The last set of leaks to The New York Times had everyone in a cozy-but-nonsensical scenario whereby the Obama administration was going to say that everyone passed their stress test by the miracle of promising to bail out anyone who’s in trouble. But in today’s article conflict rules the day as “Showdown Seen Between Banks and Regulators”.
The key issues seem to be that bank CEOs now regard themselves as badly underpaid and thus want to talk a lot about giving the taxpayers our money back and thus being able to pay themselves higher salaries. Though as in all of these stories nobody seems to actually want to give the money back. But beyond that, I really don’t hear any financiers say that they’re so eager to stop making mere millions of dollars and go back to making tens of millions of dollars that they’re willing to give up the even more valuable set of government guarantees of their businesses that are keeping things afloat. Also the banks that have lost tons of money on investments continue to prefer not to acknowledge those losses. After all, it would be hard to justify continuing to pay an executive tens of millions of dollars for leadership that amounts to losing tons of money. As a business proposition, it makes much more sense to ignore the losses and instead of having adequate capital to cover your debt obligations, just keep relying on government guarantees all the while whining that the government is being too mean to you.
It’s worth understanding the value of these guarantees. Absent the guarantees, many banks would be going out of business immediately. We wouldn’t be hearing about how company x is profitable or company y needs TARP funds. We’d be hearing about bank runs because company x owes people much more money than it has.