Sunday, January 17, 2010

The Coming Class War; an Essay

Over the last few months my blog has focused on unfunded liabilities and how government creates them, often with the complicity of unions. On Wednesday January 13, a shot was fired by President Obama in the coming class war. The looming battle between the members of society who benefit from unfunded entitlements and those who will be expected to pay for them is escalating.

“Many originally feared that most of the $700 billion in TARP money would be lost. But because of the management of this program by Secretary Geithner and my economic team, we’ve now recovered the majority of the funds provided to banks.

“As far as I’m concerned, however, that’s not good enough. My commitment is to the taxpayer. My commitment is to recover every single dime the American people are owed.”

“We want our money back, and we’re going to get it. And that’s why I’m proposing a Financial Crisis Responsibility Fee to be imposed on major financial firms until the American people are fully compensated for the extraordinary assistance they provided to Wall Street. If these companies are in good enough shape to afford massive bonuses, they are surely in good enough shape to afford paying back every penny to taxpayers.”

President Obama continued, “Now, our estimate is that the TARP program will end up costing taxpayers around $117 billion -- obviously a lot less than the $700 billion that people had feared, but still a lot of money. The fee will be in place for 10 years, or as long as it takes to raise the full amount necessary to cover all taxpayer losses.”1

A quick examination of the latest TARP Transaction History updated on January 13, 20102 shows that most of the banks subjected to President Obama’s diatribe have already returned the money lent them with interest. A notable exception is CitiBank. In that case the Treasury decided not to include its stock, (preferred stock that has been converted to common by Secretary Geithner), in a secondary offering by the bank but rather chose to speculate on the future price of Citi shares and sell them at a later time. (A side question is who votes those shares, Mr. Obama?). In the mean time the Treasury has become the majority shareholder in the automobile industry’s major financing arm, GMAC, taking on an additional $3.8 billion in an announcement on December 30, 2009.3 GMAC can now be added to Fannie, Freddie and the FHA as government owned banking businesses.

So the banking industry, which has returned its bailout funds is now responsible for paying back all of TARP. Absent from the discussion was the TARP money that has not been paid back owed by the two auto companies, General Motors and Chrysler; their combined financing subsidiary, GMAC; or by AIG. Nor was there a discussion of the open ended spigots at Fannie Mae and Freddie Mac and the bailout of underwater and overleveraged homeowners to the tune of $23.5 billion, many of whom defrauded their respective lenders on their loan applications.

Bank shareholders have suffered mightily in the dilution that has occurred in their banks, all of whom issued common stock to repay the TARP as did the shareholders in General Motors, Chrysler and GMAC. But in the case of the employees of the banks, now lambasted for the bonuses they have received, and the union employees of the auto companies who scored a major victory on Thursday in the health care debate by preventing taxation of their Cadillac health plans, and the employees at AIG; someone else is picking up the tab. Each case is different but they are all benefiting from a single government policy and most notably the banks. The enormous profits the banks are reporting today are in large part due to the zero federal funds rate imposed on the market by the Federal Reserve. “Even bankers can make money borrowing at zero and lending at 3 ½%.”

So who does pay? Savers. If you worked all your life and set aside savings to take care of yourself in your retirement you are the one paying for the miscreants in government and business who precipitated this crisis. Not only are you going to pay increased taxes on the meager returns you might squeeze out of a 1.25% CD, the artificial rate the banks (and, for that matter all borrowers) are paying is subsidizing their bottom line at your expense. So, on the one hand as Obama gesticulates against the banks for taking risk, his sidekick Ben Bernanke is forcing those who saved, didn’t over-leverage and invested prudently, now anticipating a decent return on that savings, to move out the speculation curve and take enormous risk to generate any income so the profligate can recover and prosper. The fees the banks pay will be socialized, spread across all of banking’s customers, and will mean virtually nothing to the banks’ bottom lines, passed on to their customers who are expected to be mollified by the tongue lashing meted out in their public scolding.

What is now clearer is the dividing line in the class war. As the Obama administration moves its pro union agenda forward it needs the help of the banking system. In this Faustian bargain he will continue to pursue his dance with the financiers who borrow at zero from the Fed to float record federal deficits lending those funds back to the government to finance its social experiment. Every dollar of deficit is a dollar redistributed as it will be paid back only by those who pay taxes, a shrinking percentage of the earning population.4