Banks want to have it both ways and apparently they don’t see anything wrong with that.
Many banks have received cash-infusions from the federal government’s Troubled Asset Relief Program (TARP) in the form of cheap loans. As part of the deal, the banks agreed to grant the government warrants which could be redeemed for stock in the company.
The general idea is that the bank would get capital to help prop up their balance sheet when capital is hard to come by, while the taxpayer got an opportunity to share in the recovery of the banks in the future — assuming the stock price bounced back to make the warrants valuable.
It sounds great in theory. But two funny things have happened since then, though. First, the largest banks that took TARP money were reported this month to be cutting back on lending in all categories except mortgage origination — which is largely backed by the government in other ways. And the government started demanding that executive pay at companies accepting TARP funds be capped at something less than eye-bulging, heart-stopping levels.
Needless to say, the banks don’t seem to be terribly upset over the their own cutbacks in credit to the rest of us. Presumably the bankers aren’t having their credit lines cut. But they are horrified about the taxpayers having a say on their pay. (Given that management of public companies consider it controversial for even shareholders — the owners of the company — to have a “say on pay” this should surprise absolutely no one.) Horrified enough that many want to pay back their TARP loans immediately — and they want their warrants back.
The warrants are the rub. The bankers would prefer to simply cancel the warrants. Although the warrants are currently worthless — since they give the government the right to buy stock at a price higher than the current price — they are ‘good’ for many more years.
So the government could take the TARP money back from the banks and still have a chance to make some money if the stock rebounds in the future. Right now the government is demanding the banks have a third-party valuation of the warrants and pay that market price — but the banks don’t like the taxpayer having any upside in all this mess.
Now here’s the unvarnished irony: The banks want to get their warrants back and to get out of the TARP restrictions because the government changed the terms of the loan after the fact. As the Wall Street Journal noted:
“It’s fundamentally wrong and unfair for a contract to be changed that much,” said Douglas Leech, chairman and CEO of closely held Centra Bank in West Virginia, which recently repaid a $15 million investment and had to pay an additional $750,000 to extinguish warrants associated with the transaction.
That’s hilarious coming from bankers. The same bankers who are fighting credit card reform so they can continue to modify card loan terms at will, long after the credit has been extended, are upset because the lender of last resort — the American taxpayer — helped them out to prevent the collapse of the financial system, saved their jobs, but are also demanding (among other things) that they cut their pay from truly-obscene to merely-ridiculous.
The arrogance and hubris of the modern American bankers is amazing. But not surprising. Not after watching what happened over the last decade in the credit markets.
