Repayment of Tarp Bank Loans-Becker Six months ago essentially all large American banks and many smaller ones received loans from the federal government to help shore up their capital base as they tried to weather the financial storm. Some banks would likely have failed during the severe strains in the capital market last September and October were it not for these loans. This past week, however, the two strongest large banks, Goldman Sachs and JPMorgan Chase, indicated that they wanted to, and were able to, repay their loans. Should they be allowed to do so? It appears that not all banks wanted to take government loans in October, but some large banks were apparently "forced" to as part of the TARP loan program devised by then Secretary of the Treasury Henry Paulson. According to some accounts, the government exercised this pressure in order to avoid disclosing which banks were the weakest and needed these loans to survive. This explanation of the government's behavior is strange since generally participants in financial markets do not have an excess of information about the financial viability of different banks, but rather they do not have enough information. It is wrongheaded for the government to try to mislead markets about which banks are weak. Indeed, the purpose of disclosure requirements mandated for banks and other companies is to raise the degree of public information available about different companies in order to assist participants to make wiser decisions. In any case, most firms and individuals active in financial markets already had a fair idea of which banks were stronger and which ones were weaker. Many of the banks worse fears about the strings attached to these loans have been realized. The resulting government intervention in bank managerial decisions include the well-publicized restrictions on bonuses and other pay to executives, restrictions on banks' ability to hire foreigners, and frequent demands to appear before Congressional committees to justify what they are doing. Less onerous interventions include Congressional and the media's opposition to banks holding expensive golf and other outings, bank use of private planes, and meetings at luxurious resorts. Goldman, JPMorgan, and other banks want to repay their government loans primarily to eliminate these and potentially other government restrictions on managerial decisions. I see no compelling reason why they should be prevented from repaying their loans. One argument made against allowing them to repay is the same one used to justify requiring the relatively strong banks to take the loans in the first place; namely, that the weaker banks would be exposed if the stronger banks repaid at this time. However, they are already exposed since the major participants in financial markets already know that banks such as Goldman and JPMorgan are much stronger than say Citi and Bank of America. A more sophisticated version of this argument is that if the strong banks were allowed to repay now, the weak banks would also try to repay, and thereby become still weaken, since they do not want to appear weaker than their competitors. However, weak banks are unlikely to try to repay if that would so further weaken them that they would soon require even larger government bailouts before long. Moreover, repayment by strong banks would be a good motivator if it gave weaker banks stronger incentive to get into a financial position whereby they too could repay without damaging their viability. Another argument advanced against allowing any repayment at this time is that this would weaken the capital position of repaying banks (even those that claim to have enough capital to repay). Yet especially the stronger banks would not want to repay the Tarp loans if that means that before long they have to ask the government for additional loans. Goldman has raised an additional $5 billion in equity to help finance their repayment, and the company has reduced its assets to 14 times its capital compared to 26 times at the end of 2007. JPMorgan claims to be able to repay their loan without having to raise any more capital. In any case, the Treasury is soon releasing results of the stress tests they have given to all major banks. We will then have better information to determine if the banks that want to repay now can comfortably pass these tests. I am confident that these banks will rank quite high, which would help explain why they are eager to repay. If Goldman and JPMorgan were simply allowed to repay their TARP loans, they would still have the sizable benefits of the Temporary Lending Government authority (TLGP) that provides FDIC guarantees on bonds issued by covered banks. These guarantees stem from Goldman 's conversion into a bank holding company last fall-JPMorgan was already such a company. Goldman has borrowed about $28 billion under TLGP. This would be the right time to start reducing these guarantees for Goldman and JPMorgan as a condition for these banks being allowed to reduce government controls over their decisions.

Comments

[gator80]

I believe you have overlooked the 'real' and most dangerous rationale for blocking repayment: because it removes the rationale for the government to continue interfering with the banks' operations.

