Last week, JPMorgan Chase (NYSE: JPM ) applied for a $1.4 billion tax refund -- and not because it overpaid. This is part of a little-known rule squeezed into last year's stimulus package.
See, Washington Mutual, which JPMorgan acquired in 2008, made money hand over fist for most of the last decade, lending money to anyone who smiled. Now that this harebrained experiment has failed (literally), WaMu is due a refund on some of the taxes it paid on those profits. Think of it as a reward for screwing up -- stimulus at its finest.
Other industries have exploited this rule, too. But when the story broke, you could almost hear a collective groan: Holy smokes, yet another gift from taxpayers to banks.
Frankly, I wasn't surprised. On top of the infamous TARP bailout and injections from the Federal Reserve, banks have enjoyed dozens of these seldom-noticed gifts since December 2007. That's why I call it 800 days of Christmas.
Here are four more.
1. A conveniently timed short-selling ban
From Sept. 19, 2008 until Oct. 9, 2008, the SEC banned short selling financial stocks. Most at the time assumed this would have no long-term material impact. They were dead wrong.
No one wanted short sales banned more than Morgan Stanley (NYSE: MS ) CEO John Mack. On Sept. 17, Mack sent his employees a memo that said, "We're in the midst of a market controlled by fear and rumors, and short sellers are driving our stock down." (Surely, it had nothing to do with the firm running out of cash.) Management, Mack wrote, was "taking every step possible to stop this irresponsible action in the market."
That involved pleading for mercy to SEC chairman Chris Cox, who quickly agreed to ban short sales. (Because nothing cures possible market manipulation like actual market manipulation.)
For Morgan Stanley, the timing couldn't have been better. On Sept. 29, the bank sold 21% of its common stock to Mitsubishi Financial for $9 billion. Without the short-selling ban, Morgan Stanley shares would have traded at a lower price, making the transaction more dilutive to existing shareholders, assuming it was doable at all.
Ditto for Goldman Sachs (NYSE: GS ) . On Sept. 24, the bank sold $5 billion of equity to Berkshire Hathaway (NYSE: BKR-A ) (NYSE: BRK-B ) . The deal included $5 billion of warrants linked to Goldman's then-current common stock price, which was being held up by the short ban. That made raising capital far cheaper than it otherwise would have been.
Within six weeks of the short ban's removal, Morgan Stanley and Goldman's shares plunged 37% and 54%, respectively, so it's hard to claim the ban wasn't a massive boon. Former Treasury Secretary Hank Paulson agrees, writing in his memoir: "We had to give the market a signal that Morgan Stanley and Goldman Sachs weren't going to fail. The SEC's short-selling ban had bought them a grace period." Lucky them.
2. Tweaks to mark-to-market accounting
In April 2009, the Financial Accounting Standards Board (FASB) relaxed mark-to-market accounting rules, making it easier for banks to value toxic assets however they'd like, rather than relying on market prices.
Some say this was a good thing. The market was an irrational nutcase, they say, and forcing banks to use market prices bred unreasonable losses. There's some truth to this, but:
- When market prices were irrationally high during the bubble years, no one complained. Instead, banks used absurdly high market prices to justify eight-figure paydays.
- This wasn't the most honest of rule changes. Financial firms spent $27.6 million lobbying members of Congress to persuade FASB to act. Thanks to the change, Wells Fargo (NYSE: WFC ) boosted Q1 2009 capital by $4.4 billion; Citigroup (NYSE: C ) juiced earnings by $413 million. Not a bad return on investment.
- We're now clearly past the days of irrational pessimism. So why haven't mark-to-market rules returned to their prior status? If the rules were altered to circumvent panic, and that panic has ended, why are we still here? (Hint: Read previous bullet point.)
3. Fed buying mortgage-backed securities
In late 2008 and early 2009, the Fed announced plans to buy up $1.25 trillion worth of mortgage-backed securities backed by Fannie Mae, Freddie Mac, and Ginnie Mae (known as agency securities).
Banks are one of the largest owners of these securities. So when the Fed intentionally drove up prices, the banks enjoyed guaranteed write-ups. And thanks to interest-free loans from the Fed, banks could load up on these securities while the Fed was still buying, ensuring even more profits. As bank analyst Meredith Whitney put it:
A lot of the banks got sort of back-door financing from the federal government by this massive agency trade, where they increased their holdings of government-backed securities … and made billions of dollars off of writing those securities up.
How much did banks make? It's hard to know. We do know that banks increased their holdings of Ginnie Mae securities nearly threefold between June 2008 and June 2009, from $41 billion to $114 billion. With the Fed telegraphing its intention to buy this stuff by the ton, you can hardly blame them.
4. Term auction facility (TAF)
When banks get into trouble, they can tap the Fed's discount window for emergency funding. But banks hate doing this, because it broadcasts their vulnerability.
Easy fix: In December 2007, the Fed rebranded the discount window into an anonymous program called TAF, where banks could borrow away from prying eyes. The Fed is happy to admit as much, writing, "The TAF offers an anonymous source of term funds without the stigma attached to discount window borrowing." At least they're honest.
Nothing surprises me at this point. What do you think should happen to the banks? Let us know in the comment section below.