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Welfare-Case Companies: Goldman Sachs, Morgan Stanley, and Big Banks


Have the big banks become addicted to the taxpayer-backed funding known as TLGP?

We all know perhaps more than we'd like to about TARP, the Troubled Assets Relief Program that, in 2008, injected $700 billion of government money into a financial system on the verge of all-out failure. The strategy -- which saw the Treasury investing in banks to boost available capital -- was recently named a success following studies by two of the country's most respected economists.

But fewer people are aware of the other stream of taxpayer-backed money made available to the banks during the recent crisis. As Daniel Gross stated in a Newsweek story in January, "The big American banks aren't nearly so independent as they would have us believe. JPMorgan Chase (JPM), Goldman Sachs (GS), and their peers are still benefiting hugely from significant post-crisis subsidy programs that boost their profits."

He was referring to the Temporary Liquidity Guarantee Program, or the TLGP, a little-known Federal Deposit Insurance Corp (FDIC) arrangement that is still operating and essentially equals a banking-sector subsidy.

The program was launched in 2008, just after the fall of Lehman Bros, to help banks raise short-term capital at a time when liquidity was frozen. For a reasonable fee, the FDIC would guarantee debt issued by the banks.

At the time it was created, the program was seen as essential. As a blogger at Naked Capitalism stated, "Finding a means to achieve cheap funding in the term markets was of life or death importance to banks. Furthermore, the TLGP being open only to Bank Holding Companies, was one of the reasons for the demise of the 'old model' and the transition of such iconic investment banks as Goldman Sachs into BHCs."

TLGP funds were tapped by Bank of America (BAC), Citigroup (C), General Electric (GE), Goldman Sachs, JPMorgan, Morgan Stanley (MS), and Wells Fargo (WFC), among many others.

So what's the problem? As it turns out, the "temporary" program has proven not to be so fleeting. The FDIC has extended the plan until December 31, 2010, although enrollment was closed to new entries in June 2009.

A representative of the FDIC tells Minyanville that, as of March 31, 2010, its last reporting date, just over 6,000 banks had opted out of TLGP, leaving more than 7,500 banks covered. (In other words, nearly 55% of TLGP-eligible banks that were automatically enrolled -- all US bank holding companies, financial holding companies, or those who engage in bank holding activities -- had yet to opt out.)

And last winter, the FDIC proposed extending the length of debt guarantees by 10 years.

On its website, the FDIC publishes a list of institutions that have chosen to cut off their access to TLGP funding. Check out the names and you'll notice that the First Bank of Okarche has opted out, as has the Dime Saving Bank of Williamsburg in Brooklyn, the Central Bank of the Ozarks, and the Neustro Banco of Raleigh, NC. Thousands of other small banks you've probably never heard of are on the "out" list.

The names you won't see belong to the heaviest hitters, those making the largest profits using TLGP's cheaper money, backed by public credit. A search of Bloomberg data shows that Goldman Sachs has outstanding TLGP borrowings of close to $21 billion, while Bank of America had $37 billion. The largest "user" has been GE, which has borrowed around $88 billion. Citigroup, meanwhile, has $20.3 billion of TLGP debt maturing in 2011. In 2012, it will face $38 billion in TLGP borrowings that will require refinancing.

For critics of Wall Street, the irony is striking. Writing in Barron's last year, Andrew Bary said, "Goldman wants to have it both ways. It wants the explicit and implicit financial benefits that come from Uncle Sam, including the widespread perception that it is 'too big to fail,' and it also wants to be relatively unfettered in its ability to pay people and make investments."

He also pointed out, that Goldman "does little lending," saying, that "It is true that more traditional banks, such as Bank of America and Citigroup, have used the TLGP program to finance their trading positions. But at least they are sizable providers of consumer and business credit."

Gross, at Newsweek, made a similar observation: "At any time, the banks could go out into the public markets and raise debt to replace the taxpayer-subsidized borrowings. But they haven't. The reason: It would make them less profitable." Under TLGP, the banks are saving a bundle on interest rates.

(An update: Last month, Citigroup announced that it would sell up to $21 billion in debt in 2010.)

Peter Atwater, president of the Chadds Ford, Pennsylvannia-based consulting firm Financial Insyghts and a contributor to Minyanville, says it's far too soon to gauge whether the TLGP was a long-term success.

"It clearly achieved its objective in buying time in order for the fiscal stimulus to hit, but as the borrowings come due it remains to be seen if the market will take on the exposure, particularly holding company exposure," says Atwater.

To complicate matters, he adds, an even larger amount of debt will need to be refinanced in Europe over the next few years. This will "only compound the challenge as banks compete with each other for scarce funds," he says.

Many have argued that the TLGP will ultimately make banks more reliant on government funding, not less, and that the bigger problem is that a viable exit plan has yet to be mapped out. Perhaps the bleakest viewpoint comes from the pundit who compared America's banks to heroin addicts, saying, "…like every addiction, the longer it continues the higher the likelihood we will all end up with just one more dead, zombied junkie."

Seems it's time for somebody to plan an intervention. The question is, who?
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