Economics

Is the Government Acting Like a Payday Lender?

Banks want to pay back their bailout loans early, but Treasury doesn't want to let them go.

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Everyone knows that you should read the fine print before taking out a loan, whether it's $100 from a payday lender or $100 million in bailout loans from the federal government. You'd think that no one would know this better than bankers themselves.

But a few banks have decided they would prefer to get out from under the thumb of their bailout lender, the Troubled Asset Relief Program (TARP). Some additional regulations have cropped up, they don't like the political scrutiny, or they're otherwise chafing under federal supervision. So they tried to pay back their loans early and end the relationship on good terms. This is where they're running into trouble. Seven banks have attempted to pay back funds, but the final step in the process is a negotiation about the ownership stake the federal government holds in bailed out banks. That step isn't going smoothly.

"It almost makes the Treasury look like a payday lender," Camden Fine, president of the Independent Community Bankers of America told Bloomberg, discussing the kerfuffle over the refusal of the Treasury department to accept early repayment of bailout loans on favorable terms.

While Fine meant to criticize Treasury for the high dollar costs it was imposing on banks attempting to pay back TARP money ahead of schedule—"If you look at the cost of those warrants and turn it into an annual percentage rate, it's enormous," Fine said—but the point goes in both directions. The federal government may be acting like a payday lender trying to extract the greatest gain from loans to folks with limited options, but the banks are acting like payday lending customers who take out loans and then go whining to their legislators and city council members when the loans come due.

Bankers who jumped at the bailout money now seem surprised to discover that the fine print gave the government the right to buy stock in the bank at a specified price for up to 10 years, essentially retaining an ownership stake for that period. If someone showed up at my door and offered me an enormous sum of money on the condition that I take it right now! hurry! hurry! hurry! and sign here! I'd be a little suspicious. Doubly so if that person introduced himself with that age-old phrase "I'm from the government, and I'm here to help." Banks were led to believe the warrants provision was minor, and wouldn't be a problem when the time came to negotiate repayment terms. But if there's anything this financial crisis should have taught us, it is to be skeptical of lenders who casually promise that paying back enormous loans won't be any problem at all (ask anyone with an adjustable-rate mortgage).

Of course some banks didnt jump, they were pushed. Rep. Tom McClintock (R-Calif.) noted that fact this week as he proposed legislation to re-write the terms of repayment of TARP funds. "Banks which were pressured to accept TARP funding are now facing serious obstacles, uncertainty and continued government control in their efforts to return the funds to taxpayers," said a press release from his office. McClintock said, "the Administration says it wants out of the banking business but when it is presented with that opportunity it seems to balk. When banks want to give us our money back we shouldn't argue the point." 

One of the banks that has paid back its loans is Centra Financial of Morgantown, West Virginia, which took $15 million at the beginning of the year. The bank's vice president John Fahey, told Fortune, "We're not TARP babies anymore." While his choice of words is troubling—is Treasury infantilizing our banks?—the sentiment is good. Want to get out from under your loan? Pay it back on the terms you agreed to, and have your lawyers do a better job of the fine print (and demanding clearer phrasing) next time. Of course, he is also trying to finagle a refund to the $750,000 his bank would have to spend to buy its warrants back from Treasury.

Among the bigger banks, Goldman Sachs has been the most vocal about wanting to return the TARP money ASAP in order to avoid government meddling. But recognizing the power of the "I'm rubber and you are glue" argument, they're not begrudging the feds a little profit on this transaction and not lobbying for a change in the terms: A spokesman for Goldman Sachs, said the bank "recognizes its obligation to U.S. taxpayers" to fully repay TARP assistance, including warrants."Taxpayers have the right to expect an appropriate return on investment."

Just as any lender does. When I took out a payday loan from ACE Check Cashing for an upcoming story defending under siege payday lenders in the print edition of Reason (stay tuned!), I got several large-print legal notices along with my pile of cash. One of them informed me that there would be no penalty for early repayment, others told me just how much I'd owe when the loan came due. Used to be, a major criticism of payday lenders was that once you had contracted with them, there was no way to avoid paying a large sum to extricate yourself. As the industry has become more regulated, and done more self-regulating to stave off government action, early repayment penalties have been abolished at most of the larger chains.

