Big Banks Repay Bailout Money
August 31, 2009 by Miranda Marquit
Filed under Finance
One of the more interesting bits of news today is the fact that taxpayers actually have a $4 billion profit from the bank bailouts that came last year. The special financing that big banks received came with interest obligations, and that means that when big banks paid back what they owed with their recent large profits, taxpayers earned a little bit as well.
That is good news, since it is leading some to hope that bank balance sheets are back in some sort of good order. However, lending to businesses still hasn’t resumed at its pre-financial crisis pace, and businesses continue to suffer. For banks, all of this is a good thing. But for the rest of us, there is another issue: The fact that the taxpayers’ profit is only an initial profit.
U.S. government remains exposed to losses
The U.S. government still remains exposed to losses. Loans to big banks do not represent the only way that the taxpayers helped the big guys. In addition to those loans, the government also bought some assets. Some of these assets are still providing the potential for billions in losses. So that initial profit is just what is available right now. That money will have to be put aside to cover possible losses on assets that the government now owns.
This is a common occurrence in corporate finance, as well as in government money shifting. Some capital from profits must be preserved because there are usually assets on the balance sheet that could result in losses, and it might be necessary to shift things about in order to keep things from going really bad.
Image source: Jleon via Wikimedia Commons
The Fed has and is continuing to create an environment for the banks to earn their way out of their problems. It’s very good news that the TARP money is being paid back, slowly but surely. I held my nose when the government did this originally, and still wish they hadn’t done it, but at least it looks like the taxpayer will turn a profit on this. Of course, the bad news is that whatever profit they will earn was spent years ago, but that’s a different topic.