TARP Payback

It seems the big banks don't like the executive compensation limitations Obama announced two weeks ago (see Reigning in Wall Street), and now they are "threatening" to repay loans from the Troubled Asset Relief Program (TARP) early.

So far, Goldman Sachs, Bank of America Corp., JPMorgan Chase & Co., and Morgan Stanley have said they plan to pay back the loans early. It may be that this was simply a reaction to the grilling they endured at the hands of House Financial Services Committee members. Apparently they didn't see the drubbing the automakers took in December for a measly $17.4 billion in loans. They missed the part where the CEO's of the Big 3 automakers were asked if they would work for $1 a year. More likely it never occurred to them that they would come under the same scrutiny, even though taxpayer funds to bail out banks far exceeds anything given to the automakers. They are, after all, banks.

Some of the banks have claimed that they were pressured to take TARP funds by former Treasury Secretary Hank Paulson, and there may be some truth in this. After promising Congress to use TARP funds to buy mortgages and mortgage-related assets, Paulson decided to dole it out to his buddies on Wall Street and hope for a "trickle down" effect. It didn't work.

At least in public, Paulson claimed the idea was to avoid any "stigma" from accepting TARP funds (after all, we wouldn't want anyone to have their feelings hurt over this disaster). This way, none of the other banks would know who was about to go broke, and either would investors or the American taxpayer. He even applauded the willingness of the initial group of banks to accept government money, saying "these are healthy institutions, and they have taken this step for the good of the U.S. economy."

The problem: banks must lend to each other for credit markets to function smoothly, and the banks themselves couldn't tell who was about to go broke. Very little TARP money was actually used to provide loans, and the hope that confidence would improve as a result of TARP loans was replaced with growing uncertainty and a lack of consumer confidence. The Paulson strategy of secrecy failed.

So the Obama administration has put compensation restrictions in place, and the message is clear; we will allow banks to fail, and the Paulson game of "Who's Got the Button?" is over. The message to the banks: if you don't need taxpayer money, send it back. If you do, don't expect to continue to hand out bonuses larger than the average American will earn in a lifetime. It's a step toward transparency.

It will be interesting to see how many other banks decide to take him up on the offer.