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Thursday, June 11, 2009

TARP early payback a cop out on regulatory prevention

NYT: 6/9/09. The bank holding companies, among them American Express, Goldman Sachs, JPMorgan Chase and Morgan Stanley, plan to return a combined $68.3 billion of previously granted TARP money. That represents more than a quarter of the federal bailout money that the nation’s banks have received since last October, when many feared that failures might cascade through the industry.

But the decision to allow the banks to exit the Troubled Asset Relief Program, or TARP, also ushered in a new, and potentially risky, phase of the banking crisis. Letting the lenders out now — earlier than many had envisioned, and without the industry reforms some consider necessary to prevent future crises — raises many sobering questions for policy makers, bankers and taxpayers.

The program was aimed at purchasing assets and equity from banks to strengthen them and encourage them to expand lending during a tightening credit squeeze. But after banks return the TARP money, the administration will forfeit much of its leverage over them. With that loss goes a rare opportunity to overhaul the industry. The administration’s ability to push institutions to purge themselves quickly of bad assets and do more to help hard-pressed homeowners will be diminished.
Of even deeper concern is the running trouble inside the banking industry. Despite tentative signs of revival, many banks remain fragile. Four of the nation’s five largest lenders, including Citigroup and Bank of America, were not allowed to return their bailout funds.

Some analysts worry that financial institutions that repay bailout money now may turn to Washington again if the economy worsens and losses overwhelm banks. One of the most vexing problems of the credit crisis — how to rid banks of their troubled mortgage investments — remains unresolved.

The banks are eager to escape TARP and the restrictions that come with it, particularly the limits on how much they can pay their 25 most highly compensated workers. (Even so, the Obama administration plans to propose guidelines on executive compensation for the broader industry as early as Wednesday.)
Yet even banks that return taxpayers’ money will remain dependent on other forms of government aid. Among them are enhanced deposit insurance, incentive payments to modify home mortgages and federal guarantees on bonds that banks sell to raise capital.

“They may need the government’s money to get through this storm,” Christopher Whalen, a managing partner at Institutional Risk Analytics, said of the banks. “If the banks have to come back and ask for more money in a few months, I don’t think the response from Washington will be too kind.”

Taxpayers — many of whom probably never imagined that banks would return their bailout money so soon, if ever —stand to make several billion dollars from their investment in the 10 banks. So far, the Treasury has collected about $1.8 billion in interest payments. It also might reap as much as $4.6 billion as the banks seek to expunge other government investments, known as warrants.
The first round of repayments will free up billions of dollars that the administration can then funnel to other troubled banks and companies without having to return to Congress for more money.

But homeowners and consumers are unlikely to benefit if banks repay their TARP funds en masse. Banks are giving back money that might otherwise be used to make loans.
The announcement on Tuesday underscored the stark dividing line across the banking industry. On one side are big banks now considered healthy enough to forgo their TARP money. On the other side are those considered too weak to go without it. Still, some of those weaker banks may be allowed to repay the money soon.
Mr. Obama, in remarks on Tuesday in the East Room of the White House, stopped short of declaring the crisis over. And the president, who has been harshly critical of multimillion-dollar bonuses for Wall Street executives, had a message for the banks that were returning the money.

“I also want to say: the return of these funds does not provide forgiveness for past excesses or permission for future misdeeds,” he said.
The Treasury did not name the banks, but the institutions quickly acknowledged the decision in a barrage of press releases on Tuesday morning. Morgan Stanley was among the first out with the news. American Express, Bank of New York Mellon, the BB& T Corporation, Capital One Financial, JP Morgan Chase, Northern Trust, the State Street Corporation and U.S. Bancorp soon followed. Goldman Sachs, which had pressed hard to repay the money, waited nearly two hours before issuing its release.

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