At the height of “bailout fever,” after TARP had been instituted but before the automakers had been completely bailed out, one argument that we heard a lot of from Detroit’s defenders was “how can you begrudge the manufacturing base a few billion when speculators at the banks are receiving far more support?” At the time, the argument seemed to me like a convenient way to shift attention away from Detroit’s failures and undercut the argument that consumers, not a credit crunch, were responsible for killing off GM and Chrysler… but at least then it still had some validity. Fast forward to today, and history has stripped it of all relevance, as it turns out the banks will likely be picking up the automakers’ bailout tab.
The Detroit News‘s David Shepardson reports that the Obama Administration has resurrected its “Financial Crisis Responsibility Fee” as part of its new deficit-reduction package, which, in the words of Treasury Secretary Tim Geithner,
is designed to make sure that if there are any losses from the emergency actions we took to put out the financial fires of ’08 and ’09, that we recover those losses in the form of a fee on the institutions that benefited most directly from those programs… If Congress did not legislate a fee like this, then if we ultimately realize losses on the emergency programs, then those would add to the deficit. So by proposing this fee, we try to make sure that doesn’t happen.
Sounds good, right? Well, here’s the problem with expecting payback for bailouts: the firms that “benefit most directly” from them are least likely to be able to pay them back. As a result, the big bad banks that have not only paid back most of their loans but also lent Chrysler the cash to pay back its TARP loans are the ones in line for a soaking. The automakers, which received less up front but are paying back a lower percentage of their loans, are in line for a free pass. Think of this as a handy reminder of all that “moral hazard” stuff people were talking about a few years ago.
The Freep explains the details
The fee would be restricted to firms with more than $50 billion in assets, according the Obama administration plan – and is estimated to raise $30 billion over 10 years.
By “firms with more than $50b in assets,” the Freep means the biggest banks. With the exception of AIG, Ally Financial (formerly GMAC, GM’s once-captive finance arm), and the Fannie/Freddie twins, this refers to banks that were the quickest to recover post-bailout, and have repaid most or all of their TARP loans. And the last time the Obama Administration proposed this Fee, the heads of those banks were not amused. In early 2010, the WSJ reported that
[J.P. Morgan Chase CEO James Dimon] said it felt like the banks which have already paid back taxpayers, were being asked to subsidize the bailout of General Motors and Chrysler.
At the time, I wrote
The real irony is that the bank bailout allegedly took place because nobody understood the real nature of the crisis, shrouded as it was in the opacity of financial industry jargon. Now that the moment of crisis is over, the banks are back to making money, while the automakers are still dreaming of that first post-bankruptcy profit. Which one turned out to be the more difficult, complex industry?
But now that Detroit is making big profits, what’s the excuse? By my count, Chrysler still owes the American people around $5.3b that it shows no interest in ever repaying. At current stock prices, the taxpayers are likely to lose around $15b on the GM bailout. And GM is already making so much money it has to shell out nearly a quarter-billion dollars to the union that helped drag it from industry-dominator to federal charity case. But rather than putting GM and Chrysler on a payment plan until they square up with the American people, we’re going to shake down the banks for their share? Is this making sense to anyone?