Last week I somewhat unfairly mocked two blogs for demonstrating a lack of understanding of what I consider basic financial principles. I say unfairly because, although I believe everybody should know this stuff, I would be the first to point out that tragically few do.
I am reminded of this because essentially the same point of confusion about interest rates and paying back loans that tripped up the bloggers appears to be confusing the Obama administration.
It seems that Goldman Sachs, the tiresomely successful former investment bank, wants to pay back the $10 billion in TARP money it got from the government last year. This isn’t a vague aspiration. Goldman has the money and is politely asking to whom the check should be made out.
You might think that the administration would be very happy about this. They could use it as evidence that things were looking up, or that the banks were not as bad off as previously thought, or even that the mountain of taxpayer money poured into the TARP might actually be repaid someday. Instead, they are confused and annoyed by Goldman’s actions. They even hinted that they might not accept the money. (Yes, that’s right, Goldman actually needs special permission to pay the taxpayers back.)
Goldman never really wanted the money to begin with. They took it because the Treasury asked them to, on the theory that if all the major firms took some, even the fairly healthy ones, then shaky firms wouldn’t be shy about asking for the help they need. Sorta like how you take a little Children’s Tylenol to convince your three-year-old to take some too.
You can see Goldman’s participating in the TARP as a noble act, or merely the result of recognizing that doing the Treasury a favor is good for business. Either way, Goldman signed up before the Great Bonus Hysteria prompted Congress to threaten all sorts of punishments for financial success while holding TARP money. Owing $10 billion on stiff terms is one thing, but living under the threat that the government may at any time, for example, interfere with how much you pay your people is another. Goldman paid 963 employees more than a million dollars last year.
So it’s easily understandable why Goldman wants out. Why isn’t the administration keen to let them out? Basically, they worry that if Goldman pays back the money then everybody will want to pay back the money. And that, believe it or not, the administration considers to be a bad thing. Because, and here is where they remind me of the unfortunate bloggers, they would prefer banks to lend any spare money out to customers rather than pay the government back. You’d have to be pretty financially illiterate to think that makes sense.
TARP money is expensive. The headline interest rate is only 5%, rising to 9% after five years, but it comes with a laundry list of other benefits for the government and restrictions on what the bank can do, such as warrants on the bank’s stock and limits on the dividends the bank can pay to other shareholders. And Congress has demonstrated a willingness to add new restrictions retroactively. How much this other stuff costs is hard to measure, but the fact that Goldman is apparently much less interested in paying off its debt to Warren Buffet, which carries a 10% interest rate, tells us that an all-in 10% cost estimate is not implausible.
An individual who owes money on a 10% car loan would be hard pressed to find an investment more attractive than paying down the car loan. Not only is it the equivalent of an investment with a 10% return, it is a risk-free 10% return.
Similarly, it is very hard to imagine any bank having a potential loan or any other investment that is more attractive than paying off the TARP. And it doesn’t take the superior acumen of Goldman to work this out. Given the current political and economic climate, paying back TARP money is clearly the first order of business for every bank as solvency improves. Isn’t that obvious? I guess not.