This is exemplified in a recent column by John Gapper in the Financial Times (Don't Set Goldman Free, Mr. Geithner) where he states, "The bigger danger is the long-term precedent [allowing Goldman to repay the Tarp loans] would set. Goldman wants to bolt before Congress or Mr Geithner, who still operates as a one-man band while the nomination process for his senior staff meanders along, has the chance to change fundamentally how it operates."

[runescape power leveling]

Just wanted to say HI. I found your blog a few days ago and have been reading it over the past few days.

[Joe]

Quite honestly, the government will probably need the loan repayments from these banks in order to fund all the other financial aide promises they've made. I'd let the banks that can do so, repay their loans.

[Jim]

Within these principal postings are subtexts which need commenting upon. Taking Simon Johnson's and Lester Thurow's point of view, both the government and the banks were (are) stupid. The incestuous ruling economic oligarchy in The United States has failed over and over to recognize that unrestrained greed is in of itself a form of stupidity. I love Johnson's view from the IMF that obscuring the title of the current mess, one could not be blamed for thinking that the financial situation in The United States was that of an emerging nation vis-a vis the IMF. To make matters worse, academic economists gave the financial shenanigans some degree of legitimacy by joining boards and becoming consultants to investment banks and hedge funds such that the public was duped into thinking that "They must know what they are doing". And now, because we have a political structure focused on maintaing itself in power, the bits and pieces approach is at hand (should we give them money and should they pay it back and which ones are weak and which ones aren't) instead of doing the obvious and nationalizing the banks, breaking them into smaller parts and selling them off to the highest bidders toxic assets and all. I suspect that the revolving door between Harvard, Columbia, Goldman Sachs and the government has something to do with the decision making and its eccentricities.

When 45% of the countries profits were made in the financial sector based on an unsustainable debt load the "smart" bankers should have seen this coming. The government enabled it, the bankers did it and now we are discussing how these very same people are going to set it right so they can do it all over again.

A good thing is that the Becker-Posner blog will have an endless supply of subjects until there is some decent separation between the private financial sector and the political theatre of the absurd.

[Jowanza Joseph]

I thought it was a good sign that banks wanted to pay the money they borrowed back ASAP, it shows a sign of vitality and resilience. However, like you said in the blog it is not good for the government to try to hide the true solvency of the banks from us.

[Anonymous]

"I see no compelling reason why they should be prevented from repaying their loans."

Our system is such a joke, and it all started because our govt. has adopted a "Too Big To Fail" philosophy. Govt. is forcing some banks to take bailouts. Now it won't let them pay it back until Chissy Dodd gets another sweetheart deal so he can buy a fourth house in Ireland.

Our Government is a THUG. Make no mistake, this has gone into "FORMER" USSR territory. There is simply no possible way this insanity can continue. This country was built on capitalism, and this govt. is throwing our basic principles away. No possible way this country continues on as the world's financial superpower.

[Besrerve]

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[blake]

I think one argument would be that these organizations, like Goldman for example, will still be getting tarp money through such things as AIG insurance policies, and the Government doesn't want the upper management just pocketing it. Let them pay the money back AND kiss their promises from effectively bankrupt companies goodbye. Then they can do whatever they want with their own money, not the taxpayers.

[Anonymous]

The original TARP funds were to be paid back only once a bank could raise private funds to replace them. Goldman took $10 Billion yet only raised $5 Billion. I suppose that Goldman feels that they could easily raise the other $5 Billion.

I agree with Mr. Becker that any bank that wants to come out from under the auspices of the government should also repay all FDIC backed bonds. Only then would their threats be viewed as anything but false bravado.

[Jack]

Whew! A number of these "banks" (Wells and Citi) have announced "earning billions" in the first quarter, apparently while slacking in their role of providing liquidity to the banking sector and loans to consumers and commercial borrowers. Geez! wouldn't it be great if those who actually make something like our beleagured auto companies could heal as rapidly even while not playing much of its appointed role?

Ahhh, yes! Let the bonuses begin as this sector returns to "earning" as much as the rest of our economy earns for providing far more goods and services.

Will there be a "Jesus" wise and brave enough to tip over the tables of the moneychangers?

