The case for allowing TARP repayments

By Felix Salmon
June 9, 2009

Reuters’s US commentary team had 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 I’m thinking that actually the opposite is true: if Treasury needs new firepower to rescue banks in real trouble, then — given Congressional opposition to any new bailout bill — the only way to get the necessary funds will be to use money already in the TARP account. Since the TARP is pretty much all spent by now, Treasury has little choice but to let JP Morgan et al replenish it.

Worries about stigmas, it seems, are very 2008 — back then, the idea was that if everybody got funding then the government wouldn’t be sending signals about who was healthy and who was ill. But in the wake of the stress-test results, pretending that all banks are equal is silly. So let the healthier banks repay the TARP funds — especially if the government retains some oversight over pay — and use that money, if necessary, to shore up the less-healthy banks. Treasury will likely need it if Elizabeth Warren gets her way and the stress tests are run again.

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Comments
7 comments so far

Kinda surprising that Amex is being allowed to repay it, if that is indeed the case. But I offer a different argument: out of the largest 20-25 institutions, why leave “govt capital” invested in entities where it is less needed? If JP Morgan truly does not need that, and perhaps Jamie Dimon has proved his superior leadership to say, Ken Lewis, then JPM should be allowed to move forward.

At worse, set a schedule for voluntary repayment. This should have been the solution from the VERY OUTSET of TARP, that within a period of 12 months & with primary regulator approval TARP recipients would be allowed to repay it

Posted by Griff | Report as abusive

If TARP was truly a government investment, then the money repaid should not be lent out to Banks that are obviously in too precarious a situation to survive very long. With the government debt ballooning, any infusion into Treasury should be guarded not wasted on failed institutions.

Posted by Greg | Report as abusive

If the original purpose of TARP was to prevent a catastrohic failure of the entire banking system, and that threat has now passed, then there should be no need to recycle paid TARP loans into new loans. The financial system could use a little less government debt at this time, and if the risk is just a few failures instead of many, then we should live with that risk.

Posted by KenG | Report as abusive

And now it’s clear that a major effect of TARP and the other programs is they enabled the banks to raise capital. I wonder how much that side effect was considered when these programs were designed or if it was merely luck.

Posted by jonathan | Report as abusive

I thought the morning meeting was rather focused and well paced.

Posted by jeffrey | Report as abusive

“Reuters’s” – is that house style?

Posted by Matt | Report as abusive

Well, it’s my style. You got a problem with it?

Posted by Felix Salmon | Report as abusive
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