Credit Card Companies Happily Tap TARP Merry-Go-Round
American Express, yesterday, received approval from the Federal Reserve to transform itself into a bank holding company in order to potentially qualify for billions of dollars from the recently adopted bailout plan. Why not? If the automakers can get money under the bailout, let’s just toss in a few credit card companies as well!
The money from the bailout, nicknamed TARP, was originally intended to be used to buy toxic mortgages off the balance sheets of banks to free their capital to lend money to businesses and consumers. After concern that the purchase of the troubled assets through reverse auctions would occur too slowly, some of the money has been used to directly inject capital into some of the nation’s financial institutions.
The first tranche of the bailout will soon be allocated in its entirety, and Congress will be asked to approve the spending of the remaining $350 billion. In my limited review of the announced recipients of bailout money so far, the following banks also provide credit cards (I’m pretty sure you’ll recognize some of the names):
- JP Morgan (Chase)
- Citigroup (Citibank)
- Bank of America
- Wells Fargo
- Capital One
Before I precede, I’d like to say that I support the fundamental ideas behind the TARP - that something must be done to relieve the pressure on banks balance sheets from mortgage backed securities (or, similarly, construction loans), as well as stop the invisible runs on the bank from happening at financial institutions holding deposits and the public’s money (such as the investment banks).
Still … If I were running a credit card company, I would want to get in on the bailout money. I could borrow money from the federal government at a 5 percent interest rate and then lend it back to the American public at interest rates of up to 30 percent. I would be even more interested in the government money if my traditional method for financing the lending, the securitization of credit card debt, had largely dried up.
The issue of the day on the Hill seems to be executive compensation. They don’t want to be funding compensation and bonuses for executives that led their companies into the arms of the bailout. I don’t care how much shareholders want to pay their executives.
I’d rather have the government use its investment in the banks to reform the practices of credit card issuers - the very same practices which the Federal Reserve and Congressional leaders were so eager to condemn in April and May of this year. I would hope that a $250 billion bailout (cough … investment) would buy a little influence.
I’m not sure that it would be prudent for Congress to hold approval of the remaining $350 billion in TARP funds hostage to credit card reforms or to renegotiate the terms of the money lent to the banks so far.
But, to the extent that the government is extending my money as a taxpayer to the banks, I wouldn’t mind if they decided to charge the banks the same interest rates and fees for which they so willing lend to the rest of us.
