No returns: Banks' offer to pay back TARP should be a non-starter
As I wrote earlier, some of the largest recipients of Troubled Assets Relief Program (TARP) money want to pay it back. TARP was originally designed to buy toxic waste from banks, but it turned into a plan to put capital into banks in exchange for senior preferred stock. Since TARP limits how much banks can pay executives and employees, the banks want to return the money so they can get a competitive advantage over banks that can't pay afford to pay it back.
How so? If a bank pays back the TARP, it will no longer face limits on how much it can pay its top executives and it won't have to cut back on corporate jets and multi-million dollar office renovations. TARP-free banks will then be able to raid the TARP-laden ones for any top talent with a soft spot for indoor driving ranges and not having to wait on line for the 6 A.M. out of O'Hare.
Does this mean that banks want to stop getting taxpayer money altogether?
Oh, no, not at all. In fact, the banks that are getting $200 billion in TARP money from Treasury are also getting $336 billion in cheap loans from the FDIC and another $1 trillion in emergency loans from the Fed. The healthier banks still want to keep that money, because it gives them access to cheap capital and comes with absolutely zero strings attached. They're not stupid, after all (well, some will argue with that statement, but that's the subject of a different post).
Fortunately, the new administration isn't stupid either. They seem to be holding firm on not letting any banks pay back the TARP money unless or until all 19 pass the stress test and they all can pay back the TARP at once. The government understands that anything short of that would leave the U.S. holding a big, radioactive sack of toxic waste when the losing TARP-holders are bled of their best talent and go belly-up.
But I'd even take it a step further. In return for banks like Goldman Sachs Group (GS) being so magnanimous about wanting to repay the TARP money, I'd put the same pay restrictions on the FDIC and Fed loans as are on the Treasury cash. That'll shut them up.
After all that's happened, isn't it amazing we have to play such games? Left to their own devices, these banks would gladly endanger the global financial system as long as it lined their own coffers and benefited top executives.
And you still don't think Wall Street has too much power?
Peter Cohan is president ofPeter S. Cohan & Associates. He also teaches management at Babson College. His eighth book isYou Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned.