Political Prisoners of the Bailout – Good Banks

Instead of writing about a specific topic in finance and providing background and context (as well as dangerously getting ever closer to making this blog sound more like a textbook), I wanted to take a break and talk about something more political in nature. The reason I want to talk about this topic in particular is because it’s been grabbing a lot of headlines lately on various news wires and I’m beginning to believe that both politicians and news agencies are grandstanding this issue and twisting the truth.

The issue that is frustrating me is the scrutiny financial companies have begun receiving with how they spend their money. The populist argument today is that since these financial firms received government assistance by way of the TARP funding (the $700 billion dollar bank bailout that was passed last year to save the US banking system), they should not be spending money on things like vacations for their employees or sport sponsorships. Politicians and ‘experts’ (PLEASE notice how I put them in 2 distinctly different groups) have come out vehemently protesting specific banks as they held these controversial events.

Now, to a certain extent I agree with this argument. If you run a company that is performing so poorly that you had to beg the government for assistance, then you should by no means be awarding lavish vacations to your employees. That is just a blatant misuse of taxpayer money. However, the key to this argument is that the company is performing poorly enough to require government aid. In reality, many of the financial firms that received money from the TARP were not performing poorly at all – in fact, some are even still profitable. Why then would they go to the government begging for money? That’s the thing, they didn’t.

TARP – The Ultimate Political Trump Card

When the initial $350 Billion of TARP funds was approved, it was initially supposed to go to buying the toxic assets (i.e. mortgage backed securities and collateralized debt obligations) that banks could not get rid of. However, then Treasury Secretary Hank Paulson soon dropped that strategy in favor of directly investing in banks and essentially buying their stocks. The interesting thing about this strategy change was that the banks had no say whether or not they actually wanted any TARP funds. The treasury basically picked a bunch of major financial institutions and forcibly invested in them. In fact, some bank executives came out in protest of the TARP saying they didn’t want the government owning a part of them (and I don’t blame them in the least). The government’s justification was that it would not interfere in their day-to-day operations – it would be a silent partner.

Well, here we are now. Over the last few weeks, and the silent partner is being anything but silent. 2 examples in particular come to mind where financial institutions that are relatively healthy are being scrutinized since they were recipients (albeit unwilling) of the government bailout.

1. Wells Fargo – As I’ve mentioned in previous posts, I believe WFC is one of the best positioned banks in this downturn. Yes they have been experience extensive losses during the last few quarters (mostly due to the poor performance of Wachovia which they acquired in late 2008). But the losses were expected and they have continually said that they did NOT want and need any TARP funds. However, certain government politicians have recently gone on rants about WFC and an annual Vegas vacation that WFC gives it top performing brokers basically saying “How dare companies that were recently begging for government money hold these kinds of event?”
2. Northern Trust – Another forced recipient of TARP money, Northern Trust has actually been performing fairly well in the downturn – mainly because it’s more of an asset manager and less of a bank. Here, the politicians vilified the company for continuing to sponsor a PGA golf tournament even though they received TARP funds basically saying “These companies spends millions to sponsor these events to wine and dine themselves and their clients.” In fact, this outrage recently forced Wells Fargo to cancel it’s sponsorship of its own PGA event (thereby losing out on millions of dollars worth of exposure and contract cancellation fees).

I strongly believe that the above 2 examples are situations where politicians are using the financial crisis to gain support from voters by twisting the truth. Granted both companies received TARP funds, but neither wanted or needed them. The government forced it upon them and the changed the rules – that’s what I think is not fair. I whole-heartedly agree in situations where truly poor institutions should be scrutinized (e.g. Citi and AIG), but Wells and Northern Trust are not those cases.

Think Before You Judge

I agree that banks played an integral role in the collapse of the financial system. They made many irresponsible decisions that caused the current situation. However, it is also important to separate the good from the bad. Not all banks were irresponsible. So next time you hear about politicians ranting about how companies are spending the TARP funds, take a step back and make sure the context around the issue is correct – then make an appropriate judgment. The government unfortunately has done a poor job of distinguishing between the good and bad apples in the financial sector, so I hope you’re able to pick up the slack.

Questions/Comments/Feedback?
Please don’t hesitate to let me know of any questions or comments you have about this post or any other. If you want me to write about something else investing related, do let me know!

The Standard Disclaimer:

The stuff I just wrote above is my opinion and my opinion only. Please do not take it as fact. Perform all necessary research and analysis prior to acting on anything I’ve said above. This includes consulting with a financial advisor.