Wall Street firms earn high profits with Uncle Sam's backing

McClatchy NewspapersJanuary 24, 2011 

WASHINGTON — Goldman Sachs, Morgan Stanley and other Wall Street giants that played roles in the subprime mortgage debacle are reporting huge profits and awarding hefty bonuses again even as the government remains on the hook for tens of billions of dollars of their debt.

Banking behemoths are among the scores of lenders and insurers that floated as much as $345.8 billion in federally guaranteed bonds under a program that's widely credited with helping to keep money flowing at the height of the financial crisis, when businesses had nowhere to turn for capital.

Now, with the crisis in the rearview mirror, banks that escaped tough federal pay restrictions by retiring more than $200 billion in direct loans from the Treasury Department are still benefiting from the Federal Deposit Insurance Corp.'s less-conspicuous debt guarantee program, which has no such strings attached.

Some of the Wall Street firms that are getting the guarantees are expected to draw criticism from the congressionally appointed Financial Crisis Inquiry Commission this week when the panel issues its final report on the root causes of the subprime mortgage meltdown, which crashed the global economy.

Under the FDIC program, federal guarantees ensured that bonds that dozens of lenders, investment banks and insurers issued — including Goldman, JPMorgan Chase, Bank of America, Morgan Stanley, Citigroup and General Electric — got gold-plated ratings that drew investors and drove down the cost of financing the debt.

The FDIC's bank insurance fund, which backs the bonds, has reaped more than $10 billion in fees from firms using the guarantees, while the outstanding debt declined to $267 billion as of Dec. 31.

The program doesn't expire until the end of 2012, and the agency says that most of the bonds don't expire until next year.

Robert Pozen, the chairman of Boston-based MFS Investment Management, argues that the government shouldn't have released firms from executive pay restrictions until they'd paid off the Treasury Department's Troubled Asset Relief Program and the FDIC program.

"Any bank that gets out of TARP, it's basically saying that it's now 'good to go' in the private market," said Pozen, the author of the 2010 book "Too Big to Save?" "They shouldn't be continuing to have this big guaranteed subsidy."

However, the agency put tight restrictions on banks' ability to refinance the bonds. Further hampering refinancing is the fact that the market for unsecured bank debt is just beginning to thaw. Morgan Stanley only recently completed a $5.25 billion bond offering, the largest by a U.S. bank in 20 months.

Banking industry consultant Bert Ely said that the adequacy of the fees in the FDIC program, known as the Temporary Liquidity Guarantee Program, was "the kind of thing that will be debated for years."

"If you don't charge enough, then that's what creates moral hazard" and the presumption that risky behavior won't be penalized, he said. "If you charge too much, you may end up sinking institutions that you need."

On Monday, the FDIC, which hadn't identified the participants in its program, gave McClatchy a list of the institutions involved.

Three of the nation's biggest banks — Citigroup, JPMorgan Chase and Charlotte-based Bank of America — account for more than a third of the outstanding debt. Citigroup owes $58.2 billion, JPMorgan $36.1 billion and Bank of America $27.4 billion.

The biggest initial issuer, however, was GE Capital Corp., General Electric's financing arm, which reported nearly $74 billion in FDIC-backed debt as of March 2009, a figure that's since declined to $53.4 billion. Ally Financial, formerly the financing arm for General Motors, has $7.4 billion in guaranteed debt outstanding.

Ely said the banks "are clearly profiting by virtue of having this relatively low-cost funding in place, even though it's in this runoff mode. The question is, to the extent they're making money, how much of that is going into the bonuses? ... There's no way to figure that out."

Goldman, which is doling out $15 billion in employee bonuses for 2010, borrowed as much as $29.8 billion under the FDIC program. It still owes $18.8 billion.

Goldman became something of a pariah in Washington before it settled an SEC civil fraud suit last summer for $550 million that stemmed from its controversial sales of subprime mortgage securities. It's sought to restore its image by announcing an array of internal revisions.

Last week, perhaps symbolizing a return to normalcy, Goldman CEO Lloyd Blankfein was among U.S. corporate chiefs invited to attend a White House luncheon with President Barack Obama and Chinese President Hu Jintao, followed by a state dinner.

Some skeptics have suggested that firms such as Goldman and Morgan Stanley could easily have used the proceeds of the guaranteed bond sales to pay off their TARP loans.

A spokesman for Goldman, which repaid a $10 billion TARP loan in the summer of 2009, declined comment on its government-backed debt.

Spokeswoman Sandra Hernandez of Morgan Stanley, which also repaid a $10 billion TARP tab from Treasury, said the money didn't come from the proceeds of its government-backed bonds, on which it still owes $21.3 billion.

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