The Treasury department is making a habit of rewriting, or heavily reinterpreting the fine print. This is a luxury that private players like payday lenders don't traditionally enjoy. For those without political power, a contract is a contract.

So on some accounts, at least, it looks like Fine is wrong: Payday lenders are actually rather better behaved than government lenders.

Katherine Mangu-Ward is associate editor at Reason magazine. 

NEXT: Just Go Blago

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  1. So the banks that tried to make a killing on shady mortgage deals and pyramid schemed investments are gonna get hosed?

    We'' boooo frickin hoooo.

  2. Moral of the story - never into a contract with the government. Period.

  3. banks were lead to believe

    led, led, LED!

  4. Katherine, you missed the opportunity for a picture like this.

  5. See, the government should have just bought controlling stock in the frigging failed banks and stopped this pussy-footing around.

  6. Moral of the story - never into a contract with the government. Period.

    Somebody cue up Darth Vader.

  7. So the banks that tried to make a killing on shady mortgage deals and pyramid schemed investments are gonna get hosed?

    We'' boooo frickin hoooo.

    [citation needed]

  8. Not that I feel particularly sympathetic towards these banks, except for the ones who were strong-armed into accepting this bullshit.

  9. Katherine, you think the phrase "TARP Baby" is troubling because it infantilizes banks? I think it misses the point that that good ol' WV boy was making wordplay on "tar baby." Choose from any of several unfortunate implications.

  10. getting hosed, brotherben? WTF? If anything, it should be "those banks that want to let the taxpayer off the hook...cannot?"

    Come now.

  11. The whole thing is an elaborate Kabuki. No TARP bank is solvent. They can not pay back the funds, nor will they be able to at any foreseeable time. However the charade that the government will not permit payback is perpetrated in order to con the public into believing that there exists such a thing as a sound financial institution. This type of thing has been going on since TARP began with the ridiculous claim that some stronger banks only took the funds at the urging of the government so as not to cause runs on their weaker brethren.

  12. There are many people that I hate more than irresponsible house buyers who acted like someone held a gun to their head and made them take a loan they didn't read. But BANKERS doing it, that certainly qualifies...

    Also, people who try to convince me that either of the above ever happened.

  13. Well I totally sympathize with banks that were pressured to accept tarp funds whether they needed them or not.

    I also totally sympathize with the banks' complaints about the government changing the terms of their loans after the fact. The banks can't just declare that your fixed-rate is now adjustable and will be jacked up just because they stand to make more that way. A deal is a deal.

    Of course, the banks that dumped money into politician's pockets in exchange for what they thought was a sweet corporate welfare windfall (ie most of the ones lobbying and now complaining that their politicians didn't stay bought) are another story.

    Most banks fall into more than one category. General Electric openly agitating on behalf of the President's party doesn't seem like a half-bad idea. Call it insurance. At least, insurance for as long as they stay bought.

  14. The government doesn't care about the money; it's all just bad checks backed by nothing after all. The whole purpose of TARP was always to nationalize the banks.

    -jcr

  15. No TARP bank is solvent.

    Actually, that's not true. Wells Fargo didn't need the money, and they didn't want it. Paulson shoved it down their throats.

    -jcr

  16. Yeah, as a few people note, the argument that "the banks should have stopped and thought before they accepted the money" ignored that Paulson and crew insisted that banks with solvent balance sheets take the money, because otherwise everyone would know which banks were insolvent; i.e., the ones taking the money.

    It has a sort of logic to it, in that if only insolvent banks took the money, that certainly could start bank runs, but of course it becomes an excuse for all sorts of meddling.

    And yes, Katherine, the "TARP baby" comment is an obvious reference to "tar baby." As Wikipedia says:

    In contemporary usage, "tar baby" refers to any "sticky situation" that is only aggravated by additional contact. The only way to solve such a situation is by separation.

