Bob CollinsTen banks have been allowed by the federal government to pay back the government’s investment in their banks. What does this mean?
Q: Why are banks in such a hurry to pay back the TARP funds?
A: Because of the restrictions and stigma that come with taking them in the first place. Banks that accepted TARP money also were limited on the number of foreign workers they could hire, and had executive compensation restrictions placed on them. Richard Davis, the CEO of US Bancorp called it “a lousy program” last February and said the rules kept changing.
Keep in mind the original goal of the money was to purchase bad mortgages that led to the financial collapse last fall. Banks are still sitting on the toxic, mortgage-backed assets, however.
Q: Do these 10 banks now have a competitive advantage over banks who took the TARP funds?
A: Yes, some “industry experts” say. Those banks have to pay a high dividend on the government’s shares that the 10 banks don’t. And they could lose high-priced execs to banks that don’t have restrictions on their compensation now.
Q: If the TARP money was meant to loosen credit, will paying it back tighten credit?
A: Possibly, although some of the banks are publicly saying they’ll continue to lend money. The proof, however, will be in who can borrow. Have you tried to get a loan from a bank lately? How’d it go?
“We fully expect to continue to vigorously offer lending opportunities to our credit-worthy consumer, small business, corporate and institutional customers, invest for future growth and support the U.S. government’s overall efforts to stimulate the economy,” Richard K. Davis, chairman and CEO of U.S. Bancorp, said in a statement.
Q: Does this mean the banks are safe?
A: Not according to Elizabeth Warren, who administers a TARP oversight panel for Congress. “The notion that you can get out from under some restrictions but still want some government benefits, seems to me to have a foot in both boats, ” she said today. She released a report today suggesting the government keep conducting “stress tests” of the nation’s 19th largest banks to ensure their viability.
Even without TARP money, the banks are still getting their debt guaranteed by the Federal Deposit Insurance Corp. and credit lines are guaranteed from the Federal Reserve.
“None of this means that we’re out of the woods yet; there’s a lot of work that the banks have to do and the regulators have to do,” Richard Spillenkothen, a director at Deloitte & Touche LLP in New York, told Bloomberg news.
Unemployment is still rising. More people are defaulting on loans because they’ve lost their jobs. Banks are poised to lose more money.
Q: What happens to the money the banks are paying back?
A: It goes into the Treasury to be used again if the economy gets worse. It’s almost as if the Treasury Department isn’t sure the recovery is taking hold.
Q: What do the stock markets tell us about today’s action?
A: That it’s not exactly the financial equivalent of VJ Day. At midday, the Dow industrials are about even. The stock of some of the banks — including US Bancorp — drifted lower after the announcement.
