (hurting the value or the market for housing). But not a rationale based on "poor pitiful borrower didn't know what he was getting into."

I also feel sorry for the thousands of people who are being hurt by this stuff indirectly, like those who aren't mixed up in bad mortgages and didn't make dumbass loans (or agree to cover dumbass loans) but that are being laid off or who are losing their life savings in the market.

max hats|3.11.09 @ 8:18PM|#

The heroic John Galt's of the banking industry don't need the government to make terrible decisions. They don't need terms on money being shoved in their pockets by the government. For these cowboys of the financial frontier, for these heroes know, money from the government yearns. . . to be free.

A cap on executive compensation in exchange for tens or hundreds of billions of dollars? I bet you expect these titans of industry to stand in line, maybe fill out forms. Well I've got news for you, Comrade: capitalism doesn't want a contract, it wants a handout.

So you better reach deep and reach fast for those wallets - top talent needs to be retained, and we can't afford no for an answer.

|3.11.09 @ 8:55PM|#

But I don't buy it. They (the bankers) were screaming for bailouts -- bailouts come with conditions (as they should so as not to reward poor behavior).

You mean, kinda like the "structural adjustment programs" that the left is always freaking out over when the IMF bails out some third-world socialist hellhole.

Except, in this case, the conditions make the bank LESS likely to pay the loan back, not more.

|3.11.09 @ 9:06PM|#

The fact that they now think the strings are not worth it demonstrates that they should never have qualified for the "bailout" in the first place.

Well I agree with you there...the best case would have been no bailout at all, let FDIC temporarily take over any banks that fail. But trying to add strings after a loan is already given is dirty pool.

I don't quite share your enthusiasm for nationalizing banks, though. That would multiply the opportunities for political abuse tenfold, and is the absolute last option we should consider.

|3.11.09 @ 9:11PM|#

max hats -

Hey, if there absolutely must be a bailout of some sort, I'm totally OK with attaching strings to govt loans up front. If the banks don't like the strings they can refuse the money and go under.

What I'm not OK with is telling them there'll be no strings so that they take the money (and in the case of WF, forcing them to take the money they don't want), and then changing your mind a few months later.

|3.11.09 @ 9:22PM|#

Really, Obama's problem is trying to hard to appease you guys and the hard-on for private enterprise. He should just nationalize the stupid banks that need bailouts.

Welcome to H&R, Chas! Sorry you missed out on that job opportunity, better luck next time.

economist|3.11.09 @ 10:00PM|#

Max hats wins a stunning victory over a straw man.

economist|3.11.09 @ 10:02PM|#

"Really, Obama's problem is trying to hard to appease you guys and the hard-on for private enterprise. He should just nationalize the stupid banks that need bailouts."

MNG goes off the deep end. If Obama has been trying to do anything, I can assure it does not involve "appeasing" libertarians.

MNG|3.11.09 @ 10:02PM|#

The government should have "bailed" them out, if they requested it, by buying voting stock. Then they could use that to get the banks to change their policies anytime, and no bitching could ensue.

Giving banks under private ownership and direction public money is bullshit.

MNG|3.11.09 @ 10:04PM|#

economist
Libertarians are not the only folks in the U.S. who have such an ideological attachment to private enterprise. Nationalization and socialism are bad words here in the U.S. for more than libertarians, and so even if were the right thing to do Obama was afraid to go there.

|3.11.09 @ 11:15PM|#

"I don't think they changed the rules of the game. Banks that got TARP I funds only didn't have those restrictions, but new monies coming from the Fed and the Treasury were subject to the conditions, and I think Congress added restrictions for TARP II funds.

I may be wrong, but this is my understanding of the conditions imposed."

This is not true. The initial TARP funds were allocated without any strings attached. Maybe you think the banks should have assumed that there were more conditions attached then were stated in the contract, but they signed a legally binding agreement with the Government that did not include any of these conditions added after. They include;

- Pay restriction for top Execs

- Restrictions on H-1 B visas (foreign workers)

- Limiting dividends and stock buybacks

- Limiting M & A activity

- Increased lending (while credit quality is declining)

And a number of banks have decided to give the money back. They initially were reluctant to do this, because the Preferred stock agreement said they would be forced to raise equivalent outside capital if they wanted to return the funds. This is obviously quite difficult in this environment.

The new Stimulus bill basically added a provision that allows you to return the money after consultation with your regulator if they approve without raising equivalent capital. This is a bit confusing, but among large banks

- Northern Trust

- Goldman Sachs

- US Bancorp

which are all well-capitalized want to return the TARP money ASAP. And IberiaBank has already returned the funds.

The only banks to go for more than one round of TARP funds were Citi and BOA. 2 of Citi's capital injections were prior to the announcement of any restrictions, and the final didn't add any capital they simply changed the preferred stock investment to common equity. BOA's second capital injection was necessitated by the Merrill Acquisition, which the government forced on them.

No other bank has gone back more than once.

JB|3.11.09 @ 11:30PM|#

People should pull money out of any bank that does not give back the government funds by May 1.

Transfer your money to banks that don't need a government enema.

|3.12.09 @ 12:08AM|#

The government should have "bailed" them out, if they requested it, by buying voting stock. Then they could use that to get the banks to change their policies anytime, and no bitching could ensue.

That's exactly the problem. The government would use it's voting stock to force the banks to give money to favored political constitutencies.

Which is exactly what they are doing right now. They are forcing the banks to hand out loans to people who probably won't be able to pay them back.

Even if they weren't literally doing that before with Fannie Mae and Freddie Mac, they are *explicitly* doing it now.

Seward|3.12.09 @ 12:23AM|#

The fact that they are putting restrictions on the flow of labor is highly problematic and well, stupid.

jester|3.12.09 @ 3:20AM|#

Nationalization and socialism are bad words here in the U.S...

Because the Socialists of America are so spineless they cannot stand behind a term others in the world wear proudly. If you are for nationalization and socialism, just admit it. Joe McCarthy is not Jason or Freddy for that matter.

You may not be well-liked around this site, but you're free to visit and comment.

travman67|3.12.09 @ 9:37AM|#

"But its got electrolytes. Its what plants crave."

|3.12.09 @ 8:26PM|#

I would love it if they piled on the restriction so no one would take the money, assuming that the money would go back to the people.

Ha, like that would ever happen.

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