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Monday, April 20, 2009

Do Not Repay This Loan

The Financial Times reports that banks and other financial institutions which received TARP funds may not be allowed to repay the loans. Yes, that is correct:
Strong banks will be allowed to repay bail-out funds they received from the US government but only if such a move passes a test to determine whether it is in the national economic interest, a senior administration official has told the Financial Times.

“Our general objective is going to be what is good for the system,” the senior official said. “We want the system to have enough capital.”

I understand that there are systemic issues as to liquidity, but I don't recall any discussion when TARP passed that the government would not allow the loans to be repaid. The original purpose of TARP was to rescue failing financial institutions and stabilize the housing market by using federal funds to buy bad mortgages; and then TARP was changed to provide direct investment into financial institutions in order to stabilize balance sheets and provide liquidity.

According to the Financial Times article, the purpose has morphed yet again, this time into a recession management tool:
The official, meanwhile, said banks that had plenty of capital and had demonstrated an ability to raise fresh capital from the market should in principle be able to repay government funds. But the judgment would be made in the context of the wider economic interest. He said the government had three basic tests. It needed first to “make sure the system is stable”. Second, to not create “incentives for more deleveraging which would deepen the recession”. Third, to make sure the system had enough capital to “provide credit to support the recovery”.
Something is wrong here. This is taxpayer money, to the tune of $246.73 billion, handed out to banks to avoid a banking system collapse. That collapse, if it ever were a real threat, no longer is a threat. If this were a consumer loan, the banks which received the money could cry fraud:

JPMorgan Chase Chief Executive James Dimon said Thursday that his firm is eager to return the $25 billion they've received from the government, and will do so as soon as possible.

"We could pay it back tomorrow," Dimon told reporters Thursday morning. "We're waiting for guidance from the government."

The justification for refusing to take the funds back is that the administration wants more lending. But maybe the problem is not a lack of liquidity, but a lack of credit-worthy borrowers. If we force banks to keep the money, the next step will be to require banks to lend the money by lowering credit standards, which is exactly the policy which got us into this problem in the first place. And to the extent the banks want to remove executive compensation restrictions to keep personnel, forcing the banks to keep the money and the restrictions may feel good, but it won't get banks to lend.

There also is evidence that the government is contributing to the problems. Fannie Mae and Freddie Mac have added a 0.75% surcharge to all condominium loans regardless of the borrower's credit rating, in addition to other surcharges on other types of properties.

It is one thing for the government to lend money to banks to help the banks survive. It is someting quite different to use the lending to maintain control of the private sector when the specific borrower-bank no longer needs the money. And the greatest irony is that many banks which didn't want or need TARP money took it at the insistence of the feds, and now they can't pay it back.

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  1. Quite interesting and informative. Thanks for sharing.

  2. Wasn't it Bawney Fwank who said "if there are legal challenges for you to return this money, we will make the laws available" ?

    After the banks make some substancial donations to his campaign coffers, Bawney'll take care of it

  3. or maybe this Bawney quote:

    "Today, many people take for granted the notion that people whose lives are going to be very heavily affected by public policies should have a say in how they are formulated and carried out."

    or maybe this one :

    "Increasing inequality in income distribution in this country has broader policy implications, and there is also the growing problem of perverse incentives that result from executives receiving grossly disproportionate compensation based on decisions they themselves take"

    I say, the banks created this boondogle by accepting the money from the government, let them play tea-bagging with Bawney for a while. While they are trying to get out of this mess, take your money out of these banks and place them in sound thinking banks/credit-unions who never took the money in the first place.

  4. All well and good, but it's my understanding that at least some of the financial organizations were strongarmed into taking the funds in the first place - Wells Fargo comes to mind, although I can't cite a link at the moment.

    How much blame do you WANT to heap on retail banks when they are threatened into taking loans? Hell, I've read of some smaller regional banks took the bailout because they were forced to do so and set 100% of the 'loan' aside in escrow to repay as soon as they could - and here they are being punished AGAIN.

    There are firms out there who have practiced a high degree of fiduciary responsibility, walked the tightrope between running a responsible business and attracting lawsuits over non-compliance with CRA, and now they're taking it up the keister because they want to repay the loans.

    Now tell me who the victims are?

  5. "But maybe the problem is not a lack of liquidity, but a lack of credit-worthy borrowers."

    It stands to reason. The build-up to the rec/depression was fast, loose and easy credit. Now that people are once again afraid of losing capital their underwriting standards are returning closer to 'normal'. How many/much of the overall loans were made to unprofitable ventures? If it was 10-20%, that's a big number and certainly going to be noticed.

    What else would we expect from a debt-led recession?

  6. The loans were never about stability.

    They're about POWER.

    If the Socialists allowed the banks to repay the loans, they wouldn't have any power over them.

    So, of course they won't be allowed to do that.

  7. I'm less concerned with what this (and the past) administration say the intent is. I'm more concerned with the way the actions are going. If you look at where this is headed, you see a much stronger government hand in the data gathering, decision-making, and overall control of banking.

  8. Taking TARP money from this administration is like letting Tony Soprano buy a share in your restaurant.

  9. Lie down with dogs, get up with fleas. Government money always comes with government controls, and government never relinquishes control save under political pressure. The only thing surprising here is that it took this long for the banks to realize the trap they put themselves into.

    I do have some sympathy for the banks that were strong-armed into taking the TARP money. I wish they'd made more of a stink over that at the time, but I'm not surprised that they didn't.

  10. One reason feds won't allow repayment: they want to convert the "loans" they've already made into equity stakes, and take controlling interest in the institutions. That's why they "loaned" funds to institutions that didn't even want them. This has never been a "bailout" - it has always been a takeover in disguise.