    The metaphor works for me. I guess they're just too sophisticated and edjumacated in West Virginia, using literary metaphors and the like.

  17. Banks who jumped at bailout money now seem surprised to discover that the fine print gave the government the right to retain ownership stakes in the banks for up to 10 years. Sure, banks were lead to believe the warrants provision was minor, and wouldn't be a problem when the time came to negotiate repayment term

    My bank told me that I would have a low fixed interest rate on my credit car. I jumped at the chance.

    Now I am surprised to see in the fine print that the bank can raise it whenever they want on me. Sure It's still "fixed" in that it isn't tied to prime, but they can change it as they see fit.

    I guess it's only a problem when it happens to the banks, not when the banks do this to all their customers?

    Fuck the banks who took government monies. They should have said no thanks. What's that? They would have gone under with out it? Then quite your bitching.

  18. Again. I repeat. There were no solvent TARP banks. There are no solvent TARP banks. When Wells perpetrated the lie that they were strongarmed into taking the TARP money, Paulson and Bernanke certainly were not going to call them on it. Do some homework.

  19. Again. I repeat. There were no solvent TARP banks. There are no solvent TARP banks. When Wells perpetrated the lie that they were strongarmed into taking the TARP money, Paulson and Bernanke certainly were not going to call them on it. Do some homework.

    And if you post it three more times, even using ALL CAPS or bold, no linkee, no believee. Learn basic internet discussion techniques.

  20. The Treasury department is making a habit of rewriting, or heavily reinterpreting the fine print.

    This is your starting point; go back and try again.

  21. "There were no solvent TARP banks. There are no solvent TARP banks."

    All banks are technically insolvent.

    Solvency has varying legal definitions, but one of the fundamentals is that available liquid capital must exceed demand deposits.

    In essence, no bank in the world meets this standard because doing so would mean having to impose withdrawal constraints on depositors (e.g. 30 days notice), or having to maintain 100% of deposits in reserve (and earning nothing on the funds).

    Fractional reserve banking can only function because not all depositors are likely to demand simultaneous withdrawals. Capital adequacy regulations do nothing more than establish an arbitrary level for "acceptable insolvency".

    Depositors only tolerate this because they have confidence that their money will be available to them when asked for.

    A loss of confidence would trigger a run on any bank, and even a "sound" bank, in full compliance with all capital adequacy regulations, would be unable to cover all of its deposits.

    Hence, singling out any bank as weak would become self-fulfilling, as depositors would panic and further weaken the bank to the point of inevitable failure.

  22. Joe:
    You hearless bastard! Why would you do such a thing?!

    Kim:
    Because then there will be barance! Every country will be a third-world country! Just imagine it: All around the world there will be massive explosions! [a scene of an explosing near the Taj Mahal.] With nobody to guide them, the people will break out into panic and rioting all over the earth! [Big Ben explodes, with subsequent explosions killing many more people.] The true nature of humanity is unleashed! [an outdoor eatery is destroyed] Dog eats dog and everyone attacks everyone and fend only for themselves! Global stability unravels! [Hollywood is blown up] By the time my show is over, it will be far too rate. [the team members are in awed silence]

    Joe:
    Your plan will fail! You'll never keep the world's leaders distracted here for nine hours!

    Kim:
    Oh no? I've got Eric Bardwin.

    Joe:
    Dear God...

  23. "the Administration says it wants out of the banking business but when it is presented with that opportunity it seems to balk.

    I said it before, I'll say it again: Obama doesn't want to run these companies the same way I don't want to beat someone elses annoying children...

  24. I'm remarkably unsympathetic to the argument that banks are somehow too unsophisticated to keep on top of the government during financial negotiations. It's hard to get much more financially savvy than *being a bank.* If we're letting people with $200k annual incomes qualify as accredited investors, these people sure as hell are. And if banks really didn't "understand" some of the clauses they were signing up for, then they're idiots - and if they did, but don't like the bed they made now, they're not much smarter.

