We received a lot of feedback from readers last week when we covered the news that Associated Banc-Corp planned to send a group of its employees on a trip to Puerto Rico and TCF Financial Corp. had already sent a group of its employees on a trip to Mexico.
As you may recall, the trips were intended to reward some of the banks’ top performers.
The public outrage about the banks was fueled by the fact that Associated had received $525 million and TCF had received $361.2 million in assistance from the federal Troubled Asset Relief Program (TARP).
Many people questioned how the banks could, on one hand, receive taxpayer assistance, and on the other hand, send their employees on lavish trips.
The outcry became so intense that Associated chief executive officer Paul Beideman later decided to cancel his company’s trips.
However, not everyone was outraged by the banks’ behavior. In fact, one financial expert in downtown Milwaukee called to scold me for media coverage of the trips. I found his viewpoint fascinating. So, I asked him to write his comments and e-mail them to me for consideration.
My friend does business with the banks in town. To protect his interests, I need to keep his identity secret. I don’t know if I agree with him, but I do feel it is instructive to allow him to explain his contrarian point of view, because it adds some context to the complex issue that has not been otherwise provided. His remarks follow:
The mortgage crisis was caused by the banks. The credit crisis was caused by the banks. We were forced to bailout the banks.
These are easy things to say and they’ve been repeated often enough to have become believable. For the media, it makes a strong, simple story – perfect. For politicians, it makes a strong, simple sound bite – again, perfect.
Unfortunately, America has been misled. In truth, the mortgage crisis was caused by some banks. The credit crisis was caused by some banks. We were forced to bailout some banks.
Ironically, many of the worst offenders were not really banks at all. They were investment banks – think large, sophisticated stock brokerages. They are very different from your local bank, but it’s easier just to call them all banks, even if it is inaccurate.
Even when you lump true banks and investment banks together, the number of problem companies is very small. The vast majority of banks in this country remain quite sound. The real travesty is that even the best banks have been swept up in this campaign of misinformation. Our most evident local example is Associated Bank.
Associated has not faced the severe loan problems experienced by even some very good banks. It has been profitable throughout the current downturn and its capital ratios are exceptionally high. Disappointingly, they made one big misstep. When the government showed up at their door and said, "We’re here to help." they didn’t slam the door shut.
During the fourth quarter of 2008, after Congress passed the TARP, banks, investment banks and others were allowed to apply for an investment by the government. The government intended these investments to increase capital levels, boost national confidence in banks and increase lending. The best, most sound banks in the country were encouraged to apply.
Why did the government want to GIVE capital to even good banks? That’s the key question. The answer is "The government DIDN’T GIVE money to ANY bank." Just as you or I might do, the government made an investment in these banks. These investments are in the form of preferred stock, which, in substance, is somewhat similar to a loan. Anytime you read or hear that a company was "given" TARP money (or any other assistance for that matter), know that you are being misled.
The other word that gets thrown around recklessly is BAILOUT. Associated Bank and most other banks that accepted the government’s investments didn’t need the money. They were encouraged to apply for the money for the reasons mentioned above. Many of these banks believed they could bolster customer confidence by accepting the capital, whether they needed the capital or not. It was viewed as a relatively inexpensive way to look strong.
Boy did that backfire. Suddenly, people were talking about these banks being "bailed out." Despite the compelling stories and juicy sound bites, nothing could be further from the truth. A bailout suggests that a company was saved from demise. That certainly wasn’t anywhere near the truth in the case of Associated – likewise for many other fine banks across the country. These companies are being falsely vilified.
To make matters worse, any spending by these companies is now coming under tremendous scrutiny. These companies must be allowed to make their own decisions based on business realities. If we tie the hands of the companies that accepted government investments, we will weaken them. Contrary to current thought, these are companies run by smart people. They are already responsible to shareholders. We certainly don’t need or want them to be responsible to the media or politicians.
Associated received a government investment of $525 million. The interest rate the bank will pay for this investment is 5.00 percent for the first five years, rising to 9.00 percent after that. Thus, over five years, Associated will pay the government $131 million of interest.
Meanwhile, the government’s most recent five-year Treasury note auction was at a rate of 1.82 percent, costing $48 million on $525 million over five years. I know you’re already doing the math in your head – yes, the government will make a PROFIT of $83 million on the money it invested in Associated. Who’s bailing out whom?
I say let’s "give" these quality banks lots more money. Where else does the government actually EARN a return on investment? We should thank these fine institutions for lowering the federal deficit.