I remember my father quoting Wimpy once in a while when I was a kid, and he would generally do it in response to my request for a “loan” of some kind. My intentions were good, I fully intended at the time of my request to return said loan to its rightful owner. I thought he was just sort of being funny at the time, relating to my youth through a popular cartoon character.
I was fully missing the point that Wimpy never paid for a single hamburger during the entirety of Popeye’s television run. My dad was making fun of me (or himself, really) for participating in a loan that would immediately be written off as a gift or even a loss.
It seems like we have entered into a “Wimpy” stage of the economic recovery (pardon the bad joke). Loans being doled out by central banks aren’t even expected to be repaid. How crazy is that? The European Central Bank (ECB) has made several bridge loans to its struggling member nations knowing full well the borrowers will be holding their hands out again in a matter of months if not weeks. In fact, the quality of a loan these days is measured by how long it takes before the debtor comes back to the creditor for a larger loan or better terms.
And what about that controversial and highly-criticized TARP program we initiated four years ago? Remember that? Would you believe that almost all of the TARP loans have been paid back, with interest, to the US Treasury? A little over $600B was actually loaned out (to Banks, Fannie Mae and Freddie Mac, Auto companies, and some other government agencies and insurance companies) — $430B has been repaid (including almost $100B in interest, dividends, and fees), leaving only $173B outstanding.* This website provides a pretty good analysis.
Can these seemingly futile loans actually work? Maybe so. After all, why does a bank loan people money in the first place? In the hope/expectation that the borrower can afford to repay the loan, slowly, with interest. And why do people borrow money? Sometimes it’s because they simply don’t have the funds to make a purchase. Other times, it’s because they intend to use the funds for purposes that will earn them a higher rate of return than they will be paying in interest; otherwise it wouldn’t make sense for either party to engage.
Now, did our government make emergency loans to banks on the brink with the sole purpose of turning a profit? No. Clearly the the survival of our financial system and ailing auto industry were at stake and Uncle Sam stepped in. Will it turn out to be a profitable “trade?” Maybe so. Hard to believe….
Have a great week!
* B = Billion (this is still a lot of money)
Adam B. Scott
Argyle Capital Partners, LLC
10100 Santa Monica Blvd, #300
Los Angeles, CA 90067