Posts Tagged ‘banks’

The TARP Trap

Tuesday, April 21st, 2009

So let’s see…

A bunch of banks are in trouble, having gotten involved in questionable business practices (forced upon them by misbegotten government regulations — but that’s another story…). A large number of banks are facing insolvency, and if too many of them go down, the whole economy could crash.

So the government swooped in and saved the day with the TARP program, in which they basically gave a gigantic pile of cash to the banks so they could stay afloat.

I trust this is sounding pretty familiar so far.

Here’s the bit you might not have heard. A bunch of the banks, especially the larger ones (The Northern Trust, TCF, and Wells Fargo among them), were not in trouble. They took their hits in the crash, but were not facing failure. Some of them were in fact in pretty strong positions. So when the government came calling with a TARP check, they said “We don’t need it.”

The government said, “Take it anyway.”

Banks: “But we don’t need it. Really. We don’t need it, nor do we want it. We’ll be fine, thanks.”

Government: “Take it anyway. We want banks to have more cash on hand so they can make more loans. Also, if people know which banks, specifically, are close to failure, it will cause a run on those banks, and that could cause an economic disaster. Take the money.”

Banks: “But we don’t….”

Government: “You don’t have a choice. You’re too prominent. It’s a PR thing. We’re making you take it.”

Banks: *sigh* “…Fine.”

Government: *writes check* “Okay, now that you’ve got the money, there are a bunch of new rules you have to follow that we just made up.”

Banks: “These new rules are going to make it harder to do business or hold onto the top talent. No thanks.”

Government: “Sorry. Anyone who took the money has to follow the new rules, plus any others that we come up with later.”

Banks: “Well then we’re just going to give the money back.”

Government: “Not so fast. We won’t accept it. You’re not allowed to give it back.”

Banks: “But we didn’t want it in the first place!”

Remember Kids: When you hear the words, “We’re the government; we’re here to help,” slam the door and lock it.

US News & World Report: Why Goldman Sachs Should Repay Its TARP Money

Treasury Secretary Hank Paulson ordered nine of the nation’s biggest banks to accept a big pot of bailout money last fall, whether they felt they needed it or not. It signaled they were all in the same mess together, and that there was no stigma associated with getting bailout money. For the dozens of smaller banks that ended up needing a bailout, that reduced the chance that depositors and trading partners would abandon them, making failure self-fulfilling. Where would they go, after all – to a bigger bank that was also getting bailed out?

Wall Street Journal:
Obama Wants to Control the Banks

Under the Bush team a prominent and profitable bank, under threat of a damaging public audit, was forced to accept less than $1 billion of TARP money. The government insisted on buying a new class of preferred stock which gave it a tiny, minority position. The money flowed to the bank. Arguably, back then, the Bush administration was acting for purely economic reasons. It wanted to recapitalize the banks to halt a financial panic.

Fast forward to today, and that same bank is begging to give the money back. The chairman offers to write a check, now, with interest.[…] But the Obama team says no, since unlike the smaller banks that gave their TARP money back, this bank is far more prominent. The bank has also been threatened with “adverse” consequences if its chairman persists.

CNS News: Treasury Won’t Say If It Has Refused to Allow Banks to Give Back ‘Bailout’ Money

?When we took the money, it was because only the good banks were going to get the money, the strong banks,? [TCF Financial spokesman Jason] Korstange told CNSNews.com. ?We believe that we are and we know that we are a strong bank and that?s why they came to us and asked that we take it (TARP money).

?Then public perception, quite frankly, led by some of the politicians, changed–it became bailout money and it completely changed the perception of what (the TARP program) is.?

After Congress began considering additional limits on executive pay and closer inspections of participating banks, TCF decided to get out as soon as it could.

?Once that happened, the politicians decided they could run the banks (and) that they could tell us all the things we can and cannot do,? Korstange said. ?So we just said, ?Hey, we don?t need this, we didn?t need it at the beginning, and we?ll give it back to you.?”

CNN Money:
Bankers: Take your TARP money back

Brian Garrett, chief executive of Bank of the Bay in San Francisco… and other bank executives complain the Treasury’s program to stabilize banks during these turbulent times is actually weighing down their potential for growth.

They’re especially concerned the limits on executive compensation – imposed in February, four months after Treasury starting sending out checks – could make it difficult to hold on to star talent who may jump to financial institutions that are not receiving any Government assistance.

Bloomberg.com: Wells Fargo Assails TARP, Calls Stress Test ?Asinine?

Even though Wells Fargo didn?t want the money, it must comply with the same rules that the government placed on banks that did need it, he said.

?Is this America — when you do what your government asks you to do and then retroactively you also have additional conditions??

Forbes: Strings On The TARP

Treasury Secretary Henry Paulson basically forced major U.S. banks like Goldman Sachs and Citigroup to accept billions of dollars to flood the financial system with cash–with relatively minimal restrictions.

San Francisco Chronicle: What banks are doing with TARP funds

One notion he wants to dispel is that taking TARP money means you’re troubled.

When Congress approved $700 billion for TARP, it was supposed to buy troubled mortgage securities from banks. But the bill’s language was broad, and former Treasury Secretary Henry Paulson decided in October he would use $250 billion to buy preferred stock in banks to bolster their capital.

In late October, Paulson forced the nation’s nine largest banks to accept a total of $125 billion, regardless of their health.