Big banks like Bank of America (NYSE: BAC) and Citigroup (NYSE:C) are still using free government money, in the form of low interest loans from the Temporary Liquidity Guarantee Program (TLGP), guaranteed by the FDIC. So while CEOs and industry spokespeople decry the government for its “interference” despite the fact they’ve paid back their TARP money, the fact remains that they are still using taxpayer monies to generate profits that are then used to pay exorbitant bonuses.
The TLGP was started after the failure of Lehman Bros. to help banks retain access to short term capital as lending between banks evaporated at the height of the economic crisis. The goal of the program (and pool of available money) was fulfilled and was closed to additional loans in June of 2009. This program probably wouldn’t raise any eyebrows if it wasn’t subsidized by taxpayers. Yes that’s right, the billions of dollars loaned out to these big banks are significantly below market rate.
As of this month, there is still $313 billion outstanding in the TLGP including the following companies with the corresponding outstanding balances, as well as the annual percentage rate on the outstanding balance:
- Citigroup – $64.6 billion, 0.91%
- Bank of America – $44.5 billion, 0.67%
- JP Morgan – $39.7 billion, 0.73%
- Morgan Stanley $25.1, 0.70%
- Goldman Sachs – $21.5 billion, 0.77%
- Wells Fargo – $9.5 billion, 0.68%
With the exception of Citigroup, all of the banks on the above list have repaid the TARP money they have borrowed. And yes, the banks do have to pay a fee in order to participate in the program and borrow money, but the fee in no way approaches the amount of profit they can produce by borrowing at these significantly subsidized rates. Most reasonable business people would be able to generate a decent profit with a multi-billion dollar line of credit at below 1%.
Not only is TLGP money available at a severely discounted rate to what would be available on the open market, it also comes with less legal liability since it’s backed by the FDIC. Money issued with (a US government and taxpayer backed) FDIC guarantee is not only cheaper, but doesn’t leave the bank liable should the loan default. Cheap money, and the lender not on the hook in case of default sounds like a recipe for more financial troubles, not the answer to the current issues in the financial system.