The Administration is trying to look like it is not rolling over to banks’ demands on the issue of repayment of TARP money. But despite the tough-ish talk, the problem described by John Gapper remains. Whether the bank pay back the TARP or not, they and the wider world clearly know that they will not be permitted to fail, at least in their current (big and interconnected) incarnations. That in turn means they should be kept on a short leash until industry reforms and/or restructuring has taken place, since they are in effect gambling with house money, no matter what the formal balance sheet arrangements are. Keeping them in TARP is one way of addressing this conundrum; imposing other sorts of interim restrictions on “too big to fail” concerns is another approach. But Team Obama seems determined to try to restore status quo ante and not deal with any remedies that might prove inconvenient to the moneyed classes.
From the Financial Times:
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.”
Yves here. Note the turn of phrase? This crowd is fond of tests as being objective measures, when in fact they are being run by the industry on data not independently verified, through risk models shown to be unreliable in the face of extreme events. And first the official talks of “national interests” and sees that as tantamount to “what is good for the system”. That line of reasoning conveniently ignores the problem that the system we have in place, per Simon Johnson, may be diametrically opposed to our collective best interest. Back to the article:
On Sunday, Lawrence Summers, President Barack Obama’s top economic adviser, told NBC’s Meet the Press that repayments could eventually help the government provide further resources to help the sector. Such a move could also allow healthier institutions to differentiate themselves from weaker banks and free them from constraints on executive pay, and other activities, that come with bail-out money.
Yves here. Again, ideology rampant. Being “free from constraints” is seen as being aligned with the general good, when pretty much everybody except the banksters and their buddies at the Fed and Treasury think more regulation is in order. To the FT;
“Not surprisingly different banks are in different situations; they are going need different levels of assistance of taxpayers,” Mr Obama told a press conference at a summit in Trinidad on Sunday, while promising: “I’m not going to simply put taxpayer money into a black hole.”
Yves here. Ooh, and pray tell what is AIG? Oh, because it is not a bank, merely a back channel to recapitalize bank, it’s exempt from the black hole consideration. Back to the article:
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”.
Yves again. The banks are ALREADY adding to pressures to delever by cutting consumer credit lines, In fact, if you buy Tyler Durden, banks are squeezing shorts by cutting credit even further to prime brokers, which is leading to less stock market liquidity and makes it (and other markets) more vulnerable to downturns. One of the big impetuses to goose the market would be for banks like Goldman to sell stock at more favorable prices to get out of the TARP. So if you buy argument #2, you wouldn’t let any bank who is a major prime broker (Goldman, Morgan Stanley, JP Morgan) pay back TARP proceeds,
And how much capital is needed to provide for recovery very much depends on your view of the future of securitization. Right now, it’s on government life support. Without fundamental reform, that market will not come back in a meaningful way (at least until the lessons of this disaster are forgotten and people make the same mistakes all over again). And the economics will not be anywhere near as favorable under a new regime that fixed incentives properly. For instance, requiring banks to hold enough of the paper they originate would increase costs and require better capitalized intermediaries all along the food chain. And even that didn’t succeed last go round; recall Merrill held a lot of the risky late vintage CDOs on its books when the market turned.
If the private securitization market does not come back in a meaningful way, that means either phony government diddled credit markets indefinitely, or vastly bigger balances sheets in the financial sector, since banks will originate and hold loans (probably trading some loans among themselves to create better diversification). That too argues against returning TARP funds.