The Corner

Re: TARP to Banks: I Can Never Let You Go

Veronique, with reference to Geithner’s refusal to allow some banks to repay their TARP money, you wrote, “It is not clear what this is all about, except a need for power.”

The reason Geither won’t accept repayment of TARP funds is the same reason Paulson demanded that healthy banks take TARP funds in the first place: The Treasury Department wants to disguise the health of individual banks to prevent runs on the weak ones. If a bank is saying, “Here, take this back, I don’t need you or Barney Frank telling me how to run my business anymore,” that’s a pretty clear signal to the market that that particular bank is doing ok. Geithner’s concern is that investors, creditors and depositors would conclude that banks that didn’t return their TARP funds were in serious trouble and abandon them.

As a colleague here put it, “They’re afraid that the market might work.”

Keith Hennessey had a good post about this last week:

Certain large banks (e.g., JP Morgan Chase and Goldman Sachs) are publicly signaling that they would like to repay the Treasury.  It is hard to blame them, considering the political and legislative environment.  Martha MacCallum of Fox News pushed me on this point, correctly pointing out that it seems un-American to dissuade banks from paying back the taxpayer.

The banks are reportedly being told “not yet” by the Administration.  I will guess that the Administration is concerned about something that worried some of our experts –  if healthy banks return their funds, then investors will conclude that every bank who is not returning their funds must therefore be unhealthy.

This logic becomes strained, however, when those banks find other avenues for signaling to the market that they are healthy, as they are doing now by screaming “WE WANT TO GIVE IT BACK.”

Felix Salmon has a different theory: Some banks want to give back their TARP money, not because they are truly healthy, but because the appearance of health will give them a temporary advantage over their competitors and, besides, if they fail, Geithner will just bail them out again:

… banks like Goldman and JP Morgan seem to think that repaying TARP funds will give them an artificial advantage over the rest of the big players, especially when it comes to things like executive compensation. Is there any reason for the government to let them have that advantage, when their too-big-to-fail status gives them an automatic “Geithner put” in the event they blow up?

I don’t think firms that return TARP money will continue to enjoy the “Geithner put.” Politically, it would be extremely difficult for the administration to re-rescue a firm that cockily returned its TARP funds to avoid executive-pay caps. The next step for such a firm would be some sort of liquidation or structured reorganization — and Geithner and co. are trying desperately to avoid taking that approach with any firm.

So, I wouldn’t go so far as to say it’s not a power play. But I think it’s more likely that Geithner is terrified of having to seize another insolvent giant and determined to take any steps to avoid that outcome.

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