Repaying TARP….not so fast

June 8, 2009

The Obama administration is on the verge of letting a number of financial institutions–think Goldman Sachs and JPMorgan Chase–to begin paying back tens of billions in bailout money. That may sound like a good idea, especially with the federal deficit continuing to balloon. But what’s the rush?

It’s obvious why the banks want to get out from under the Troubled Asset Relief Program: they want to be free of government meddling and prove they can operate without government support. But Sandy Lewis and William Cohan, in a long op-ed in The New York Times on Sunday, make a good case for the administration going slow in allowing banks to repay the bailout money.

I particularly like their suggestion that bank executives be forced to testify under oath about the causes of the financial crisis before any institution can repay TARP money. It brings to mind that infamous hearing when Congress hauled the CEOs of the tobacco companies to Capitol Hill and forced them to testify under oath about whether or not cigarettes caused cancer. Let’s force the bank executives to testify then whether they really believed a bundle of subprime mortgages could be turned into a Triple A security by waving some credit-agency pixie dust over it. Or whether it made sense to operate their firms with leverage ratios of 30 to 1.

Lewis and Cohan also rightly argue that the banking system is far from fixed. The recent surge in the stock market and a slight slowdown in the pace of job losses should not lull anyone into believing that the economy is on the fast road to repair. If all the talk about economic green shoots is just some mirage, the banks could be in for a lot more trouble if there’s a new spike in mortgage defaults or corporate bankruptcies. And given the current public mood, it will be impossible to provide any struggling bank with a new round of financial aid.

So why not wait a few more quarters, to make sure that the first quarter’s relatively strong bank results are sustainable. There’s a lot of reason to believe those results won’t be repeated in the second and third quarters. A good deal of the strong numbers posted by the banks came from trading gains fueled by bnormally big spreads between the yields on Treasuries and corporate bonds. Banks also got the benefit of a last minute accounting gift from FASB, which made it easier to value some hard-to-value assets.

Another thing the Obama administration should do is force the banks to rid themselves of some of the toxic assets clogging their balance sheets before they can repay any TARP money. Why not force the banks to take-up an idea I suggested last week, which would permit banks to donate ailing CDOs and other rotting securities to charitable trusts. That way, the banks could get a tax write-off to offset some of their losses and cash-starved charities would get these asssets for free. If CDOs and other ailing assets ever recover in value, the charities would be looking at some instant cash.

The truth is, until the banks get rid of the bad debts on their balance they never really will be healthy again.


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Matthew, you suggest that we should count on the United States government to enforce financial accountability? The United States government? Is this the Twilight Zone?

Posted by Russ in PA | Report as abusive

Seems to me that if I wanted to pay back a loan early, I would still be accountable for a big chunk of the interest that would have accumulated over the life of the loan. So OK, let the banks pay back now, but make sure they are paying back with the full interest they are on the hook for… no more free ride for these pinstriped scumbags, especially when they are slashing savings rates 200bp without disclosure before the fact, raising interest rates across the board, and applying punitive penalties that breach their own ‘code’ for penalties for any infraction. Oh, and maybe hire back some of the 250,000 people they’ve laid off in America alone.
But ideally, they should NOT be allowed to pay back early and should fulfill completely the obligations they agreed to when they had their hands out begging for survival. Though it’s fair to say that the gov’t forced them into a raw deal with some unfair terms, so what? That’s what happens when you ar in financial – you gotta take what you can get, whatever the terms.

Posted by Richard | Report as abusive

Lewis and Cohan are right on the ‘money’ in that article. Criminal conduct goes unpunished, ignored. Bad business decisions and risky monetary behavior – no problem as Uncle Sam is there to cover all bad bets. Doesn’t matter what you plant in the ground – it will come up roses. This is not the way the universe works and you can’t break the law of the harvest – it breaks you.

Posted by John | Report as abusive

If the bank can pay the TARP money back, let it. Not all banks wanted TARP money but were told by Treasury Sec. Paulson that they had to take the money so as not cause a run on those banks that needed it. Then the rules of the game got changed. We Americans are up in arms about the banks changing interest rates on us but think that the banks should be treated the same way. Go figure. If you want the US government(the folks who brought us the IRS) to run the banks, just nationalize the banks. That will fix the situation completely. The banks will be under government control and all will be perfect in the land of milk and honey, until you find out that your lactose-intolerant.

Seriously, Americans are so full of hate right now. And no, I’m not living off of a trust-fund or gainfully employed at this point. Crying over spilt milk is never going to solve anything.

[...] its first, rather bedraggled, morning meeting today. The news of the day is the TARP repayments. Matt Goldstein is worried that once the money is paid back, Congress won’t allow it to be re-lent, but [...]

The public deserves their money back.

Let the banks pay ASAP.

Posted by noc | Report as abusive

Let them pay it back plus interest. If during the next cycle they come crying for more, tell to suck it up like the rest of us. All the mortgagee sales haven’t gone unnoticed. As ye sow, so shall ye reap.

Posted by Luke | Report as abusive

Russ said: “Matthew, you suggest that we should count on the United States government to enforce financial accountability? The United States government? Is this the Twilight Zone?”

In response, I agree with the sentiment that we should never trust that any government can completely enforce financial accountability. But on the other hand, it is from the government that the financial accountability must come. Between trusting the government or trusting financial institutions, I will never trust the bankers. Banks make money for watching other people’s money move around.

Posted by Tom | Report as abusive