Fees At Last!

The bailout of the financial system, which began about a year ago, was conceived in sin. It would have been wholly unnecessary if highly paid executives in the financial sector—the people who had the most to benefit from the system's survival—had met minimal standards of competence and self-preservation. It's been an expensive debacle, especially for taxpayers, who are being forced to shoulder hundreds of billions of dollars in costs. In a more just world, the banks and Wall Street firms would pay the entire cost of their own bailout through higher taxes, or fees, or industry insurance funds.

It may be cold comfort, but the final cost of some programs is likely to be much less than anticipated. The government is getting decent returns on the TARP's capital repurchase program. And now it turns out that the bailed-out banks are also defraying a small fraction by paying fees to the government. In exchange for the huge gift of guaranteeing money-market funds, commercial paper, and other bank assets, the Fed, the Treasury, and the FDIC have charged fees to the participating companies. Call it balance-sheet rental. Thus far, we've collected several billion dollars in fees without having to make any payments.

Consider Bank of America's recent decision to drop a federal guarantee on $118 billion in loans on its books. Since January, when Bank of America got the federal guarantee, the financial markets have stabilized, in large part because of federal programs and the Fed's ultra-aggressive monetary policy. Bank of America, having raised new capital, began to feel healthy enough to lose the guarantee. The government argued, correctly, that the mere existence of that backstop had a huge tangible benefit for the troubled bank. So on Monday, Bank of America said it would remove the guarantee and pay $425 million in recognition of the value the taxpayers had provided the bank. (Of course, BoA still owes the taxpayers $45 billion in TARP funds.)

After the failure of Lehman Bros., the Treasury Department agreed to guarantee the $3.8 trillion industry for money-market funds. In so doing, taxpayers assumed a massive liability. Managers of money-market funds were charged a tiny fee for this insurance. On Sept. 18, the government lifted the guarantee, reporting that it had collected $1.2 billion in fees without having made any payments.

Commercial paper, the vital market through which companies borrow money for 30 to 90 days, likewise broke down after Lehman's bankruptcy. In October 2008, the Federal Reserve started a program to guarantee that sector of the financial world. Those issuing commercial paper in the program had to pay a small "facility fee" (10 basis points, or one-tenth of 1 percent of the amount they could issue). Thus far, the program has been a success. At its peak earlier this year, the Fed was backstopping nearly $350 billion in commercial paper. But as that debt rolled over and the commercial paper market returned to normal, it was replaced by non-guaranteed debt. The guarantee is slowly withering away. As of last week, the balance of the Commercial Paper Funding Facility was about $45 billion. The Fed hasn't had to pay any claims on defaulted commercial paper. It hasn't disclosed the fees it has collected, but they're likely to run several hundred million dollars.

By collecting deposit insurance premiums, the FDIC essentially taxes banks to pay for their own bailouts when necessary. Of course, when failures threaten to overwhelm the insurance fund, the presumption is that the taxpayers will kick in. The FDIC, it turns out, also has been renting the public balance sheet out to financial companies. Last October, it started a program under which it would insure short-term debt (up to three years) issued by financial companies. The program has been used heavily. But, as is the case with commercial paper, banks are finding it less necessary. The amount of guaranteed debt outstanding is $307 billion, down from $346 billion at the end of May. And this week, the FDIC proposed closing the program to new issuers at the end of October. Banks participating in the program pay fees, calculated as a small percentage of the debt they issue. Thus far, the FDIC has collected $9.35 billion in fees and hasn't had to make good on any guarantees. If banks are able to pay down this short-term debt over the next few years, that money could help replenish the depleted FDIC deposit insurance fund.

Of course, all these items amount to a small drop in the bucket. After all the bailouts and market supports are wound down, taxpayers will likely be out a few hundred billion dollars. And the government shouldn't be in the business of renting out its balance sheet to private firms. But, to a large degree, the insurance efforts cited above have worked. And, perhaps inadvertently, they've established what should be an important principle going forward. As the government winds down its taxpayer-backed guarantees, the financial sector should be establishing its own industry-backed guarantee programs and funds, and strengthening existing ones. That way, when the next deluge arrives, their first call for a bailout won't be to taxpayers.

Daniel Gross is also the author of Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation  and Pop!: Why Bubbles Are Great For The Economy .

© 2009