    I do have more sympathy for the argument that banks were pressured to accept TARP funds, but not all that much more. Political pressure is a fact of life, and banks spend enough money lobbying the government to realize that. The fact that this time, the government went against them isn't much of an excuse.

    Later, the article claims that the government is heavily "re-interpreting" various clauses in the TARP agreement, with the implication that it is attempting to leverage its power to gain some sort of additional undeserved equity stake. Unfortunately, this claim comes at the end of the article with absolutely no substantiation. There are contractual disputes all the time in business without any bad faith being involved, and so I'm quite unclear on where the bad faith imputation here comes from.

    In short, the article seems to begin from the premise that the government is simultaneously both incompetent and preternaturally malicious, and thus the banks need to be somehow excused from the consequences of their own actions. This is as anti-libertarian an argument as I can think of.

  25. Again. I repeat. There were no solvent TARP banks. There are no solvent TARP banks. When Wells perpetrated the lie that they were strongarmed into taking the TARP money, Paulson and Bernanke certainly were not going to call them on it. Do some homework.

    According to Obama officials-- which are the same officials in charge during the Bush administration (Hope! Change!) there were solvent ASSRAPE (erh, TARP) recipients.

    The justification, we were told by King Henry Paulson himself was, if only insolvent banks received TARP funds, then us wiley bank customers could plumb which banks were insolvent, and we'd have a run on the insolvent banks, driving their financial woes further into the grave. So solvent firms were forced (yes, there's an ongoing debate on what "forced" really means when the federal government, flanked by powerful lawyers "asks" you to take TARP funds while a team of IRS agents wait in the wings for their orders to start applying crippling audits should you 'opt out') to take TARP funds to "hide" which firms were insolvent vs. those that weren't.

  26. And if you post it three more times, even using ALL CAPS or bold, no linkee, no believee.

    What if there were a number of exclamation points following it?

  27. Banks can whine all they want to. I have *zero* sympathy.

    Would my bank let ME out of my mortgage early if I found the money for it?

    Not unless I paid a "penalty" that would ensure they would receive 100% of the interest they would have earned if I had continued paying to the end of my term.

    Let the banks that can afford to get out early by all means do so.

    But make 'em pay.

  28. Political pressure is a fact of life

    When did it get to the point that we accepted this as a given. And why?

  29. Jameson,

    Agree with your general tone. Only some minor nitpicks. I think what you're seing here is not so much a boo-hoo for the banks, but a mistrust of a government which claims to be slaying the dragons of unfair lending, all the while engaging in gross, political manipulation of their own lending process.

    What I'm finding when discussing with people is if you complain about the governments disingenous approach to the bailouts, it's concluded you must support corporations and their odious business practices that got themselves into this mess in the first place. Most of us have a firm distaste for both.

    I'm all about watching the corporations fail. But the goddamned government won't let it happen. How quickly we've forgotten about Obama bitching about a few million in bonuses while he was signing authorizations to ship billions to the very firms he was chastizing? "Ok, ok, uncle, I won't pay out $165 million in bonuses... oh, thanks for the $40 billion grant!"

    Later, the article claims that the government is heavily "re-interpreting" various clauses in the TARP agreement, with the implication that it is attempting to leverage its power to gain some sort of additional undeserved equity stake. Unfortunately, this claim comes at the end of the article with absolutely no substantiation.

    It's possible the article didn't substantiate these claims because it was fairly common knowledge?

    For instance, must we substantiate that water is wet?

  30. Well Sharkibark, if you signed a pre-computed interest loan on a fucking mortgage, I have absolutely ZERO sympathy for YOU. You're one of the ones that shouldn't have had a mortgage in the first place.

    A little shopping and a little application of the math you learned in grade school would tell you it's a shitty deal. And if you chose to sign on the dotted line anyway, it's on you, not the bank that offers the product.

  31. When the banks partnered with the government to rob taxpayers, they had no idea how good the government is at manipulating. Banks lost their edge years ago when they were lulled to sleep by the Fed -- they are no match for the government when it comes to playing this game.

