As readers may recall, we have been skeptical of the TARP from the get-go. As the program ricocheted from one high concept to another, one had to wonder: were Paulson and the Treasury truly that incompetent, or was the seeming cluelessness, as some have suggested, a cover for a program to transfer funds to the financial sector, sort of a Hailiburton in Iraq version 2.0?
The damning Congressional Oversight Panel report on the TARP’s activities to date, and the lame Treasury response, are instructive. And we have plenty of troubling incidents along the way: the Treasury strong-arming nine banks to take a total of $125 billion among them when some were obviously in greater need than others (by all accounts, JP Morgan’s Jamie Dimon was furious over the move).
Now one can legitimately argue that having banks maintain or expand their bubble-era level of lending is a mistake. Putting that aside, the TARP was created with the notion that supporting the banks would lead to more lending, so one must measure its success against that goal.
Tonight’s New York Times article, “Bailout Is a Windfall to Banks, if Not to Borrowers,” not only indicates that banks are using the government largess for pretty much anything but lending, but even worse, the fund has provided money to banks in no need of government assistance.
From the New York Times:
Individually, banks that received some of the first $350 billion from the Treasury’s Troubled Asset Relief Program, or TARP, have offered few public details about how they plan to spend the money, and they are not required to disclose what they do with it….
A review of investor presentations and conference calls by executives of some two dozen banks around the country found that few cited lending as a priority. An overwhelming majority saw the bailout program as a no-strings-attached windfall that could be used to pay down debt, acquire other businesses or invest for the future.
Speaking at the FBR Capital Markets conference in New York in December, Walter M. Pressey, president of Boston Private Wealth Management, a healthy bank with a mostly affluent clientele, said there were no immediate plans to do much with the $154 million it received from the Treasury.
“With that capital in hand, not only do we feel comfortable that we can ride out the recession,” he said, “but we also feel that we’ll be in a position to take advantage of opportunities that present themselves once this recession is sorted out.”…
For City National Bank in Los Angeles, the Treasury money “really doesn’t change our perspective about doing things,” said Christopher J. Carey, the bank’s chief financial officer, addressing the BancAnalysts Association of Boston Conference in November. He said that his bank would like to use it for lending and acquisitions but that the decision would depend on the economy.
“Adding $400 million in capital gives us a chance to really have a totally fortressed balance sheet in case things get a lot worse than we think,” Mr. Carey said. “And if they don’t, we may end up just paying it back a little bit earlier.”
One issue the article raises is the use of TARP funds to support acquisitions. Since the financial services industry is badly in need of rationalization and consolidation, this activity is helpful to the extent that the purchased banks are troubled (note that Citigroup recently tried to buy Chevy Chase Bank, a healthy institution, so readers should not assume that any deal announced in this environment necessarily involves a floundering seller).