So what does all this add up to? Are they really paying it back? Was the program a success? Yet to be seen? Is this just PR nonsense?
Yes they are really paying it back. It is a qualified success. What caused a lot of the problems was that the capitalization ratios went bad. Due to some of the loan choices that the banks made as well as low capitalization ratios to start with.. the banks were in jeopardy though not necessary insolvent.
CEO’s and execs want their bonuses…I’m being serious…
That is only part of it. As part of the TARP loan, there were warrants against the common stock. The warrants had decreasing strike prices. The warrants are like options but in this case, the option strike price or price that it becomes ‘in the money’ decreases as time goes by. BofA’s strike price on their TARP warrants were going to be ‘in-the-money’ this upcoming year. The effect of the warrant would be that the Bank would have to hand over some of its common stock on request by the gov (gov then owning part of the Bank).
One of the other problems was the interest rate being charged on TARP funds. The rate was different for different Banks. I don’t know what Goldman had for their interest rate on TARP funds, but I suspect it was lower than the rest if not 0. BofA has to pay 3.5% on TARP money (about $405Mil per quarter) Freddie and Fannie have to pay about 10% on their TARP loan (which amounts to over $1Billion per quarter.. each.). These are not currently competitive rates. LIBOR is currently 1.03%. You could say that the Fed was playing loan shark.. they set needed capitalization ratios, and charge banks higher than standard interest rates on the money the Fed lent to cover the needed capitalization. It is costing the Fed 0.5% interest on Treasuries it used to fund TARP… neat spread (0.5% to 10% on nearly 100Bil)
Much of the losses that were recently declared by banks were for increasing their loss reserve. Freddie and Fannie now have over $40Bil in loss reserves.
