What a difference a year can make. Little more than twelve months ago, the world was teetering on the brink of economic depression, as the credit crisis that started in the U.S. subprime mortgage market escalated and threatened to bring the world economy to its knees. To prevent economic collapse, the U.S. government was forced to step in to bail out too-big-to-fail U.S. financial institutions through the $700 billion Troubled Asset Relief Program (TARP).
For consumers in general and credit cardholders in particular, the TARP program has been a bitter pill to swallow. Over the last year, even as the largest credit card issuers continued to be propped up by taxpayer TARP money, they have tightened credit card terms, hiked credit card interest rates, and in many other ways reined in lending practices in ways that made life difficult for consumers.
If you are one of the many credit card users who have to reach for your blood pressure medication when you hear the word TARP, take heart. Just in time for the holidays, Bank of America, one of the largest credit card issuers in the U.S., has announced that it will be paying back the $45 billion in taxpayer bailout money the bank received as part of TARP.
Why would BofA pay back the $45 billion bailout money? There are several good reasons, which generally boil down to the same thing: less government oversight. BofA doesn’t want to deal with the added restrictions the government put in place as part of the TARP program to protect taxpayers’ interest.
Only a few months ago, Bank of America and other banks receiving TARP money drew fire for continuing to pay out large bonuses to executives, even as they continued to be on taxpayer life support. In response to demands that it put curbs on bonuses, BofA protested that the government-imposed restrictions on executive pay put it at a competitive disadvantage to its peers in terms of retaining and attracting executive talent. A case in point: lately Bank of America has been struggling to find a replacement for the bank’s soon-to-be-retired leader, Kenneth D. Lewis, and the federal oversight of executive pay has made it difficult for the bank to find interest among qualified candidates.
By paying back the TARP money, Bank of America will also save money on dividend payments to the U.S. Treasury. So far, BofA has paid $2.54 billion in dividends on the TARP money; and the bank will be saving an estimated $3.6 billion each year in annual dividend payments by repaying the TARP funds now. With Bank of America exiting the TARP program, only Citigroup and GMAC remain among the largest banks that received large sums of federal bailout.
Bank of America will pay back the TARP money through $26.2 billion in cash. In addition, it will raise $18.8 billion by through a security offering to private investors. The cash comes from Bank of America’s earnings on Wall Street wagers over the past months, following its otherwise controversial acquisition of troubled investment bank Merrill Lynch.
Is Bank of America’s step to pay back the TARP money an indication that the financial system is stabilizing and that we’re out of the woods? Yes and no. Bank of America’s rebound is based largely on its Wall Street gains, while its consumer lending units, where the credit crisis originated, continue to struggle with considerable losses. In a weakened economy where all credit card companies are shouldering record credit card defaults, Bank of America has been reporting credit card defaults 50-75 percent higher than its competitors. And while BofA states that it has issued $760 billion in new credit over the past twelve months, the overall lending practices of banks and credit card issuers still remain restricted, and unemployment remains at a twenty-five-year high.
Still, the BofA move, without a doubt, is a welcome step forward for the many U.S. taxpayers, who resent having their hard-earned money on the line to bail out billion-dollar financial institutions. It is a hopeful sign that the government’s unprecedented venture into the private sector may have paid off and created the results intended, at what so far appears to be at a minimum cost to taxpayers.
