Marketplace Scratch Pad


Scott Jagow Jun 10, 2009

I’m struggling with the TARP payback story. On one hand, it’s supposed to be a good thing that banks are paying back this money. For them, crisis averted (Did they even have a crisis? Has it been averted?). On the other hand, some people make a good case that TARP was a sham.

Let’s start with TARP’s raison d’etre. Yesterday, the Treasury Secretary testified on Capitol Hill:

Tim Geithner told Congress that the planned repayments show the “very tangible benefits” of rescue plans such as TARP. Boosting bank lending is “the ultimate measure of the success” of Treasury’s financial rescue programs, Geithner told the Senate Appropriations Committee Tuesday.

Okay, but as Fortune points out, two of the banks repaying the Treasury are investment banks. They don’t do much lending. Three more are asset managers. They don’t do much lending.

In fact, three of the biggest lenders are still under TARP’s thumb — Bank of America, Wells Fargo and Citigroup, and they’ve now been weeded out by the government as sicklier than the other big banks. So, if boosting bank lending is the measure of success, how can you say TARP has been successful?

Barry Ritholtz, author of Bailout Nation, still maintains that TARP was a ruse by former Treasury Secretary Paulson to bail out Citigroup:

A loan just to Citi alone would have been problematic, went this line of brilliant reasoning, so instead, we gave money to all the big banks…

The hurry to repay this cheap cash confirms that the fix was in. If these banks were really in the bad shape Paulson suggested, they would hold onto this cheap source of credit. Instead, they want to throw the yoke of government monies off as soon as possible.The desire to return to their old compensation packages for executives cannot be the only factor.

This is a plausible explanation, but a more likely scenario is that Paulson didn’t know how bad things might get, so he threw a lifeline to every bank.

But back to the present. Questions abound. Now that these 10 banks have paid back their money, has the government lost a significant amount of leverage over the industry in terms of reform?

Or, will these banks need to come back to the government for more money down the road? Chris Whalen, of Institutional Risk Analytics, believes the answer to that one is yes:

The banks and Treasury have created a “fantasy-land version of reality” that the industry is healthy again, he says.

Banks and regulators have “done a deal with the devil” by believing they can “pump up confidence” to bring credit spreads down and the Fed can keep rates down by buying Treasuries, the analyst says. The Fed is “fighting a losing battle,” Whalen says, arguing the currently favorable rate environment that allows banks to essentially print money by borrowing for next-to-nothing and lending at substantially higher rates will not persist for much longer.

In the end, the TARP payback is a bad idea because it’s unclear what kind of business model the big banks have without government subsidies, Whalen says. Given the still unresolved issue of toxic assets and expectations loan losses will rise in a “gruesome” second half of 2009, he expects some big banks will be coming back for more federal handouts later this year or early 2010, something the American people almost certainly won’t stomach.

No, I wouldn’t think so. But will the Fed and the Treasury say: “Not this time.” Or will it be, “Sure, how much do you need?”

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