Posted by Jim Lindgren:
http://volokh.com/archives/archive_2009_04_19-2009_04_25.shtml#1240243860
When I first heard rumblings that the Government would not allow big
banks to repay their TARP loans, I thought it was either a genuine
misunderstanding or an unfair partisan canard against the Obama
administration. But the stories continue in the press and Tim Geithner
has not done what he needs to do to kill this story: publicly announce
that any bank that wants to pay back the TARP can bring a "check" to
him personally.
From my vantage point, this appears to be a naked power grab by the
government, trying to get more and more of private enterprise within
state control. This shift in government policy should be resisted
vigorously. In Congressional hearings, the legislators certainly
wanted the funds paid back as promptly as possible.
The latest press report is in the [1]Financial Times, with analysis at
[2]Legal Insurrection (via [3]Instapundit):
The Financial Times [4]reports that banks and other financial
institutions which received TARP funds may not be allowed to repay
the loans. Yes, that is correct:
Strong banks will be allowed to repay bail-out funds they received
from the US government but only if such a move passes a test to
determine whether it is in the national economic interest, a senior
administration official has told the Financial Times.
�Our general objective is going to be what is good for the system,�
the senior official said. �We want the system to have enough
capital.�
I understand that there are systemic issues as to liquidity, but I
don't recall any discussion when TARP passed that the government
would not allow the loans to be repaid. The original purpose of
TARP was to rescue failing financial institutions and stabilize the
housing market by using federal funds to buy bad mortgages; and
then TARP was changed to provide direct investment into financial
institutions in order to stabilize balance sheets and provide
liquidity.
According to the Financial Times article, the purpose has morphed
yet again, this time into a recession management tool:
The official, meanwhile, said banks that had plenty of capital and
had demonstrated an ability to raise fresh capital from the market
should in principle be able to repay government funds. But the
judgment would be made in the context of the wider economic
interest. He said the government had three basic tests. It needed
first to �make sure the system is stable�. Second, to not create
�incentives for more deleveraging which would deepen the
recession�. Third, to make sure the system had enough capital to
�provide credit to support the recovery�.
Something is wrong here. This is taxpayer money, to the tune of
$246.73 billion, handed out to banks to avoid a banking system
collapse. That collapse, if it ever were a real threat, no longer
is a threat. If this were a consumer loan, the banks which received
the money could cry fraud:
JPMorgan Chase Chief Executive James Dimon said Thursday that his
firm is eager to return the $25 billion they've received from the
government, and will do so as soon as possible.
"We could pay it back tomorrow," Dimon told reporters Thursday
morning. "We're waiting for guidance from the government."
The justification for refusing to take the funds back is that the
administration wants more lending. But maybe the problem is not a
lack of liquidity, but a lack of credit-worthy borrowers. If we
force banks to keep the money, the next step will be to require
banks to lend the money by lowering credit standards, which is
exactly the policy which got us into this problem in the first
place. And to the extent the banks want to remove executive
compensation restrictions to keep personnel, forcing the banks to
keep the money and the restrictions may feel good, but it won't get
banks to lend.
References
1. http://www.ft.com/cms/s/0/f3bc75b2-2d1a-11de-8710-00144feabdc0.html
2. http://legalinsurrection.blogspot.com/2009/04/do-not-repay-this-loan.html
3. http://pajamasmedia.com/instapundit/77058/
4. http://www.ft.com/cms/s/0/f3bc75b2-2d1a-11de-8710-00144feabdc0.html
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