Now raising intellectual capital

Repaying TARP….not so fast


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.

from Matthew Goldstein:

Bank Investors Get that Sinking Feeling

Once again, bank investors are getting a reminder that share dilution is an issue they'll have to live with for quite some time.

Shares of most financial institutions were falling Tuesday after federal regulators issued a new edict that requires banks to raise capital by selling shares before they can begin repaying any of the government bailout money they've received. The new mandate applies even to the nine banks that last month passed the government's so-called "stress test,'' and were believed not to need to any more capital. It really makes you wonder what passing the stress test was all about.