Why the failed PPIP should prevent TARP repayments

By Felix Salmon
June 8, 2009

When the PPIP was introduced, everybody was scared about the amount of toxic assets on banks’ balance sheets. Don’t worry, said Tim Geithner: between the stress tests and the PPIP, we’re going to be able to put a price on all those toxic assets, work out what the banks’ losses are, and ensure that the banks have enough capital to absorb those losses.

The market loved this idea, and started going up rather than down, to the point at which people weren’t scared any more about the amount of toxic assets on banks’ balance sheets. And so it didn’t matter that the adverse scenario in the stress tests is looking positively sunny these days. And it didn’t matter that PPIP disappeared with a whimper, the toxic assets no more priced now than they were six months ago. So long as the stock markets are happy, what’s to worry about?

Ezra Klein, for one, is still worried; so am I, not least because of all those leveraged loans maturing over the next few years. In other words, this is no time for banks — which, by their nature, are fragile leveraged institutions — to start repaying TARP funds. As my colleague Matt Goldstein notes:

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.

Optimism is good, and we all hope that the stock market’s present upward trajectory proves justified and sustainable. But hope is not a regulatory strategy. And TARP funds shouldn’t be repaid with the hope that the banks don’t need them any more; they should be repaid only when the banks have demonstrated — with clear prices for their toxic assets — that they’re definitively in the clear.

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5 comments so far

I don’t see the point of your proposal. If the banks need the money going forward, we’ll give it to them. In the meantime, they should pay the money back if we have a better use for it. We should leave it with them only if it’s earning us a good bit of cash.

It’s got nothing to do with optimism. It’s more like realism that I’m suggesting.

It seems pretty clear to most which entities are the best-run, functional institutions and those which still need help. To suggest Goldman or JP Morgan need to hang onto their TARP money for another few quarters makes little sense, when it’s really Citigroup & Bank of America who continue to need the most support. Morgan Stanley and Wells Fargo may still need to wait a little while longer…tough cookies

Given how the CLO market functioned prior to doomsday last summer/fall, leveraged loans is likely analagous to the pending maturity schedule in Commercial MBS. And just guessing, those commercial MBS will be a higher $$ amount to refinance.

Posted by Griff | Report as abusive

I completely agree with you as you article is definitely needed considering the recent news. This is a highly likely scenario:
1. The banks repay the money
2. They pay out bonuses and raises without the TARP restrictions
3. Unemployment crosses 10%
4. New stress tests are performed
5. The banks need to raise more money and this time aren’t successful through the market
6. The government gives another bailout

This cycle would then start again at number 1.

It seems like the government is set on letting these zombie banks continue to ruin the economy. The politicians like to give the impression that they will some day rid the banks of their toxic assets and limit bonus/raises. At the same time allowing loopholes for the banks to do what they want while the economy gets progressively worse. Those toxic assets are then becoming even less valuable and the banks are becoming more insolvent.

Why can’t a long term solution be decided before the economy completely collapses?

Posted by Chris | Report as abusive

The government MUST get taxpayers out of the bank bailout business.

Our financial system, with the decades long assistance of our three branches of government, has become a multi-tentacled parasite that feeds on citizen’s wealth.

High interest loans, low interest savings, fees on debit card purchases, ridiculous terms on credit card transactions and college loans, optimal back-dating of stock options, outrageous compensation executive compensation packages, predatory investment management fees, corporate tax considerations, and TARP is only a partial list of painful examples.

This voracious parasite has been engorging itself to the point where it very nearly killed its host during the past year. It now sustains itself by feeding upon generations of hosts that have not even been born yet.

Until our government changes the rules environment that fostered these excesses, we will continue in this Malthusian arrangement.

I’m beginning to understand how the French citizenry felt at the time of the French Revolution.

Posted by Charlie Johnson | Report as abusive

if retail banking is such a turn-off, I would suggest an alternate resource for your financial needs: Credit Unions. By and large, most of your local CU are locally run and of course locally owned. Will never get your face ripped off in fees, and actually the past 10 years they have added competitive loan products.

I have used one in North Carolina for 10+ years, and recommend them (broadly speaking)

Posted by Griff | Report as abusive
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