Sunday, August 28, 2011

What A $1.2 trillion Low Interest "PayDay" Loan Gets You

Lloyd Blankfein, CEO of Goldman Sachs; Jamie Dimon, CEO of JPMorgan Chase and Co.; Robert P.Kelly, CEO of the Bank of New York; Ken Lewis, CEO of the Bank of America; Ronald E. Logue, CEO of State Street; John Mack, CEO of Morgan Stanley; Vikram Pandit, CEO of Citigroup; and John Stumpf, CEO of Wells Fargo, testify during the House Financial Services oversight hearing of the Troubled Assets Relief Program (TARP). Photographer: Scott J. Ferrell/Congressional Quarterly/Getty Images

Over and above the $160 billion TARP bailout from the Treasury, various banks, including foreign banks, were gifted with low cost loans that peaked December 2008, at around $1.2 trillion. The money has since been paid back.

Still, one might question the wisdom of such loans on numerous fronts, not least of which: the moral-hazard argument; the fact that the US borrowed the money (via the sale of bonds) that it lent to banks;  the piddling interest banks paid on the loans given the extraordinary circumstances (These were like PayDay loans, and what do they charge? Like 400%! The Fed got 1.1%.); and the crummy collateral provided by the insolvent banks (stocks, junk bonds, etc.). Do you think even an established small-business should hope for a loan with such terms? Hah!

Gretchen Morgensen is a fine journalist, who cuts to the chase and offers clear provision of facts. She should be honored. Her article below refers to a Bloomberg article that should also be read if you want to understand what went on in 2008. Here's a quote:
“Bailing out firms indiscriminately hampered rather than promoted economic recovery,” Mr. Kane continued. “It evoked reckless gambles for resurrection among rescued firms and created uncertainty about who would finally bear the extravagant costs of these programs. Both effects continue to disrupt the flow of credit and real investment necessary to trigger and sustain economic recovery.”
The Rescue That Missed Main Street, NY Times
Published: August 27, 2011
Read the Times and Bloomberg stories, and check out the Bloomberg interactive graphic based on Fed data. They are required reading for civic minded citizens.

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