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Recycle the TARP

September 1, 2009

The U.S. insurance fund for bank deposits is running out of money. At the same time, some of the big institutions that received federal bailouts last fall have repaid more than $70 billion to the Treasury Department, and more checks to the government may be in the mail soon.

Right hand, meet left hand.

Indeed, one way of dealing with this looming crisis at the Federal Deposit Insurance Corp would be to take all that repaid bailout money and simply inject it into the bank insurance fund. Such a move would instantly bolster the deposit insurance fund, which at the end of June had just $10.4 billion in the kitty.

Transferring the repaid bailout money to the insurance fund would permit bank regulators to move more aggressively in shutting down some of the 416 troubled lenders with $300 billion in assets on the agency’s watch list.

And the sooner the FDIC can dispose of the worst banks, the faster the nation’s financial system will be on the path to a real recovery.

Using money repaid to the Troubled Asset Relief Program would also save President Obama from the embarrassment of having to go to Congress to ask for another bailout if the FDIC exhausts a $100 billion line of credit from Treasury.

It’s far easier for Obama to get Congress to approve the reallocation of bailout money that’s already been appropriated than asking for a new round of government welfare for the nation’s banks.

Plus a transfer of TARP funds to the FDIC’s insurance fund could be spun into a political victory for the Obama administration.

Right now, repaid bailout money goes into the Treasury’s general fund waiting to be doled out to other troubled banks. By replenishing the deposit insurance fund with TARP money, the administration would be sending a strong message to the public that the year of the bailout is over.

A year after Lehman Brothers’ collapse, the government should no longer be in the business of pumping money into too-big-to-fail institutions to prevent a global financial meltdown.

Rather, the government should be reloading the deposit insurance fund, so that regulators have ample ammunition to take over failing lenders and return a bit of moral hazard to the banking world.

Recycling TARP money may also allow the FDIC to avoid having to draw on the $100 billion line of credit with Treasury. And the FDIC will get the job done faster than imposing a series of special assessments on banks to replenish the fund

Comments

Interesting angle Matthew. Do the numbers add up though ? By how much are the US Banks in the red (insolvent)? Will this make a difference in this vast pool of $ millions, billions and trillions ? Also: ‘A year after Lehman Brothers’ collapse, the government should no longer be in the business of pumping money into too-big-to-fail institutions to prevent a global financial meltdown.’ – Global ? The whole World is facing these dilemmas, surely all economies are trying to prevent a regional meltdown ?

Posted by Casper | Report as abusive
 

A nice approach; however, bailouts have not fixed anything and corrupt our capitalism. Industries suffer or die when they make bad decisions, here we are attempting to ‘help’ out entities that made bad decisions and soften the blow. What about the ones that made sound decisions? They are left to compete against propped up giants who should have had to face the consequences.

I say no, put the money back, give the tax payers a break and let them sort it out for themselves. Time to move ahead and stop trying to support the interests of a few and protect their financial positions; from these failures will come a stronger industry.

Posted by mark | Report as abusive
 

Instead of talking about political victories lets talk business victories. In my opinion, from a business perspective the incoming TARP monies should be spread over the different areas which need it most. The FDIC is just one of many. Should the monies be redeposited in the FDIC or the FDIC takes money from the Treasury, it is a wash. However the FDIC needs to reclaim what it has spent.

Posted by Jeff | Report as abusive
 

Great soundbite idea, but bad policy I think.

The gov’t should have to beg for every last dime they want to throw at this problem, especially now the apocolypse seems to have been put off to another day.

I suspect Treasury will want to keep the 70b in reserve anyway. There are still shoes to drop at the TBTF banks that may require additional capital injections/Distressed Asset purchases.

Posted by michael | Report as abusive
 

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