  32. Again. I repeat.

    Repeat it all you want, that won't make it true.

    -jcr

  33. Let's see here...ah, here we go!
    Directions to Galt's Gulch.

  34. I'm feeling the Hope and Change(tm). The proctologist has recommended a number of analgesic creams, as well as antibiotics and antivirals to prevent infection.

  35. Well Sharkibark, if you signed a pre-computed interest loan on a fucking mortgage, I have absolutely ZERO sympathy for YOU. You're one of the ones that shouldn't have had a mortgage in the first place.

    Agreed, I've never heard of a mortgage loan that didn't let you pay it off early. I've paid off one house already and am working on another.

  36. NAL, to be fair, and to avoid the inevitable leftward slanting bash of your post, there are prepayment penalties allowed in some states. You have the choice to take a prepayment penalty for a period of time in return for a lower rate.

    That being said, if you sign loan documents without knowing that, you reap what you sow, and you get no pity from me. My tax dollars, apparently yes, but not my pity.

  37. In related news, recently deceased Freddie Mac exec David Kellerman was reportedly being pressured by the feds to alter Freddie Mac's financial statements:

    http://www.nytimes.com/2009/04/23/business/23freddie.html?_r=1&scp=3&sq=freddie%20mac&st=cse
    >In addition to taking criticism over the bonuses, he was recently involved in tense conversations with the company's federal regulator over its routine financial disclosures, according to people close to those discussions who also spoke on condition of anonymity. Freddie Mac executives wanted to emphasize to investors that they believed the company was being run to benefit the government, rather than shareholders. The company's regulator, the Federal Housing Finance Authority, had pushed to play down that language. Freddie Mac reported to the Securities and Exchange Commission that changes it had made in practices to help the government "have increased our expenses or caused us to forgo revenue opportunities."

  38. Would my bank let ME out of my mortgage early if I found the money for it?

    Yes, your bank would. In fact, it is illegal for your bank to prevent you from prepaying a loan of more than 61 months' duration -- i.e., a standard mortgage. There may be some complication where ARMs and other one-, two- or five-year reset-type products are involved (though I'm not sure about that), but establishing that your loan will not penalize early payment is a fairly straightforward process. If there's any discrepancy about this in your own mortgage, you should talk to a lawyer.

  39. I can't believe there hasn't been more discussion of JCR's astute 5:16 comment.

  40. The government doesn't care about the money; it's all just bad checks backed by nothing after all. The whole purpose of TARP was always to nationalize the banks.

    Exactly. And when it became apparent that they were going full stream towards nationalization, the stock market began to nosedive into the crapper at an alarming rate, and the resulting public furor and panic caused the administration to back off, at least for a little while. But you can rest assured that secretly, they haven't given up on their hopes of full-fledged government control.

  41. The government needs to stop the bailouts, and all the excessive lending. I think they are actually damaging our economy worse then payday loans.

  42. I am not sure the government is as responsible as some payday loan companies. The short term loans that they offer are certainly leaning toward nationalization. Yet, certainly not socialist in nature as some comments say.

  43. How can any group that lends money not want to get paid back early. Even payday lenders who make short term loanswant money back early if possible. (Of course, not all of them pro-rate the loans)

    The government needed to lighten up here.

  44. How can any group that lends money not want to get paid back early. Even payday lenders who make short term loanswant money back early if possible. (Of course, not all of them pro-rate the loans)

    The government needed to lighten up here.I Don't think they are actually damaging our economy worse then payday loans. I know they are.

  45. well.. For the socialist in us all? oh wait...

    !Free market!!!

    payday cash loans are a demanded product by consumers, growing faster than most other financial services products.
    The government would be so lucky to have a product so in demand.
    (Well, i admit free bailout money is in demand...)

  46. well.. For the socialist in us all? oh wait...

    !Free market!!!

    payday cash loans are a demanded product by consumers, growing faster than most other financial services products.

    Well, I admit that free bailout money is in demand. I do agree with the post above mine, I doubt it's truly a socialist policy.

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