Fed Setting Higher-Than-Stress-Test Bar for Exiting From TARP

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Well, once in a while the authorities exceed my low expectations, and this is one of those instances. The Fed is insisting that the bank recipients of TARP fund meet a higher standard, in terms of balance sheet strength, than set in the stress tests. The banks are grumbling that this is not what they expected.

This is again industry posturing. The powers that be have been pointedly non-committal on the repayment of TARP funds, saying they were studying the matter. The idea that it should be the same as the standards for the stress tests, which were a minimum threshold to determine if they needed to raise MORE money, did not mean that “passing” it implied a bank was strong enough to escape from the extra supervision that came with being a TARP recipient.

Of course, there is an obvious reason for the Fed being a bit bloody-minded here. It would undermine its credibility completely if a bank repaid the TARP and went into the crapper any time in the next ten years, barring an unforeseen disaster like the Yellowstone caldera blowing up (or ones the great unwashed think could conceivably come to pass but the officialdom deems to be impossible, like a dollar crisis).

From Bloomberg:

Federal Reserve officials surprised bankers in the past week by demanding they raise specific amounts of new capital before repaying taxpayer funds, applying a more stringent assessment than the stress tests in May.

JPMorgan Chase & Co. and American Express Co. were told they need to boost common equity, less than four weeks after being informed they had enough to withstand a deeper economic slump. Morgan Stanley was directed to raise more funds after already selling stock to cover its stress-test shortfall. One firm was told June 1, people with direct knowledge said.

The central bank’s further scrutiny signals concern at the political and economic dangers of having a bank boomerang back to government aid once it leaves the program.

“The Fed doesn’t want to be criticized for allowing people to repay this and then having the banks say we just don’t have the capital to make loans now,” said Lawrence Kaplan, a former attorney at the Office of Thrift Supervision who now works at law firm Paul, Hastings, Janofsky & Walker LLP in Washington. “It’s an exercise to make sure that no one is going to get criticized for allowing these redemptions.”

The Fed’s demands also partly reflect the biggest three- month rally in U.S. financial shares in at least two decades, which has made it easier for banks to raise the funds…

Fed approvals for an “initial set” of TARP repayments by banks among the 19 largest institutions are scheduled to be announced next week…

If banks repay TARP funds next week, “politically, the administration can claim a victory,” said Dino Kos, managing director at Portales Partners LLC and a former New York Fed executive vice president. “They can claim TARP is working, we’re getting our money back and making a profit. But there are more shoes to drop in commercial and industrial loans, leveraged loans, and real estate.”

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  1. Chindit13

    A thing of beauty! I wonder if it is the interest payment on the TARP money, or the desire to resume grossly overcompensating themselves for a job poorly done that is the driving force?

    These clowns continue to exist merely through the unwitting good graces of the taxpayer, yet they have the arrogance to expect us to applaud them for walking off supposedly on their own?

    Do these uber-firms actually believe they are standing on their own two feet again once they rid themselves of the TARP? That ZIRP certainly is not for me, as I happen to save. Inflation is not being manufactured for me, as I carry zero debt. Nobody is paying me off 100% on monies somebody else owes me like the AIG CDS'. And there is no window I anonymously can walk to with aluminum cans or Pets.com stock or past sell date cheese to take some freshly printed Fed cash. In addition, nobody is buying assets off me at above market prices like the Fed is doing with MBS', and there is no plan I know of to have the FDIC loan money so someone can buy any other assets I have but do not like as in the PPIP.

    Pay back TARP and all of these guys are still on the umbilical cord to Mother Taxpayer.

  2. "DoctoRx"

    I have a less kind take than Yves on this topic, and in fact posted on the same subject last night: Econblogreview.blogspot.com; Following the Script: As Crime Goes By. I took the view for the sake of the post that the Fed is in bed with Big Finance all along.

    So I theorize that, now that the stocks are way up from their lows, the Fed can posture toughness. The BHCs have raised as much as they wanted to at the current "high" stock prices.

    No way to know, however; no criticism of Yves' take from side exists at all.

  3. The Rude One

    Even the new requirements are scanty: $100 billion in fresh capital against a worst-case projection of $600 billion in new losses. Of course there's always the carry trade: financing the rollover on the British, Irish, Spanish, and Greek national bankruptcies. The overwhelming impression from Bernanke's testimony is that monetary policy will have no further impact on economic activity here. We're at the mercy of fiscal sausage making and the indirect demand effects of stimulus/growth in Chindia. Dismal isn't dismal enough for this science.

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