TARP dividends are killing bank profits
When the Bush Administration gave banks money under the Troubled Asset Relief Program (TARP), it was not a complete freebie. The government has received preferred shares in many institutions. These shares pay dividends to the government as compensation for the investment. Well, apparently, those dividends are becoming a bit of a problem for banks because they are eating into banks’ much needed capital by siphoning off money to the government.
Honestly, I do not know how to sidestep this issue because the government should be compensated for its efforts as a normal investor would. Zero-coupon bonds would generate the same accounting effect, even though no money was changing hands. Payment-in-kind (PIK) preferred shares would be seen as inadequate. Common stock would be dilutive to existing shareholders and is one reason not to hold stock in these companies. Converting dividend-paying preferred shares into common stock may be the best route forward.
If anyone has a solution, feel free to chime in.
About Edward Harrison
- How Goldman profits from the credit crunch 22 Jun 2008
- Quote of the day: TARP not based on any facts 25 Sep 2008
- Should foreign companies get TARP funds? 18 Nov 2008
- Bush Administration turns the TARP over to Obama 17 Nov 2008
- Paulson abandons TARP asset purchase and risky assets plummets 20 Nov 2008
As I remember, the US taxpayer is getting on the order of 5% annually (whether loans or preferred shares) for bailing out these ugly beasts. That leaves some 95% of the capital available to lend on which they should easily be able to cover their costs and make a profit. Instead, these banks are using the money to pay excessive dividends, build reserves savaged by their own utterly stupid risk management, buy other (sick) banks, over-compensate incompetent executives, enjoy retreats at luxurious resorts, fly corporate jets, and all the rest of their idiotic behavior.
Give me (and all other taxpayers) a break!