[gnat]

You failed to address the corollary issue: that Goldman Sacs profited from a definition of property rights that has the US taxpayers bailing out Goldman and the rest of the counterparties.
http://www.interfluidity.com/posts/1239268720.shtml

[David Heigham]

As so often, Becker has a relevant and interesting point. If Goldman Sachs were not benefiting directly and indirectly from all the other Federal support, there would be no point in subjecting them to the many conditions of the TARP. However, they are benefitting, and will go on benefitting from the Federal backing implict in their status as bank holding companies even when all the current Feederal finance is paid back. Who is in a position to judge when it is safe to let them off the hook? The people who will carry the can for that decision are the Secretary of the Treasury and the Chairman of the Federal Reserve.

The saving grace is that these same two gentlemen are accountable for the overall credit standing of the USA. On that account, they will fairly soon be itching to have TARP and other support monies repaid.

[neilehat]

Just one side question, which in a roundabout way, may answer the question regarding TARP repayments.

That question is, "Was the Financial Infrastructure created for the benefit of the Finacial Infrastructure or was it created for the benefit of the Nation's Economic life"? Either answer to the question will determine whether TARP Loans should be repayed now or later.

Get the point - Who's in charge here? And this, ties back into the question regarding Financial Regulation.

[Jim]

neilehat,

The only reason for any "ecomomy" to exist is to serve the needs of society's members. Food, clothing, shelter, education, the arts, public order, safety and security. If financial regulation does not serve that purpose, then one has an oligarchy of elites who could care less about "the economy" but only about their own selfish needs. Paying back now or later will not make a wit of difference so long as the prevailing policy mood is one of screw the public. As I have said before, there is probably an old woman out there knitting names into a scarf.

[nohernerot]

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[neilehat]

Jim, It does matter a wit. As long as the "Banks" hold TARP funds, the Fed. has a modicum of control in regards to decisions and actions by the actors, both good and bad. So in a sense, it becomes a form of Regulation after the Deregulation mania that created this Crisis in the first place. To reregulate in the old fashion would require acts of Congress via Legislation that would have been too contentious and long to get passed. By which time the Financial Infrastructure would have long collapsed.

And what kind of impact would that have had on Society's members?

[Anonymous]

This is backdoor Nationalization. It is obvious.

[Jim]

Anon,

My point exactly although I think that the feds should have nationalized the banks immediately rather than this half-assed slow torture method which will not solve the problem and is being done this way for purely political raesons so that the pols feel more secure in their permapositions.

[Jack]

Given the gross negligence (to be kind) of those running the "non-banks" and the massive cost to virtually every one in our own nation as well as a major fraction of the world why are we handling these shysters with kid gloves?

ARE we dealing with a situation of "too big to imprison? or simply one of Congress having been heavily greased with campaign donations?

[Jim]

Can there be any doubt about the illigitimacy of this wholw mess when there is sworn testimony by Ken Lewis that Bernanke and Paulson pressured him to keep the status of Merrill's woes secret.

The investors and the taxpayers don't have a chance. Is there any wonder why informed folks don't trust the government and the ruling oligarchy

The mattress approach is looking better and better every day.

[praveen]

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[Anonymous]

Folks, we now live under the rule of a corrupt govt. that is every bit as evil as the former soviet union. We have a President who resembles Joseph Stalin.

If Ken Lewis shows up dead in his basement, better take arms to protect yourself, your family, and your property. There is a reason why Obama wants to take away your #2 inherent right.

[flo]

Where Are The Jobs

Book Chavez Gave Obama Becomes Best Seller

http://www.judiciaryreport.com/

[Atoria]

–°–ø–∞—Å–∏–±–æ –∑–∞ —Å—Ç–∞—Ç—å—é. –í–æ—Å—Ö–∏—â–µ–Ω–∞ –∫–∞–∫ –≤—Å–µ–≥–¥–∞

[neilehat]

Anon. If things are so bad, when are you going to become the first suicide bomber?