Puts and Calls: The banking business post-bailout

Tom Karol Occasional Political Commentator
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The bailout in a rear view mirror: Since 2008, the Federal Reserve has refused to identify the recipients of almost $2 trillion in emergency loans from American taxpayers, despite congressional demands and private lawsuits. On Tuesday, the Senate voted to force the Federal Reserve to disclose, for the first time, key details of loans to financial firms during the crisis. The Sanders amendment would require the Fed to provide names of borrowers and amounts of loans on emergency-loan programs that are mostly shut, as well as on its mortgage-backed securities program and arrangements to swap dollars for other currencies with foreign central banks. The measure would cover only loans from December 2007 to the date the law is enacted, wouldn’t apply to future lending and wouldn’t require disclosure of ongoing discount-window borrowings.

Can we have a hearing to schedule funding for a committee to staff the study? The Senate on Tuesday authorized a study by the Treasury Department about the possibility of ending the government support of Fannie Mae and Freddie Mac. The Senate had earlier voted 56 to 43 to reject the Republican amendment to end aid to the mortgage finance companies in two years. Fannie and Freddie have drawn on nearly $145 billion in government aid since September 2008. Treasury first put a ceiling of $100 billion for investments in each company, which Treasury then raised to $200 billion, before it removed all caps. The CBO in January estimated that direct U.S. aid to these companies might total $389 billion by 2019. In addition, the Treasury and the Federal Reserve last year spent $1.4 trillion to buy distressed mortgage-backed securities held by the companies. Treasury, which removed all caps on support less than six months ago and is now holding part of a $1.4 trillion portfolio, will now dispassionately conduct the study and objectively report on how to end government aid.

Financial “reform” must mean to re-form a BHC when convenient: Proprietary trading is seen as a cause of the financial meltdown, prompting current reform efforts. Goldman Sachs and Morgan Stanley engaged in substantial proprietary trading before the meltdown, converted to bank holding companies (BHC) during the financial crisis in 2008 and got $10 billion each. The Senate is now considering banning proprietary trading by BHCs as part of the financial reform bill. But under proposals now offered to the bill, Goldman Sachs and Morgan Stanley may not be subject to the proprietary trading ban, if they decided to stop being the BHCs they became to get TARP funds. Companies that convert from BHC and are no longer depository institutions would be considered non-banks. Such firms could be required to have higher capital requirements, but could engage in proprietary trading. If and when there is another financial meltdown — perhaps again fueled by proprietary trading — will anything prevent these large firms from converting back to BHC or whatever status they need for another bailout?

Consumer protection: There are 246 million cars in the U.S., nearly 95 percent of auto purchases involve financing and dealers originate most loans. But auto dealerships, which arrange financing for virtually all car loans in the United States, do not want to be lumped in with banks and other lenders that would fall under scrutiny of the consumer protection provisions proposed in the financial reform bill. President Obama issued a statement Wednesday that said the Senate should vote against the proposed auto dealer and lender carve-out in the reform package. Dentists and other businesses that provide extended payments or financing have opposed extending the proposed consumer protection provisions to them. Amendments offered this week would exempt small businesses if they sell nonfinancial products, don’t securitize consumer debt and are classified within the NAICS definition of a “small business.” There is even a proposed amendment exempt banks and credit unions with less than $10 billion in assets from the consumer rulemaking, examination and enforcement.

What could possibly go wrong? GM is looking at buying back its old auto-lending arm to become more competitive and bolster the company’s appeal ahead of an initial public stock offering (IPO). Treasury owns 60 percent of GM and has a 56 percent investment in GMAC. GMAC reported a $162 million profit in first quarter 2010, its first time in the black since 2008, but lost $5 billion for the fourth quarter 2009. The Congressional Oversight Panel’s March 2010 oversight report stated that there is still no clear business plan for GMAC. So a recovering GM (60 percent owned by Treasury) may buy a shaky GMAC (56 percent owned by Treasury) to finance more GM car sales, so that a sale of GM shares by Treasury to the public “is going to be more of a success.” One particular concern would be how — prior to an IPO — this less-than-arm’s-length transaction would be accurately recorded and valued; particularly given GM’s recent “full repayment” of TARP loans with TARP funds and Treasury cheerleading the shuffle as a “positive sign.”