The War on Banks: Getting Curiouser and Curiouser

Includes: BAC, C, WFC
by: Bob McTeer

Many mistakes were made during the Great Depression of the 1930s, and we seem determined to repeat all of them. They include starting a trade war with Smoot-Hawley, raising marginal tax rates in the middle of the depression, tightening monetary policy through misinterpretation of the meaning of excess bank reserves, and, of interest here, the demonizing of bankers and businessmen for political advantage.

The proposed new tax can only be understood as pandering to uninformed or misinformed populism after their pound of flesh from “the bankers.” Support of the banking system through the TARP program has been successful, and it is proving to be profitable from the Treasury / taxpayer point of view. The Treasury is earning about 18 percent on the preferred stock and warrants of the big commercial and investment banks that have repaid.

It appears evident to me that the TARP funds going to banks will show a net profit. This rush to impose a new tax to cover expected “losses” suggests they are trying to get it in before an overall profit becomes evident. They seem to be projecting losses to justify a new tax.

Loans to AIG and the car companies are frequently cited as likely losses, but that is far from certain. Remember, the government owns almost 80 percent of the stock of AIG, which still has many assets and, given time, may well return to profitability. Ed Whittaker, the acting CEO of General Motors, has vowed to repay TARP funds sooner rather than later. (Why would the administration project GM as a loss in the face of that commitment?) I don’t know about Chrysler, but, if they are able to do so, the pressure will be on them to follow GM’s lead.

The government’s obligation to back up Fannie and Freddie predates TARP, and, don’t forget, the government now owns them and will be in a position to sell them later. In any case, their losses were in large part created by following government (Congressional) mandates to support the expansion of home ownership beyond prudence.

Bank bashing in order to tap into the mob-rule psychology of the current populism undermines the ability of the administration’s tax policies to be taken seriously by serious people.