Monday, December 14, 2009

Thoughts on TARP Repayment

by Calculated Risk on 12/14/2009 09:56:00 PM

There seems to be a sense that the banks are rushing to repay the TARP funds so they can pay bonuses. I think it is more likely that are just taking advantage of the opportunity to raise capital.

From Eric Dash and Andrew Martin at the NY Times: Wells Fargo to Repay U.S., a Coda to the Bailout Era

Wells joins Citigroup, Bank of America and JPMorgan Chase, its largest rivals, in shedding the stigma of taxpayer support and the restrictions on compensation that came with it.
...
[David H. Ellison, a portfolio manager at FBR Funds] said banks appeared to be “rushing in” to pay back the government, so they can offer bigger bonuses to their executives and get lawmakers off their backs.

But the prospect of huge losses on mortgages and commercial real estate loans early next year might also be causing the repayment stampede, he said.

“It may be as much about raising capital as it is paying off TARP,” he said.
Exactly.

What has made this doable now is the massive support for asset prices by the Government (and taxpayers). This includes the Fed's MBS purchase program, the loose lending by the FHA, the FTHB tax credit, the HAMP, and more. These programs have limited the losses at the financial firms. Maybe this will work - as I noted last year, house prices in low end bubble areas might have bottomed - although prices are clearly still too high in many mid-to-high end bubble areas and eventually will decline (at least in real terms) to more supportable levels. And that probably means more losses for the banks.

Also in the article, Dash and Martin write that some financial experts think "If the economy takes a turn for the worse ... these same large banks will return to the government for a new round of aid." I don't think so.

I doubt there will be a TARP II. If any of these banks get in trouble again, they will probably be dissolved, management fired, and the shareholders wiped out. Isn't that implicit in paying back the TARP? Isn't that a key component of financial reform?