    As Darth Vader said: "I am altering the deal. Pray I don't alter it any further."

  11. As I understand the situation, Devrim (I may be wrong), the government pressured many solvent banks that did not need the cash to take it anway. I remember compalaining by some bank CEOs at the time that they didn't need or want the money.

    The purpose of this action was to make it more difficult for the public to know which banks needed the bailout in order to avoid a run on those banks.

    Assuming this is true, then it is poor form indeed to place these burdens on the banks that did not want the money but accpeted it only to assist the government in its efforts to not handicap the troubled banks.

  12. Where can we find a list of banks who didn't take the TARP money? (Or is the list so large that we could make do with a list of those who DID take the money?)

  13. Why couldn't these banks go to Congress with checks in hand to repay the forced loans. Might make for a very interesting show, especially if they reject it.

    Would that strengthen the tea party movement? After all, isn't the TARP money our money? I would want the money repaid... after all I have to repay my loans.

    just wondering....

  14. Tim-
    The banks that took the money have every incentive to claim that they did not really need it. I believe Citi has made that claim as well. It is very easy to make the claim.

    Many of the banks that took the TARP money have since issued FDIC-backed bonds. Now that they have that funding source available, it is possible that some of the stronger TARP banks no longer need the TARP money; that does not mean they do not need the extensive federal backing they are still receiving. It would be trusting, bordering on suicidal, for the government to free these banks from any governmental control, after demonstrating that they are 'too big to fail', without any regulatory changes to prevent them from making the same excessively risky choices that damaged them in the first place.

  15. "The justification for refusing to take the funds back is that the administration wants more lending."

    Nope. The ulterior motive is that the government wants to maintain control over these banks, and the way to do that is to own interest, either partially or wholly, in the banks. It's socialist nationalization of our economy. Period.

  16. Matt, I think you *do* need to recognize that there were banks that claimed up front, before any disbursements were made, that they didn't need it.

    I agree that post-facto, it's easy for a bank to claim that it didn't need it.

    I do have to ask, why it would be 'trusting, borderline suicidal' for a bank to be free of government control (and therefore heedful of its shareholders' interests)?

    Equally, what if one of the controls that the government imposes on TARP recipients is PRECISELY to continue to take the same excessively risky choices thatdamaged them in the first place?

  17. Mark-
    To establish my biases - I would have preferred the government had not bailed out anyone, and let banks fail.

    I know that some of the banks claimed they didn't need the money before they took it; Lehman claimed it was well capitalized a week before it failed. I do not place any weight on what any of the troubled banks say.

    I believe it would be suicidal because the banks have demonstrated that the current regulatory structure and reward system does not sufficiently discourage them from taking excessive risk, The current system rewarded investment bankers very heavily for taking extreme risks; One of the major disincentives to doing so was the possibility of bank failure. The actions of the government since Lehman failed has convinced most observers that the TARP banks will not be allowed to fail. Until something is changed that brings back the belief that major will banks will be allowed to fail, they must not be allowed to take the risks they current structure rewards.

    The government requiring them to take the same excessive risks is a real possibility, and is exactly what Congress did by trying to prop up the housing market with Fanny and Freddy last year and FHA this year. I would be against that, as well. If your argument is that the current government is more likely to do that than the banks would on their own, I'd agree if the banks were under new leadership.

  18. We're in heated agreement on the issue that the current regulatory structure and reward system does not discourage the banks from taking excessive risk, AND, as you note, the perception is that TARP banks will not be allowed to fail.

    The problem, from my perspective, is that there's no evidence whatsoever that government control of these banking institutions will result in a better product.

    Indeed, if you really believe that banks should be exposed to risk of failure, you should be cheering banks on who are prepared to put their foot down and retain control of their balance sheets. Primarily here, I'm talking about mid-market banks. The big boys like Citi are a different matter, the only upside will be the object lesson of what happens when you let the state run a bank.

    Your last paragraph is interesting - I really don't buy the claim that the old leadership were any more venal or incompetent than a new leadership would be. The regulatory structure outright encouraged, (nay, demanded, in the case of the CRA) that they should take risk. Now, has the regulatory structure changed? The same people who were encouraging the old bankers to take that risk are still there.

  19. Mark-
    I agree on mid-size banks in the sense that I don't think they really matter; it is the large ones (Goldman, Wells, JP Morgan, BOA, Morgan Stanley in particular) that I think matter. I don't include Citi because I don't think the idea of them paying back TARP passes the laugh-out-loud test.

    I agree that there is no evidence that government control will result in a better product; I argue that there is the chance that it will, and there is evidence that private control under the current system, with the added evidence that failure is not a risk, is unacceptably bad.

    I believe that new leadership might shift the weight toward private control and away from governmental control because new leaders will have the incentive to quickly mark their balance sheets to reality, and blame the mistakes on the previous leaders. My fear is that most of the large banks would fail under realistic valuations of their balance sheets.

    I believe that what is going on is a desperate attempt by the current and previous administrations to shift the losses on the banking system balance sheet from those who would currently bear them (insurance companies, pension funds, hedge funds, central banks) to the taxpayer.

  20. Matt

    Bingo. In that we can COMPLETELY agree :)

  21. Isn't there some "folk wisedom" about the devil and long spoons? Just saying....

  22. This doesn't surprise me a bit. This whole bailout thing has been so ad hoc, which is what happens when you stray into territory for which there is no Constitutional justification. The government shouldn't be involved in any of this garbage to begin with. All this was largely created by government meddling (through absurdly low rates, stupid housing policy, etc.) and now they are going to make it worse by meddling even more. The bailouts were a bad idea to begin with. They reward failure, encourage greater risk-taking, and penalize other banks who made wise decisions by making them compete with banks that should be dead.